BEYOND RISK ➜

In developed markets, the concept that environmental

risk can critically affect the viability of investments is well

understood. But in emerging markets, the appearance of

a new set of global stakeholders presents both risks and

opportunities for financiers. ➜

INTERNATIONAL
FINANCE CORPORATION
A Member of the
World Bank Group

JAPAN/IFC
COMPREHENSIVE
TECHNICAL ASSISTANCE
TRUST FUND
➜ S U S TA I N A B I L I T Y A N D T H E E M E R G I N G M A R K E T S F I N A N C I A L S E C TO R FOREWORD
➜ With support from the Japan/IFC Comprehensive Technical Assistance
Trust Fund, IFC has developed a pioneering program designed to help its financial
sector clients in emerging markets integrate environmental management techniques
into their operating practice.

Drawing on the lessons of experience of these clients, the objective of this

casebook is to examine emerging risks for the financial sector, outlining examples
of strategic responses that have the potential to transform this risk into opportunity
and documenting experience in implementing these initiatives successfully.

Letitia F. Lowe
 Table of
ACKNOWLEDGEMENTS Contents
This casebook has been prepared by Leo Johnson, Consultant, on behalf of the Environment and
1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Social Development Department of the International Finance Corporation (IFC). The project was made
possible by the generous financial support of the Japan/IFC Comprehensive Technical Assistance Trust
2 THE NEW GEOGRAPHY OF RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Fund. The task manager for the project was Letitia Lowe.

Many people within IFC provided valuable guidance, input and support including: Glen Armstrong, 3 THE EMERGING MARKET RESPONSE . . . . . . . . . . . . . . . . . . . . . . . .25
Martyn Riddle, Imoni Akpofure, Dan Siddy, Todd Hanson, Clive Mason, Maria Gallegos, Vanessa
Manuel, Sevaun Palvetzian, Debra Sequeira, James Beck, Zenaida Chavez, Sarah Ruck, Richard Caines, 4 LESSONS FROM THE FIELD: SUSTAINABILITY IN ACTION . . . . . . . . .45
Bernie Sheahan, Karin Strydom, Batsuren Eenjin and Stuart Turnbull.
5 CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . .57
Thanks also go to:
Andre Abadie, Charity Agorsor, Vera Assad, Trevor Bowden, Ferdinando Buffoni, Cesare Calari, ANNEXES
Michael Campbell, James Casey, Paul Clements-Hunt, Josefina Doumbia, Roberto Esmeraldi, Warren
Evans, John Ganzi, Maureen Gilbert, Iris Gold, Caroline Goldie, Bregje Hamelynck, Harvey Himberg, A) LIST OF BOXES, FIGURES AND TABLES . . . . . . . . . . . . . . . . . . . . .65
Hilary Hoagland-Grey, Mark Hughes, Madeleine Jacobs, Kaj Jensen, Stanley Johnson, Mark King,
Rachel Kyte, Julian Lampietti, Dana Lane, Arthur Levi, Tina Mack, Jacob Malthouse, Arvind Mathur, B) SURVEY, METHODOLOGY, QUESTIONNAIRE PRO-FORMA,
Shawn Miller, Mario Monzoni, Herman Mulder, Taies Nezam, Joe O’Keefe, Michael O’Neill, Niamh UPTAKE OF ENVIRONMENT INITIATIVES . . . . . . . . . . . . . . . . . . . .69
O’Sullivan, Harry Pastuzek, Vipul Prakash, Bruce Purdue, Gladis Ribeiro, Helen Sahi, Robin Sandenburgh,
C) LIST OF SITE VISITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Alke Schmidt, Corrie Shanahan, Mangala Suresh, Felice Tambussi, A.J. Teixeira, Yogesh Vyas, Udayan
Wagle, Flavio Weizenmann, Christina Wood, Prakash Yardi, Caroline Zuniga. D) CEA WORKSHOPS AND PARTICIPANTS . . . . . . . . . . . . . . . . . . . .83
Special thanks go to: Vijay Joshi and the management of IL&FS, Roberto Dumas Damas, and Maria E) REFERENCES, LINKS AND FURTHER INFORMATION SOURCES . . . . . . . .93
Estela Ferraz de Campos of BBA, Ziad Oueslati of Tuninvest, Gaspar Millhaiffy, Laszlo Szabo and
Attila Bogdan of Raiffeisen Bank and all of the participants in the CEA workshops.
4

1.
ACRONYMS INTRODUCTION
ADB Asian Development Bank ISO International Organization for Standardization
“A successful bank can no longer just look at the
AFDB African Development Bank MOF Ministry of Finance
CEA Competitive Environmental Advantage NGO Non-Governmental Organization commercial performance of a customer. It has to
CDC Commonwealth Development Corporation NPL Non-Performing Loan consider its broader performance in environmental
EBRD European Bank for Reconstruction and Development OECD Organization of Economic Cooperation and Development and social issues.”
EIB European Investment Bank SME Small and Medium-sized Enterprise Roberto Dumas Damas
EMAS Eco-Management and Audit Scheme
EMS Environmental Management System
SRI Socially Responsible Investment
UNEP United Nations Environment Program
Banco BBA Creditanstalt, Brazil
➜
ESMG Environment and Social Management Group USAID United States Agency for International Development
EU European Union WB World Bank
FI Financial Intermediary WBG World Bank Group
IFC International Finance Corporation WCED World Commission on Environment and Development
IFI International Financial Institution WTO World Trade Organization
IPO Initial Public Offering WWF World Wide Fund for Nature

➜ Since mid-1997, as part of a two-phased program
funded by the Japan/IFC Comprehensive Technical
Assistance Trust Fund, IFC has collaborated with
regional, multilateral and bilateral development
banks in running the Competitive Environmental
Advantage (CEA) workshop program. The workshops,
part of a program designed to build environmental
➜ SINCE 1997, OVER 375 MANAGERS FROM 275 FINANCIAL INSTITUTIONS
appraisal capacity in private financial institutions
AND 45 NATIONS HAVE PARTICIPATED IN THE COMPETITIVE
from developing and transitional economies, aim
ENVIRONMENTAL ADVANTAGE WORKSHOP SERIES
to equip participants to complete three tasks:
1. Assess the strategic rationale for environmental
management for their financial institutions
2. Perform cost-effective environmental risk manage-
ment of investments
3. Implement value-adding environmental techniques
institution-wide
Since 1997, over 375 managers from 275 financial
institutions and 45 nations have participated in the
workshops, with institution types including commer-
cial banking, project finance, leasing and private
equity. Annex D provides details of the workshops
held to date, together with a list of the participant
institutions & partner development banks.
Introduction 7
Under the second phase of the program IFC set out
to complete three tasks:
■ a website on environmental management for the
financial sector
■ development of a Trainer’s Manual
■ publication of a casebook on environmental man-
agement in the emerging markets financial sector.
OBJECTIVES
This casebook, the first of its kind to focus exclusively
on the emerging markets financial sector, aims to cap-
ture the lessons of experience of IFC’s participating
institutions:
Chapter 1 provides background and summarizes
objectives.
Chapter 2 summarizes major sustainability-related
business drivers for the financial sector.
Chapter 3 provides illustrative examples of leading
financial institutions that have responded
strategically to these business drivers,
including examples from commercial
banking, leasing, private equity and
project financing institutions.
Chapter 4 examines good practice in implementing
a cost-effective management system to
respond to these risks and opportunities.
Chapter 5 presents summary conclusions and a series
of recommendations.
8 Beyond Risk

METHODOLOGY
For this casebook IFC used a three-part approach
designed to capture the experiences and expertise
of the workshop participants:

■ IFC conducted a series of in-depth interviews

with senior management participants of the CEA
2.
workshops. THE NEW
■ IFC conducted a detailed questionnaire survey
of a representative sample of 60 institutions from
GEOGRAPHY OF RISK
different regions. What is the relevance of sustainability to the
■ In addition, IFC reviewed current best practice
among institutions in the international financial
emerging markets financial sector? ➜
sector.

Annex B presents a more detailed review of the

methodology.
Beyond Risk FIGURE 2.1 The New Geography of Risk 11
COMPETITIVE THREATS TO THE FINANCIAL SECTO R

➜ WHAT IS THE RELEVANCE

OF ENVIRONMENT TO BANKS?
ECONOMIC DECLINE OF
The emerging markets financial sector
INTEGRATION COMMUNISM
faces a growing number of competitive
TECHNOLOGICAL ■ GATT/NAFTA/WTO MATURATION ■ Privatization
CHANGE ■ Reduced Tariffs OF DEVELOPED ■ Corporate Growth
pressures; from economic integration to
COUNTRY the rise of technology-enabled banks and
■ Internet ■ Currencies linked ■ Global Private
MARKETS
■ Global Capital flows Capital Flows non-bank competition (See Figure 2.1, left).
■ Electronic Banking
■ Diversification ■ Slower Growth
■ ATM What is the relevance of environmental
➜ THE SIGNIFICANCE OF ENVIRONMENTAL AND SOCIAL ISSUES FOR
FINANCIAL INSTITUTIONS HAS, IN GENERAL, BEEN CONSIDERED LIMITED
■ Virtual Banks ■

■
Aggressive Exporters
Deregulation and social factors to the performance of
a financial institution?

➜
The significance of environmental and
social issues for financial institutions has,
FINANCIAL SECTOR COMPETITIVE THREAT in general, been considered limited. In
a number of developed countries, where
Source: Furrer, “Increasing a Company’s Value Through Environmental Management
banks have been held directly liable for
the clean up of contaminated collateral,
environmental due diligence has begun
B OX 2 . 1
to form a routine part of the due dili-
SUMMARY OF FORMS OF DIRECT LIABILITY FOR FINANCIAL INSTITUTIONS
gence process.

Direct Legal Liabilities

Between 1986 and 1996, a number of
court rulings and well-publicized cases
■ Liability for the clean up of any contaminated collateral
(for example, asbestos, heavy metals, polychlorinated bi-phenols). on environmental damage widened the
■ Liability for misrepresentation of environmental risks focus of lenders: not only towards con-
(e.g. to co-financiers). cern for pre-existing conditions on
■ Liability for negligence in any failure to assess actual and potential envi-
properties on which they foreclosed,
ronmental risks.
■ Direct liability if the financial institution is a principal, general partner but also onto their capacity to exercise
or owner. influence on the daily operations of the
company concerned. Box 2.1, left, sum-
marizes a range of direct liabilities for
financial institutions.
12 Beyond Risk FIGURE 2.2 FIGURE 2.4 The New Geography of Risk 13
SIGNIFIC ANT SOURCES OF ENVIRONMENTAL RISKS for clients identified by all financing institutions INFRASTRUCTURE

The Emergence of Indirect Liabilities Primary sources of risk were found to

The most significant long-term sources of environmental
Are these legal liabilities also the prime social risks as identified by infrastructure institutions vary according to the type of financial
risk drivers for emerging markets? To institution surveyed. Figures 2.3–2.7, pgs.
Government (e.g. shutdown, fines) 60% 80%
address the topic, IFC’s survey requested 70%
68% 63% 12–14, present the results for institutions
Export market regulators 56%
58% that are financing sectors which sub-
60 emerging market institutions to iden- Media (reputational risk, negative publicity) 40% 60% 53% 53%

tity what they considered to be the most Community 38% 50% divided into the following categories: a)
37% 32%
significant sources of environmental risk, Financiers 36%
40% export-oriented industries, b) infrastructure,
both for their clients and for their own Customers 28%
30% c) domestic general manufacturing, d) high-
20% 16% 16%
institutions directly. The results suggest Supply and distribution chain partners 20% 11% tech industries and e) extractive industries.
5%
10%
evidence of a significantly different risk Insurers 12%
0%
profile for emerging markets. International NGOs 12% Summary of findings: A Range of

Supply & distr.

chain partners
Financiers

Customers

Other
International
NGOs

Employees
Community

Insurers
Export market
regulators

Media
Government
Employees 10% Risk Drivers
Survey Results: New Stakeholders Other 8% Overall, the enforcement of national
0% 10% 20% 30% 40% 50% 60% 70%
Figure 2.2, right, summarizes the most sig- and export market regulations was the
nificant sources of environmental risk most frequently identified source of envi-
that institutions identified for their clients ronmental and social risk for client orga-
nizations. Risk drivers were found to vary
The survey showed that all the respon- significantly according to the client base.
FIGURE 2.3 FIGURE 2.5
dents in the four groups identified the
EXPORT-ORIENTED INDUSTRIES DOMESTIC GENERAL MANUFACTURING
existence of significant risk drivers for For those institutions financing export-
their emerging market clients. While oriented industries the key risk driver
government is identified still as the The most significant long-term sources of environmental to clients was identified as the loss of
key risk driver, new stakeholders have social risks as identified by domestic general manufacturers markets. Other major risks identified
emerged. In particular, 58% of respon- 80% 75% included the following: shutdown/fines,
80%
67% 68%
dents cited the influence of export market 70% 70% reputational risk, protests over critical
60% 59%
regulators as a key risk driver for their 50%
60% resources and, loss of financing.
50% 46% 46%
customer base1. 50%
41%
40% 40% 35% Risk of shutdown/fines was also identified
29% 32% 32%
30% 25% 24% as a key risk for infrastructure clients and
30%
13% 17% 16%
1
As an example, in the past 5 years, the imposition
20% 20% domestic general manufacturing along with
4% 4% 11% 8% 5%
of environmental standards requirements has been 10% 10% reputational risk, protests over critical
widely perceived as the major driver in a number 0%
of Asian export-dependent markets, particularly
0% resources and loss of market.
Export market
regulators

Financiers

Customers

Other
International
NGOs

Employees
Community
Media

Insurers
Government

Supply & distr.

chain partners

Export market

Financiers

Customers

Other
International
NGOs

Employees
Community
Media

Insurers
Government

Supply &
distr. chain
consumer electronic related. This appears to have
been one of the main reasons for the rapid uptake
of industry environmental management systems
certified to the internationally recognized
ISO14001 standard.
14 Beyond Risk FIGURE 2.6 FIGURE 2.8 The New Geography of Risk 15
HIGH-TECH INDUSTRIES PRESENTS CONNECTIVITY IN 1991

For general manufacturing, the primary technology, including the growth in

The most significant long-term sources of environmental IBRD 32423
risk driver was identified as export market social risks as identified by high-tech industries internet and fixed and cell phone usage
regulation. After government and export 78%
appear to have lessened that distance.
80%
market regulators: the risk of community 67%
70% The two Figures 2.8 and 2.9, left, show
action, the potential for adverse publicity 56%
60% changes in international connectivity
in the media and possible action from
50%
between 1991–1997
financiers ranged among the top five 40%
33% 33% 33%
overall risk drivers. 30%
22% INTERNATIONAL CONNECTIVITY
Version 2 - 9/91 Connectivity
20% Internet
11% 11% New technology has enabled the rapid
THE CHANGING 10% Bitnet but not Internet
0% 0% international flow of communications,
GEOGRAPHY OF RISK 0% EMail Only (UUCP, Fido Net)
and in the process has begun to empower

Export market

Financiers

Customers

Other
International
NGOs

Employees
Community
Media
Government

Insurers
Supply &
distr. chain
Several conclusions can be drawn from No Connectivity
previously disenfranchised individuals and
these results. Conventional wisdom sug- No Data
their spokespersons. In particular three
gests that environmental risk derives from
Source: Larry Landweber and the Internet Society. changes have occurred:
the enforcement of national legislation
with resultant civil and criminal penal- ■ Stakeholders can readily acquire infor-
ties. Government, therefore, is held to mation about the impact on environ-
be the key risk driver and where local or FIGURE 2.7 FIGURE 2.9
FIGURE 2.9 mental resources.
national government does not have the EXTRACTIVE INDUSTRIES PRESENTS
PRESENTS CONNECTIVITY IN 1997 ■ Stakeholders have a low-risk means of
resources to enforce environmental regu- preparing a coordinated international
lation, there is thought to be no risk. response to these impacts.
The most significant long-term sources of environmental IBRD 32424 ■ Finally, they have a cost-effective
social risks as identified by extractive industries
BEYOND COMPLIANCE means to implement these campaigns.
75%
A more complex reality appears to be 80%
Driven by this reduction of distance, a
emerging. A decade ago, information was 70%
60% trend is emerging. A networked economy
accessible by only parts of the interna- 50%
50% is developing in which governmental and
tional community. Distance separated a
40% non-government regulators can pose risks
company with a poor environmental track
25% 25% 25% 25% 25% INTERNATIONAL CONNECTIVITY
30% to a company’s operations at a number
record, or a proposed project with poten- Version 2 - 9/91
20% Internet of stages in the business cycle, translating
tially significant environmental impacts,
10% Bitnet but not Internet value reduction at the individual level into
from key national and international stake- 0% 0% 0% 0%
0% EMail Only (UUCP, Fido Net) value reduction at the level of the firm.
holders. But changes in information
Export market
regulators

Financiers

Customers

Other
International
NGOs

Employees
Community
Media

Insurers
Government

Supply & distr.

chain partners
No Connectivity
No Data

Source: Larry Landweber and the Internet Society.

16 Beyond Risk FIGURE 2.10 FIGURE 2.11 The New Geography of Risk 17
DRIVERS OF ENVIRONMENTAL RISK ACROSS THE CORPORATE VALUE CHAIN ENVIRONMENTAL RISKS FOR FINANCIAL INSTITUTIONS

These risks are presented in Figure CONCLUSIONS: EMERGING

2.10, right. MARKETS ENVIRONMENTAL RISK
The survey results suggest that the same
In this networked economy, corporate CONSUMER BOYCOTT
Non-performing loans/leases/investments 58%
change in the geography of risk that has
performance depends not solely on reg- Entry of substitute product
Devalued collateral 46%
■
affected their industrial client base is also
ulatory compliance, but on the ability SALES AND DISTRIBUTION Reputational risk/Negative publicity 46%
■ Product liabilities
beginning to affect the financial sector.
to understand and satisfy the expecta- ■ Product replacement Loss of IFI funding 42%
Stakeholders that have the potential to
tions of a wide range of stakeholder Reduced access to private/international capital 35%
affect the performance of financial insti-
interest groups. Liability for cleanup of contaminated collateral 23%
LABOR RECRUITMENT,
tutions are beginning to emerge, adding
Civil or criminal liability for negligence 13%
RETENTION environmental risk to the range of
RISKS FOR THE EMERGING Increased central bank/MOF regulation 10%
■ Productivity identified business risks, from interest
MARKETS fiNANCIAL SECTOR ■ Strikes or sabotage Loss of depositors 4% rate risk, currency risk, and legal risk
Having explored the changing demands MANUFACTURING ■ Shut-down
Other 6% to operational risk.
on companies, drivers for these changes ■ Fines, penalties 0% 10% 20% 30% 40% 50% 60% 70%
■ Compensation for health
and the potential for company operations Traditionally, where the primary environ-
■ Operating liabilities
to be affected by the scrutiny from stake- mental risk drivers for financial institu-
holders, the survey asked participants to tions have been restricted to the threat
identify major sources of environmental AVAILABILITY OF of direct legal risks, these new stakehold-
risk for their financial institution. Figure WATER SUPPLY ers, active in developed and emerging
2.11, pg. 17, presents an overview of the MATERIALS ACQUISITION ■ Raw materials access markets alike, are posing a wider range of
■ Raw materials price
responses. indirect risks. If a bank borrower violates
■ Permit rejection
labor laws, that borrower can be penalized
Overall, the prime risk was identified as
in ways that cause it to close down its
non-performing assets. A number of
PERMITTING DELAY operations. The borrower then goes into
other issues were also identified as
OR REJECTION default and the bank is left with a non-
significant, again varying by institutional ■ Insurance access or cost performing loan. If an industry faces a
type. Key risks identified include the fol- ■ Construction delay
sector-wide boycott or regulation, multiple
lowing: devalued collateral, reputational START- UP ■ Contract lost
■ Labor supply
companies in that industry can default
risk and loss of international financial
■ Contract terms on their loans, creating large losses for
institution funding. ■ Infrastructure obligation individual banks and the banking system.
■ Cost of capital, access
Allegations of poor corporate governance
can undermine the reputational assets of
the institution.
18 Beyond Risk B OX 2 . 2 FIGURE 2.12 The New Geography of Risk 19
FINANCIAL COSTS OF ENVIRONMENTAL NON-PERFORMANCE RISK TO THE EMERGING MARKETS FINANCIAL SECTO R

Indirect environmental and social risks, LEVEL 2: MULTIPLE

then, can affect a financial institution’s NON-PERFORMING LOANS
performance at three levels: at the level New stakeholders have the potential to
of the single non-performing loan, at the ■ Decreased quality of assets cause not just single NPLs but multiple
level of multiple non-performing loans, ■ Increased need for provisioning NPLs within a bank’s portfolio. A growing
and at the level of operating license, ■ Reduced capital adequacy LEVEL 1: Single non-performing loan trend is for an industry sector to become
driven by reputational risk. ■ Increased cost of funds the target of a coordinated campaign
■ Reduced liquidity
LEVEL 2: Multiple non-performing loan involving NGOs, consumers and the
LEVEL 1: SINGLE ■ Reduced profitability media. When these stakeholders act, they
NON-PERFORMING LOAN (NPL) ■ Reduced rating can affect numerous companies within
At the level of the single non-perform- LEVEL 3: Reputational risk the sector at once. These campaigns have
ing loan, the operations of these diverse the potential to result in a pattern of
stakeholders have the potential to cause defaults, horizontally across the portfolio.
loan defaults across the manufacturing Key drivers of multiple NPL include the
cycle of portfolio companies. Clearly, following:
these impacts on portfolio companies
■ Government regulators may respond
may pose a risk of increased costs for a
by invoking a change to regulations
financial institution. However, the prob- FIGURE 2.13 that can lead to a virtual closure of
ability of these risks occurring during the THE RISK MANAGEMENT GAP the sector, or the alternative of incur-
lifetime of a short-term loan is relatively
ring prohibitive switching costs
small. In addition a number of factors
■ Export market regulators may impose
may lower the risk of default: Unmanaged Risk
restrictions.
■ The company may have insurance. ■ NGOs may lead national or interna-
■ Debt service coverage ratios may be Low Reputational Risk
tional product boycotts.
unaffected and payments may proceed ■ Consumers may lead product or cor-
Multiple Regional NPL
on time. porate boycotts, or enter into sector-
■ The financial institution may have focused class action lawsuits.
Current Risk Multiple Sector NPL
collateral that is unaffected by envi- Assessment
Capacity ■ In addition, NGOs, local communities
ronmental stigma. and employees may adopt a project by
Single NPL
More significant for the financial institu- project strategy that has the same effect
tion though is the potential for multiple of reducing the operating viability of
COVERED
non-performing loans. High multiple projects within a sector
Low High
Potential Losses
20 Beyond Risk B OX 2 . 3 FIGURE 2.14 The New Geography of Risk 21
PERFORMANCE SIGNALS SUSTAINABILITY OPPORTUNITIES

■ Resource-based conflict can cause Reputational risk as a whole was ranked

multiple defaults within multiple sec- the third most important risk after non-
tors, impacting wholesale, retail and performing loans/investments and deval-
Accessing international funding 70%
individual accounts. ued collateral.
HIGH QUALITY
Providing loans for environmental projects 47%
BRAND SIGNAL
Significantly, the survey showed that
LEVEL 3: REPUTATIONAL RISK ■ System indicator
Providing eco-efficiency and cleaner production
26%
advisory services to small and mid-sized clients reputational risk did not just affect insti-
For deposit-taking financial institutions, ■ Quality metrics and management
LOW QUALITY Accessing ethical investment funds 26% tutions with major depositor bases.
reputation and brand image are of critical ■ Positioning for long-term BRAND SIGNAL
■ Trustworthy Providing risk-management services Additional reputation-driven costs that
importance. In particular, a deposit-taking to high-risk industries 21%
■ Perception
were highlighted included: the potential
commercial bank’s operations are built ■ Manipulation of market perception Attracting improved terms of insurance 15%
■ Lack of management capacity loss of depositors, reduced access to capi-
on a borrow-short, lend-long strategy
■ Lack of resources Attracting new depositors 9% tal from private financial institutions and
that depends on three elements: ■ Short cut/quick-fix
Other 9% international bond market, increased
■ Depositor belief that the bank has ■ Untrustworthy
0% 10% 20% 30% 40% 50% 60% 70% 80% central bank/finance ministry regulation,
a critical mass of deposits to smooth and loss of IFI funding (see Figure 2.11,
over potential asset-liability mismatches pg. 17). The financial costs of these
■ Mass trust among consumer base campaigns are hard to quantify, but the
■ Mass branding as trustable combination of these multiple NPLs may
B OX 2 . 4 FIGURE 2.15
begin to affect the financial performance
Core to the operation of a bank then is the OPPORTUNITIES FOR FINANCIAL INSTITUTIONS OPPORTUNITIES FOR COMMERCIAL B ANKS
of a bank directly.
establishment and maintenance of trust.
Key financial impacts (see Box 2.2, pg. 18)
The cost of environmental and social 80% 69%
campaigns waged against the financial ■ Accessing international funding: Securing longer term capital available from IFIs with environmental and 70% In summary, an emerging trend is for the
sector are heaviest when they erode the social performance criteria 60% rapid transmission of risk: from the risk
50%
■ Providing loans for environmental projects: Gaining market share in the growing environmental products
trustworthiness branding that underpins 50%
of adverse environmental impacts caused
and services sector
the depositary base. Adverse campaigns ■ Providing eco-efficiency and cleaner production advisory services: Gaining market share in the 40%
by a company’s operations, through risk
can transform the organization’s brand mid and small cap client base, offering advisory services that boost client business including energy efficiency 30% 19% to the company, through to risk for the
13% 13% 13% 13%
audits, cleaner production assistance, and exporter market opportunity identification 20%
assets into liabilities, turning big into 6% financial institution backing the venture.
■ Accessing SRI/Ethical investment funds: Gaining access to the long term institutional investors and SRI
brutal, dominant into dominating, 10%
investors with positive and negative environmental and social screens These direct, portfolio and reputational
0%
profitable into predatory. An additional ■ Providing risk management services to high risk industries: Gaining market share in environmentally
risks combined have the potential to

Providing loans for

environmental projects

Accessing ethical
investment funds

Providing
risk-management
services to
high-risk industries

Other
Providing eco-efficiency
and cleaner production
advisory services to SME
Accessing

Attracting new
international
funding

impact of these campaigns is the signal-
ing of inadequate management systems
and capacity.
depositors
Attracting improved
terms of insurance
and socially complex sectors by providing high value consulting services that enable clients to manage complex
social and environmental issues such as resettlement, supply chain management, and community relations
■ Attracting improved terms of insurance: Using reduced social and environmental risk as a means
of attracting lower insurance premiums at the portfolio and project level
■ Attracting depositors: Positioning the bank as a dependable institution, with ethically sound corporate
governance in its dealings with depositors and other stakeholders
22 Beyond Risk FIGURE 2.16 FIGURE 2.18 The New Geography of Risk 23
OPPORTUNITIES FOR LEASING INSTITUTIONS OPPORTUNITIES FOR PRIVATE EQUITY INSTITUTIONS

produce a range of costs for the institu- ■ The emergence of the sustainability ana-
80%
tion–from direct liability to single NPLs 56% lyst industry: A growing number of
80% 60%
to multiple NPLs and reputational risk 70%
institutions now offer an analysis of
50%
(see Figure 2.13, pg. 19). 60%
44% corporate and financial sector practice
50% 40% in terms of sustainability. In 2002,
Significantly, from the credit risk per- 40%
33% 33% 25% 25% 25%
40% 30% Friends, Ivory & Sime released a
spective, as these losses escalate conven- 27% 27% 27%
30% benchmark report evaluating the sus-
tional risk assessment and management 13% 20%
13%
20%
6% tainability performance of leading
techniques provide less guidance. 10%
10% 0% international banks. Additional lead-
0% 0% ers in the field include Innovest, and

Accessing
international
funding

Providing loans for

environmental projects

Providing eco-efficiency
and cleaner production
advisory services to SME

Accessing ethical
investment funds

Other
Providing

services to high-risk
risk-management

industries

Attracting
new depositors
Attracting improved
terms of insurance
CURRENT TRENDS

Accessing
international
funding

Providing loans for

environmental projects

Providing eco-efficiency
and cleaner production
advisory services to SME

Accessing ethical
investment funds

Other
Providing

services to high-risk
risk-management

industries

Is this risk likely to grow? A number of
emerging trends for the financial sector
suggest that the relevance of sustainability
issues will continue to increase:
■ The growth of socially responsible invest-
ment (SRI): A growing number of
investors are now conducting negative
or positive screens to ensure the social
responsibility of their investments.
Assets in socially screened investment
portfolios rose by more than one-third
from 1999 to 2001 to top the $2 trillion
mark for the first time ever. This rep-
resents just over 10% of the $19.9
trillion in professionally managed
investment assets in the U.S. SRI
analysis now evaluates financial insti-
tutions on their environmental and
social performance, potentially impact-
Attracting
new depositors
Attracting improved
terms of insurance
Bank Sarasin.
■ Sustainable indices: Both the Dow
Jones Group (Dow Jones Sustainability
Index) and the Financial Times
(FTSE4Good index) have introduced
sustainable indices to enable SRI
investors to invest in corporations
FIGURE 2.17 FIGURE 2.19 having a superior performance on
OPPORTUNITIES FOR PROJECT FINANCE INSTITUTIONS SOCIALLY RESPONSIBLE INVESTMENT—GROWTH MARKET environmental and social issues.
■ Financial sector standards and codes of
conduct: In parallel with the develop-
80% ment of more robust methodologies
64% 64% to evaluate corporate performance, a
70%
Worth over US$2 trillion in Numerous environmental, social
60% US and US$25 billion in UK and ethical ranking, rating and number of codes of conduct for banks
50%
50% screening methodologies are emerging that set out good practice
36% 36%
40% on sustainability. While there is still
30% 21% 21% no widely acknowledged template,
20% current codes include ISO 14000,
7% SOCIALLY RESPONSIBLE INVESTMENT (SRI)
10% FORGE and the UNEP Statement
0%
on Banking and the Environment.
Providing loans for
environmental projects

Providing eco-efficiency
and cleaner production
advisory services to SME

Attracting improved
Providing

services to high-risk
industries

terms of insurance
risk-management
Accessing ethical
investment funds

Other
Accessing
international
funding

Attracting
new depositors
One of the fastest growing Growing importance in Europe
ing on the access to capital for these areas of equity investment
institutions as well as their portfolio
companies (see Figure 2.19, pg. 23).
24 Beyond Risk
■ NGO and media campaigns: A number
of NGOs are now directing coordinated
campaigns towards the financial sec-
tor. Key drivers of recent campaigns
include Friends of the Earth, the
National Wildlife Federation, and
Milieu Defensie.
■ International Financing Institution (IFI)
conditions: Finally there is increasing
demand from IFIs for the financial
institutions they invest in to imple-
ment management systems that ensure
the environmental performance of
their portfolio. The procedures of
these IFIs prohibit investment in
institutions without adequate envi-
ronmental management systems. IFIs
actively addressing this through train-
ing and capacity building include IFC,
IIC, Proparco, Coface, EBRD, DEG,
FMO, ADB, AfDB and CDC.
At the same time, a number of leading
financial institutions are beginning to
translate these risks into opportunity, by
transforming these stakeholders from dri-
vers of risk to drivers of reward. In the
survey, the financial institutions were
asked to identify what they consider to
be the major environment-related oppor-
tunities for their business. Key opportu-
nities identified are highlighted below.
Figure 2.14, pg. 21, summarizes the results
for all respondents. Overall, the results
indicate that access to international
funding, providing loans for environmen-
tal projects, providing advisory services
to SMEs and accessing ethical invest-
ment funds are considered the main
3.
opportunities. THE EMERGING
These opportunities varied significantly
MARKET RESPONSE
by institution type. Figures 2.15–2.18,
In practice, how have leading financial institutions
pgs. 21–23, present the results from com-
mercial banks, leasing, project finance, started to capitalize on these opportunities? ➜
and private equity institutions.
Key conclusions include the following:
■ Overall, the main opportunity ident-
ified by all institutions was access
to IFI funding. Providing loans for
environmental projects was seen as
a key opportunity for project finance
institutions and commercial banks.
■ For project finance institutions, providing
risk management services to high-risk
industries also featured highly along
with provision of eco-efficiency and
cleaner production services.
■ For private equity, accessing ethical
investment was rated highly.
 FIGURE 3.1 The Emerging Market Response 27
PROCEDURE FOR ENVIRONMENT RISK MANAGEMENT

Before the IFC workshop, did your institution have a procedure for ➜ PERFORMANCE BASELINE
environmental risk management? To measure participants progress in imple-
menting environmental change, IFC’s
survey sought first of all to create a base-
Yes, a formal procedure line of environmental management before
the workshops.
22% Yes, an informal procedure
43%
Institutions were asked whether, prior to
➜ MOVING BEYOND COMPLIANCE the CEA workshop, they had a formal
management system in place to address
35%
the issue of environmental risk when
considering investments/lending. Figure
3.1, left, summarizes the results.
No

Overall, 22% of institutions surveyed

reported that they had a formal procedure
for environmental management before
IFC’s workshop, with results varying
FIGURE 3.2 slightly between commercial banks, pri-
ENHANCEMENTS UNDERTAKEN TO ENVIRONMENTAL AND SOCIAL ISSUES following the CEA workshop vate equity groups, leasing companies
and project finance institutions.

Training of internal staff 36% POST-WORKSHOP: RESULTS

Update operating policy 35% IFC’s survey also asked institutions to
Development of
33% identify enhancements they had made to
environmental/social procedures
Rejecting projects with 32%
their environmental and social manage-
environmental issues
ment capability after the workshop. Figure
Working with clients 30%
Report to Director 3.2, left, presents the overall findings of
on opportunities 29%
the survey.
Communications to clients 21%
External reporting of EMS 12% 100% of respondents reported that they
Providing environmental loans 11% had implemented measures to enhance
Hiring of internal 5% their environmental and social manage-
environmental consultants/staff
Media events 5% ment capability after the workshop.
Other 5%
0 5 10 15 20 25 30 35 40
28 Beyond Risk
C ASE EXAMPLES FOR PROJECT FINANCE, COMMERCIAL B ANKING, PRIVATE EQUITY AND LEASING
Despite the possibility of selection and
reporting bias, the results show significant
uptake at the institutional level. The
critical question, however, is the business
value of the initiatives implemented. To
explore the link between sustainability
initiatives and business value, IFC carried
out four more detailed case studies, aiming
for representation across financial institu-
tion types and geographical region. Table
3.1, right, presents the four case studies by
institution type and location.
These case studies address the following
questions:
■ What is the institutional background?
■ What initiatives did the institution
implement?
■ What are the business benefits?
■ What are the lessons learned?
TABLE 3.1 C ASE 1: PROJECT FINANCE The Emerging Market Response 29
C ASE EXAMPLE: INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LIMITED (IL&FS)
CASE 1
PROJECT fiNANCE:
“ The key issue now is moving beyond compliance towards the management of real social LESSONS LEARNED
TYPE OF FINANCING ORGANIZATION COUNTRY
and environmental risks” The IL&FS case reveals a number of
INSTITUTION
lessons for project finance institutions:
Project Finance Infrastructure Leasing and Financial Services Ltd (IL&FS) India Background
Infrastructure Leasing and Financial Services Limited (IL&FS) was incorporated in India in 1987 and is one
Commercial Banking Banco BBA Creditanstalt Brazil
■ For project finance clients, there is a
of the country’s top five non-banking financial companies. Initial shareholders were the Central Bank of
India, Unit Trust of India, and Housing Development Finance Corporation Ltd. IL&FS has offices in Bombay,
critical need for assistance in manag-
Private Equity Tuninvest Tunisia
Bangalore, Delhi and Calcutta, where the organization provides asset management and retail operations ing these issues.
Leasing Raiffeisen Bank Hungary services in the areas of commercialization of infrastructure projects and financial services. ■ The local consultant market does not
fulfill this need.
Key risk drivers for IL&FS clients
Operating in the environmentally and socially complex Indian market, IL&FS identifies a number of potential
■ Banks can use their cross-sectoral risk
sustainability driven risks for its client base. Key risk drivers for clients include the following: management expertise to help clients
■ Export market regulators: Loss of markets, particularly the US and EU, for example, an industrial water
address these needs.
supply project supplying export industries. Should these industries lose export market potential, this in
■ Financial institutions, and their
turn would have a negative impact on the water supply project
■ Media: reputational risk
clients, can have a range of national
■ International NGOs: issue-based campaigns and international stakeholders. These
■ Customers: loss of market share
various stakeholders can have different
■ Government: shutdown, fines
and sometimes conflicting performance
■ Community: protest over impacts on critical resources
standards that require extensive nego-
Key risk drivers for IL&FS tiation to resolve.
At the same time, infrastructure finance institutions in India face a number of sustainability-related risks: ■ The presence of a full time manager
■ Non-performing loans/investments/leases from environmental/social risks
can have a major impact on institu-
■ Liability for clean up of contaminated property/collateral
■ Civil or criminal liability for negligence
tional uptake.
■ Reduced access to capital from private financial institutions/international bond market
■ Increased central bank/MOF regulation
■ Loss of IFI funding
■ Devalued collateral
■ Reputational risk/Negative publicity
■ Loss of reputation with the concessionaires (state and central governments)
■ Reduced ability to raise money in the international markets
Implementation
In response to these emerging risks and opportunities for the institution and its clients, IL&FS sought to
attain world-class expertise in environmental management.
Continued on page 30
30 Beyond Risk
■ Consulting services represent a cost-
effective way of establishing ability to
handle complex projects.
■ The presence of a full time manager
can have a major positive impact on
institutional uptake.
■ For project finance institutions, this
can be a significant selling point,
enabling the institution to win man-
dates for more complex transactions.
The environmental management capacity
that IL&FS has acquired has the potential
to generate significant business benefits
for the institution (see Box 3.1, pg. 31)
CASE 1 Continued The Emerging Market Response 31
Environmental risk management services Results for ILFS
From 1988 to 1994, environment and social issues were the responsibility of a part-time finance/project Sustainability also provides a number of potential opportunities:
executive, helped by external consultants. In 1994 IFC provided introductory environmental risk management ■ Accessing IFI funding
training in Bombay, followed by a workshop on environmental risk management in 1997. During 1995, IL&FS ■ Providing loans for environmental projects
drew on a WBG line of credit to fund private sector infrastructure projects.As part of the WBG requirements ■ Providing risk management services through Ecosmart to high-risk industrial sectors,
an environment and social report (ESR) was developed and then adopted.The ESR defined the environment ■ Cross-promoting IL&FS financing for Ecosmart clients
and social policy framework for project development and implementation. In early 1996, an in-house envi- ■ Providing eco-efficiency and cleaner production advisory services to small and mid-sized clients
ronment and social management group (ESMG) was constituted to implement ESR requirements for all ■ Attracting improved terms of insurance
projects and investments. After operating successfully for 6 years as a dedicated group responsible for ESR ■ Accessing ethical investment funds
and WBG requirements, in 2001, IL&FS floated a fully-owned company—Ecosmart India Ltd (Ecosmart). ■ Identifying funding/financing opportunities in environmental improvement projects
The expertise built-up by the ESMG is domiciled in the new company.Apart from providing environmental
and social management services to IL&FS investments, Ecosmart provides strategic services to various
external businesses including infrastructure projects. IL&FS has also undertaken a range of additional initiatives
as part of its environmental management activities.
Additional IL&FS Initiatives following the ESR
■ Communications to clients and media events
■ Rejecting projects with adverse environmental issues
■ Working with clients to manage environmental impacts
■ Hiring of internal environmental consultant/staff
■ Development of environmental and social procedures
■ External reporting of EMS
■ Experience sharing with other financial institutions B OX 3 . 1
PROJECT FINANCE OPPORTUNITIES
Barriers for IL&FS
IL&FS faced two key challenges in implementing its management system. Initially the lack of consulting
expertise proved a major obstacle, but Ecosmart capitalized on this lack of skills and then entered the wider
market. Furthermore, the varying policies and standards of different national and international stakeholders
when handling the complex environmental and social issues of India, presented an additional hurdle. IL&FS
stresses that case studies are needed to highlight the typical differences in IFC/WB policies compared with SUSTAINABILITY DRIVEN OPPORTUNITIES
those of some developing countries, and to provide guidance on how to handle this conflict.
■ Win new project finance business
On the issue of barriers to implementation, IL&FS’s Vijay Joshi comments,“I strongly feel that we have overcome ■ Lead and manage new complex transactions
all the above barriers over the past 6 years. But the major constraint is that recognition of value of environ-
■ Gain access to high asset quality clients
mental and social risk mitigation by implementing an EMS is not, by-and-large, recognized by various
stakeholders, including government agencies.”
■ Develop fee-generating advisory services
■ Successfully complete complex deals as a result of social and environ-
mental due diligence
32 Beyond Risk C ASE 2: COMMERCIAL INVESTMENT B ANKING The Emerging Market Response 33
C ASE EXAMPLE: B ANCO BB A CREDITANSTA LT (BB A) BRAZIL

CASE 2 ■ BBA’s strategy as a bank is one of

COMMERCIAL INVESTMENT
BANKING: LESSONS LEARNED
The BBA case reveals a number of lessons:
■ IFIs provide a strong incentive for
environmental performance.
■ Negatively, IFIs can withhold fund-
ing, and the removal of one IFI’s
funding for environmental and
social reasons may cause other IFIs
to withdraw funds.
■ Positively, financial institutions
with environmental management
systems can access IFI financing
that is available for development
purposes. This funding is generally
cost-effective risk management. BBA
“ Over the last few years, it has become increasingly clear that environmental perfor- Key initiatives:
works with clients to transform border-
mance has significant implications for financial institutions. The key issues for banks and Following the CEA workshop, BBA has undertaken a number of initiatives. Key initiatives include the following: line deals. Unlike IL&FS (case 1, pgs.
other financial institutions include credit, reputation and political risks associated with ■ Report to director/board on environmental risks/opportunities
29–30), though, BBA is not aiming
■ Communications to clients and media events specifically to acquire a critical mass of
the environmental status and impact of their portfolios. For commercial and investment
■ Updating the operating policy of the institution environmental and social expertise,
banks, environmental risk management is now a critical part of the credit risk manage-
■ Working with clients to manage environmental impacts
ment process”
and position itself to manage environ-
■ Development of environmental/social procedure
mentally complex transactions. BBA’s
Roberto Dumas Damas ■ External reporting of EMS
■ Training of internal staff strategy involves a low cost operation
BBA Creditanstalt
■ Providing environmental loans for screening out rapidly the potential
Background Business benefits of EMS to BBA problem project and adhering to donor
Banco BBA Creditanstalt is the thirteenth largest Brazilian bank in terms of assets, with US$6.63 billion ■ In the last 2 years BBA was involved in 27 Projects totalling R$ 7 billion in BNDES financing.
performance standards.
in December 2001. It is positioned as the fifth largest private bank having local control and the largest
■ BBA’s environmental management system has enabled the bank to access the BNDES environment
■ The main business benefits of the
Brazilian wholesale institution and is among the five major banks on-lending funds from the Brazilian credit line, ensuring improved loan rates and loan terms not otherwise commercially available.
development bank BNDES. approach are listed in Box 3.2, pg.34.
■ BBA has met IFC’s environmental conditions for environmental management and as a result was able to
access US$40 million additional IFC funding.
Key risks for clients ■ BBA was also able to access more than US$100 million of additional funding from other multilateral

BBA identifies a number of sustainability-driven risks for its client base:

lower cost, as in the case of BBA’s
funding from BNDES’s environ-
mental credit line. Most significantly
IFI financing provides long term
lending at tenors critical to whole-
agencies with environmental screening (including DEG, EIB, and FMO).
■ Lower credit risks. BBA has identified as unacceptable and rejected a number of projects with
■ Media: reputational risk
■ Customers: loss of market share unacceptable environmental credit risks.
■ BBA has also been recognized as the first domestic Brazilian bank to adopt an EMS.The bank was
■ Government: shutdown, fines
■ Financiers: Loss of financing highlighted in the Friends of the Earth eco-finances bulletin. BBA’s Roberto Dumas Damas was invited
by UNEP to make a presentation at the Rio+10 UNEP Conference.

sale finance that are not commer-
cially available elsewhere.
Key risks for commercial and investment banks
In addition, BBA identifies potential sustainability-driven risks for commercial investment banks
operating in Brazil:
■ Non-performing loans/investments/leases from environmental/social risks
■ Loss of IFI funding
■ Reputational risk/negative publicity
■ Liability for clean up of contaminated property/collateral
■ Devalued collateral
Implementation
In response to these risks, two BBA staff attended the CEA workshop in Washington. BBA has since
established a comprehensive environmental management system, the primary objective of which is to
focus on economic development that is environmentally sustainable, minimizing exposure to companies
with poor environmental practices and facilitating access to multilateral and bilateral capital.
Barriers
Key lessons in terms of implementation include the following:
DO
1. Involve the key staff of the bank within the process.
2. Stress how environmental issues can lead to credit risks.
3. Establish clearly the roles and responsibilities of relevant staff members within the process.
4. Identify some projects that went wrong environmentally and the impacts suffered by the funding
providers.
5. Bring environmental issues to the credit committee.
6. Follow environmental issues within approved projects through external consultancy.
34 Beyond Risk CASE 2 Continued The Emerging Market Response 35
C ASE 3: PRIVATE EQUITY
C ASE EXAMPLE: TUNINVEST FINANCE GROUP (TUNINVEST)

CASE 3
PRIVATE EQUITY:
DO NOT Background LESSONS LEARNED
1. Leave any doubt among the shareholders concerning the economic and financial importance of the EMS. Tuninvest Finance Group, established in 1984, is the leading private equity and corporate finance firm in Key lessons of experience from Tuninvest
North Africa, with teams covering Tunisia, Morocco and Algeria.Tuninvest’s corporate finance team has for private equity groups include the
2. Acknowledge the EMS as a theoretical textbook only.
expertise in mergers and acquisitions, privatization, leveraged buy-outs, initial public offering, and debt
following:
3. Build an over-optimistic EMS that cannot be put into practice. structuring.Tuninvest is currently managing five funds totaling about US$ 60 million with a diversified
portfolio and a hands-on approach.Tuninvest seeks a 4 to 7 year holding period before exit.
4. Let the EMS be viewed as a time consuming decision making process. ■ Undertake the environmental assess-
Key risks to portfolio companies ment during the due diligence necessary
Tunisia is a signatory to all the international environment conventions and has signed a free trade agree- for making an investment decision.
ment with the EU.Tunisia’s environment regulations are based on EU guidelines, with environmental impact
Today, environmental assessment is
studies required for new projects and extensions. No project can be implemented without the go-ahead
of the national environmental protection agency (ANPE).
a part of the investment proposal.
■ For export strategy purposes, do not
Key risks to private equity groups assess compliance with local regulations
Most of Tuninvest’s exits have been and are planned to be through sales to strategic investors, usually
alone. Aim, whenever possible, to
from Europe. Compliance of investee companies with international and local environmental guidelines is
an important factor in the company’s evaluation.This also affects the amount of the limited term guarantee
comply with European and interna-
that Tuninvest will provide as sellers to the new owners to cover any future liability that could arise and tional standards.
B OX 3 . 2
that is related to the pre-exit period. ■ Consider also the informal require-
SUSTAINABILITY BUSINESS DRIVERS for risk-management focused commercial and investment banks
ments imposed by key stakeholders,
Implementation
■ Four members of Tuninvest staff attended the CEA workshops in Washington, Istanbul and Johannesburg.
including the workforce, customers
Following the workshops the company began the process of establishing an environmental management and neighbourhood of the company.
system. In July 1998, in collaboration with the IFC and SmArtConsult, a local environment consultancy, ■ Avoid projects with complex environ-
Tuninvest formalized its EMS.
mental issues where there is a high
■ Tuninvest’s tight operating structure and small team size facilitated adoption of the EMS. Key staff
■ Reduced management workout time involved included: investment officers, the environmental coordinator, the external consultant, the internal
cost to bring them up to standard,
■ Reduced late stage project rejection investment committee, the funds’ investment committee and legal counsel. or where management is unaware of
■ Reduced reputational risk
environmental issues and is not willing
Business Benefits of EMS to Tuninvest
■ Reduced default, loss, provisioning
to change its stance.
■ For the investee companies, having an EMS in place improved bargaining power with potential acquirers.

■ Reduced liability for clean up of collateral This was the case in several examples of deals in Sweden (SOTUPA/SCA) and France (Interchem/CEVA).
■ Tuninvest’s environmental services have enabled the organization to add value to a number of portfolio
■ Reduced legal liability for misrepresentation/negligence
companies.The cases of SOPAT and Vitalait (a milk producer) illustrate cost savings through improved
■ Low cost operating structure
productivity.The SOPAT slaughterhouse used water inefficiently in the process and managed to optimize
■ Access to IFI capital the use of water, with substantial savings.Vitalait also managed to reduce the quantity of water used in
the process and began recycling it for reuse.
36 Beyond Risk
■ Introduce environmental covenants
within shareholder agreements.
■ Following investment, instigate a
program with company management
to deal with any major corrective
actions, and review regularly (one
internal review every six months and
once a year by an external expert for
verification).
■ Inform all members of the fund man-
agement team of any significant envi-
ronment issues.
■ Seek any available financial subsidies,
as there are many subsidized credit
lines available, for example for water
treatment units.
■ Even though it is necessary for the
investment officers to be knowledgeable
of EMS and environmental issues, it
proved beneficial having an external
expert to follow and review the inter-
nally prepared EMS.
■ Schedule training for both internal
staff and the management of portfolio
companies.
CASE 3 Continued The Emerging Market Response 37
B OX 3 . 4
UPSIDE OPPORTUNITIES FOR PORTFOLIO COMPANIES
CONCLUSIONS FOR
PRIVATE EQUITY
■ Tuninvest has minimized the environmental risk of its portfolio Sustainability-driven risks can impact
■ Access to SRI funding
■ Portfolio companies are focused on exporting and becoming leaders in the Tunisian and Maghreb markets. private equity groups directly. Key risks
Sustainability has a role in helping to make these portfolio companies more attractive for an IPO or a ■ Access to IFI funding
for private equity (see Box 3.3, pg. 36).
sale to potential strategic investors ■ Increased margins through process efficiency
■ Sustainability has an additional role in helping portfolio companies achieve sustainable growth and
■ Access to new markets At the same time, sustainability provides
improve international competitiveness, as well as helping them achieve an Investment Grade rating
in order to tap the bond market
■ Enhanced branding a number of opportunities to add value at
■ Tuninvest’s environmental management system forms part of its presentation to potential IFI and institutional ■ Enhanced sales the level of the portfolio company. Value-
investors. In the first half of 1998,Tuninvest raised an international fund with investors having environ- added opportunities (see Box 3.4, pg. 37).
mental and social criteria including EIB, IFC, FMO and Proparco.Their success in applying these criteria was
a factor in the selection of Tuninvest as a technical partner in a new regional fund covering Morocco, Additionally, sustainability may add value
Tunisia, and Algeria raised in 2000 with the same investors and European private institutional investors.
at the level of the fund itself. Core oppor-
tunities for the fund (see Box 3.5, pg. 37)
B OX 3 . 3 B OX 3 . 5
DOWNSIDE RISKS FOR PRIVATE EQUITY UPSIDE OPPORTUNITIES FOR PRIVATE EQUITY GROUPS
■ Reduced valuation through environmental stigma SUSTAINABILITY DRIVEN OPPORTUNITIES
■ IPO brand impacts ■ Access to SRI funding
■ Trade sale stigma ■ Access to IFI funding
■ Incomplete warranties concerning contingent liabilities ■ Reflecting environmental risk in reduced portfolio company
■ Liability for misrepresentation purchase price
■ Liability for negligence ■ Reflecting superior environmental and social performance
in enhanced liquidity and pricing of portfolio companies
■ Reputational risk for limited partners
■ Directors liability
■ Criminal liability
38 Beyond Risk
RAIFFEISEN B A NK
CASE 4
LEASING: LESSONS LEARNED
Key lessons of experience from Raiffeisen
Bank include the following:
■ Smaller cap clients face strong
competitive pressures, with limited
financial and management resources.
At the same time, small cap clients
represent an under-banked segment
compared to large cap top tier clients.
■ For these undercapitalized small cap
clients energy efficiency enhance-
ments can boost operating margins
significantly as well as reducing oper-
ating risks resulting from fire, health
and safety issues and legislation driven
product obsolescence.
■ In addition, management willingness
to engage in longer-term process
enhancement may correspond with
long-term management commitment
to the growth of the company
■ As a result of these factors, the delivery
of energy-efficiency services may pro-
vide both a critical means of accessing
the strategically important smaller cap
market, and a means of reducing the
credit risk associated with the segment.
C ASE 4: LEASING The Emerging Market Response 39
■ Typical clients with energy efficiency
opportunities include public sector
Background Results
service providers (e.g. hospitals, trans-
In 1993, Hungary adopted a national energy policy making energy efficiency an integral part of government ■ Raiffeisen’s participation in the pilot program resulted in the immediate identification of deal flow port, utilities) and sectors where energy
energy and environmental policies.While energy efficiency has improved significantly since the late 80s, potential. Core business products included cogeneration development, and boiler/heating center recon- prices have traditionally been subsi-
these improvements have taken place mainly in the private sector. Energy efficiency in Hungary is still struction for public sector clients with inefficient and unsafe boiler technology.
dized but are presently increasing.
lower than the EU/OECD countries, with opportunities existing across a range of sectors, ranging from ■ The bank established an energy efficiency business team and continued to year two on a stand alone
■ Opportunities also exist for projects
the communal household sector to the publicly owned sector including central government and local commercial basis after the 50% staff subsidy ended
municipalities. ■ Raiffeisen invested equity in a project development company Sinesco, whose revenues come from with short pay back periods in the
shared energy savings from industrial clients, with a specialization in the hospital sector. retail market
Raiffeisen Bank was established as Unicbank in December 1986, concurrently with the establishment of
the two-tier banking system in Hungary. It was voted, “Best International Bank in Hungary 1999”.The bank
■ In year 3, the bank began financing a number of projects without IFC’s guarantee, judging that it had
■ Conducting low cost up front energy
acquired enough technical expertise in certain proven energy efficiency market sectors and could avoid
was interested in exploring the strategically important Small and Medium Scale Enterprise (SME) sector; efficiency audits is a key method of
paying the guarantee fee for these projects.
a sector that was under-served by the major commercial banks, and where the margins reflected reduced
■ Raiffeisen expanded further into the retail market, offering $800 loans for homeowners to convert to establishing client demand for energy
competition compared to large cap corporate clients.
gas and upgrade boilers, as well as developing new products to serve the untapped cooperative “block- efficiency products.
IFC, through the Global Environment Facility (GEF), offered guarantee funding as a pilot project for house” housing sector.
■ Meeting market demand for these
Hungarian Banks to finance energy efficiency projects, opening up a potential opportunity for Raiffeisen ■ As a result of this initiative, Raiffeisen has established a leadership role in serving the strategically
services depends on the banks’ expand-
to explore the smaller-cap market. IFC also worked with Raiffeisen to structure the project to mitigate important mid and small cap positions, enhancing market share at the retail level as well as undertaking
the risks associated with energy efficiency financing for SMEs, in particular the lower credit worthiness pioneer loans for the previously unserved cooperative housing sector for energy efficiency improve- ing in-house delivery capability. Bank
of small-cap clients, operating risks as a result of technological obsolescence and outdated operating ment investments. staff training on deal identification
practices, and the low collateral value of energy-efficient equipment. ■ The project’s commercial success resulted in a number of banks following Raiffeisen into the sector,
and structuring is currently under
as well as IFC investing an additional $12million from its own account into the Hungarian Guarantee
preparation at K&H Bank, HVB
Implementation Facility. Banks currently involved include OTP, K & H Bank and HVB Bank.
■ IFC, through GEF, offered guarantee funding to Raiffeisen to reduce the risk of their loans to the Bank and OTP Bank, followed by
Table 3.2, pg. 40, presents a summary of current Raiffaisen portfolio projects and transaction size across
SME sector. banking client workshops in various
a range of client segments
■ A project officer’s salary was subsidized by 50% for the first year, until a real business line was demon-
locations of the country.
strated which justified the bank’s investment in staff resources.
■ Working through the IFC’s technical assistance facility, created to support program participants in devel-
oping the energy efficiency finance business, Raiffeisen forged partnerships with potential business
developers, matching its financial structuring expertise with the technical energy efficiency expertise
of project developers. In particular, a business incubator service helped potential project developers
across the range of energy efficiency innovations to develop viable business plans that could be financed.
■ A technical assistance project helped Raiffeisen in credit risk assessment for these loans to SME Energy
Service Companies (ESCOs). As part of this credit risk assessment, three officers from Raiffeisen
attended the CEA workshop.The workshop examined potential environmental risks to target Eastern
European clients, ranging from major hazards, fire, occupational health and safety, regulatory shut down
and EU legislation driven product obsolescence, identifying potential opportunities for energy efficient
products with lower risk profiles.
40 Beyond Risk TABLE 3.2 FIGURE 3.4 The Emerging Market Response 41
HUNGARIAN ENERGY EFFICIENCY PROJECT EXAMPLES EVOLUTION OF BEST PRACTICE

THE SME MARKET Although they may appear to be the least

SME clients form a key market segment. likely to have the time or money to focus
As Figure 3.3, right, presents, a number on business performance, the reality is
PROJECT TYPE TRANSACTION SIZE (US$)
of factors are increasing the strategic that this group is likely to gain the most
importance of the SME market for com-
Hospital gas-fired heating system
Hospital heating project
115,707
518,369
COMPETITIVE ADVANTAGE
➜ Environmental
Value-Added
from environmental performance enhance-
mercial banks and leasing companies. ment, as many SMEs use outdated and
Block housing gas heating system 68,435 RISK
resource-inefficient technologies.
To what extent can sustainability enable Meat packing plant gas boiler system 115,340
MANAGEMENT
FAILURE
➜ Environmental
Compliance
a financial institution to boost market Railroad station gas heating system 825,902 Procedures These SMEs, therefore, present opportuni-
share in this strategically important seg- Street lighting projects (21) 396,388 ties to increase efficiency and reduce costs
RISK
through cleaner production, productivity
ment? Conventional wisdom assumes
that SMEs have no time or money to
Block house window changing

TOTAL
114,078

2,154,219
ASSESSMENT
FAILURE
➜ Financial
Compliance improvements, access to premium export
Procedures
concern themselves with environmental markets and management system design.
issues. Typical SME characteristics include
the following: that they are undercapital-
ized, facing global competitive threats,
using antiquated, resource inefficient
technologies, and operating in areas
FIGURE 3.3
with lower enforcement levels of envi-
DRIVERS FOR SME BUSINESS
ronmental regulations.

Retail Banking Competition

PUSH FACTORS PULL FACTORS

■ Growth of Bond Market ■ Retail market size

■ Increased IPO’s ■ Growth rate of market
➜
■

■
Internet Banking
Loss of second tier markets
➜ ■

■
Local knowledge
Under-served segments
■ Margin reductions
RETAIL SEGMENT
■ Global financial markets
42 Beyond Risk
PROVIDING ENVIRONMENTAL VALUE-ADDED TO SME CLIENTS
Providing these services can generate
business benefits for the leasing company.
Key business drivers include the following:
■ Develop new SME business
■ Cross-sell existing products to supply
and distribution chain
■ Deliver environmental product
extensions
■ Reduce client marketing costs
■ Increase inter-client referrals
■ Increase intra-client referrals
■ Build low cost ‘word of mouth’
marketing addressing corporate
and individual accounts
■ Build media campaigns
CASE STUDY CONCLUSIONS:
FROM COMPLIANCE TO
VALUE-ADDED
The four cases above provide examples
of financial institutions not only per-
forming comprehensive financial and
environmental due diligence, but com-
plementing it by offering their clients a
range of sustainability-based products
and services that address the clients’
business needs.
These cases, then, suggest an evolution
in approach: from financial compliance—
where client creditworthiness is assessed
B OX 3 . 6 TABLE 3.3 The Emerging Market Response 43
SUSTAINABILITY AS A BUSINESS DRIVER—ILLUSTRATIVE EXAMPLES
primarily as a function of the balance
Sustainability as a Business Driver: Good Practice Review
sheet, through environmental compli-
ance—where the institution imposes
GOOD PRACTICE environmental conditions to secure client
BUSINESS OBJECTIVE BUSINESS DRIVER EXAMPLE
compliance and, to sustainability—
Increasing business volume ■ Winning mandates for complex IL & FS
SME BUSINESS NEEDS ■
where the financial institution ensures
projects ■ IDFC
Revenue growth ■ ABN AMRO compliance as a core part of risk man-
■ Decreased operating costs
agement. This approach also delivers
(labor, inputs, waste disposal etc) ■ Providing loans to SME clients ■ Banco Cuscatlan
■ Rant Leasing environmental value-added to clients
■ Increased productivity SUSTAINABILITY
■ Banco Real in a way that enhances its competitive
■ Enhanced quality control PRODU CT S
■ Enhanced customer security ■ Winning microfinance market share ■ Banco Real position (see Figure 3.4, pg. 41).
■ Environmental management systems
■ Access to financing ■ African Bank
■ Cleaner production audits
To what extent is the market capitalizing
Risk reduction
■ Energy efficiency audits ■ Winning ethically conscious ■ Garanti Bank
■ Energy efficiency products depositors and credit card holders ■ Cooperative Bank on these opportunities? Table 3.3, left,
■ Long term local operating license
■ Long term international operating provides examples of current good practice
■ Winning SME market share through ■ Raiffeisen Bank
license offering energy efficiency products ■ OTP Bank in terms of sustainability initiatives that
■ Avoided loss of contracts, strikes, HVB Bank
■
can increase business volume, increase
government shut down, penalties etc.
business margins or enhance the long-
■ Access to insurance
■ Offering finance to sustainable ■ Terra Capital
businesses ■ Triodus term franchise of the institution.
■ ASN Bank
Increasing margins ■ Reducing environmental credit ■ Indasia SUSTAINABILITY
risk provisioning through quality ■ Vilniaus Bank
processes ■ Bioventures AS A BUSINESS DRIVER
■ Fleet Boston While this list is not exhaustive, it
exemplifies the potential for sustainability
■ Providing fee-based advisory services ■ Unibanco
■ Tuninvest strategies to enhance the core drivers of
■ IL & FS
institutional performance as Figure 3.5,
Building long-term ■ Gaining access to IFI finance ■ BBA pg. 44, suggests.
competitive position ■ Banco Cuscatlan
■ Gaining access to SRI finance ■ Capital International
community Partners
■ Citigroup
■ Maximizing employee performance ■ Cooperative Bank
■ Standard Chartered Bank
■ Corporate governance premium ■ Bank of Shanghai
44 Beyond Risk FIGURE 3.5
SUSTAINABILITY AS A STRATEGIC TOOL FOR THE FINANCIAL SECTO R

Core opportunities in terms of increasing

business volume include the following:
■ Increasing business volume: to trans-
form undoable deals into doable ones, LONG-TERM PROFIT
and increase the bankable portfolio,
to provide additional sustainability-
driven financing that supplements
4.
existing loan products, to finance new VOLUME P/A MARGIN DURATION LESSONS FROM THE FIELD:
sustainable sectors, to reduce attrition, SUSTAINABILITY IN ACTION

➜
increase client loyalty, and enhance

➜
loan renewal rates What are the main lessons learned in terms
Core opportunities in terms of increasing MORE DEALS BIGGER MARGINS LONG-TERM OPERATION of implementation? ➜
business margins include the following:
■ Increasing business margins: to
reduce critical costs (losses, workout
time, insurance costs, capital costs,
legal liabilities and provisions), to
retain fees from advisory services,
syndications/underwriting services,
to reflect value-added in premium
loan pricing

Core opportunities in terms of increasing

business longevity include the following:
■ Increasing business longevity: To
leverage sustainable portfolio perfor-
mance to access expansion capital
(key sources include IFIs, long term
institutional investors, bond markets,
pension funds, depositors and SRI
investors)
 B OX 4 . 1 Sustainability in Action 47
ISO14000 SERIES

➜ PERFORMANCE-BASED
MANAGEMENT SYSTEMS
Chapter 3 has identified a range of
The International Organization for Standardization (ISO) has published a standard potential sustainability-driven benefits
on guidance for establishing an EMS–ISO14001.This standard is one in a series of
for financial institutions. What are the
key lessons of experience in terms of
voluntary standards (the ISO14000 series) concerning environmental management,
implementing sustainability initiatives?
environmental performance, product life cycle assessment and product environment
For an institution to achieve these
➜ FOR AN INSTITUTION TO ACHIEVE THESE SUSTAINABILITY
BUSINESS GOALS RELIABLY, IT NEEDS A SYSTEMATIC APPROACH.
labeling. Many organizations globally have undergone third party verification of their
sustainability business goals reliably,
EMS and have attained certification to the standard. Others have opted for the EU’s
it needs a systematic approach. Priority
EMAS scheme which sets out more demanding requirements. ISO14001 focuses
business goals are identified and the
on implementation of the EMS, while EMAS concentrates on actual environmental
institutions formal and informal structure
performance. Both standards are voluntary. Some of the largest banks, for example, is then aligned to achieve them. Although
Deutsche Bank, UBS, Credit Suisse, Sakura Bank, were among the first in the financial these core components are integrated
sector to achieve certification to ISO14001. For financing institutions, the most within the organization’s operating sys-
important advantage of certification is likely to be a wider public recognition that tems, a common term used to refer to
the bank’s position on environmental and social issues is sound. these elements is an environmental
management system (EMS). Where the
management systems of the ISO14000
series focus on process conformance, the
EMS outlined in this chapter focuses on
business performance.

There is considerable literature available

on the design and implementation of
environmental management systems
designed to secure process conformance,
in particular the ISO14000 series, see
Box 4.1, left.
48 Beyond Risk
EMS TYPES ACCORDING TO STRATEGIC FOCUS
The objective of this chapter is to examine
experience based on creating an EMS
that has three aims:
■ To boost the business of core clients
■ To generate a clear return for the
financial institution
■ To work with available resources and
minimize the cost of implementation
Customizing the System
The scope and structure of an EMS,
therefore, varies according to a number
of factors, including institution type,
client base, and strategic focus. Figure 4.1,
right, presents four types of EMS catego-
rized according to strategic focus.
Type One focuses on the management of
key environmental and social risks with
a minimum of resources.
Type Two addresses comprehensive envi-
ronmental and social due diligence to
present the financial institution as world
class in terms of credit risk management.
Type Three manages risk comprehensively
but identifies specific value-added oppor-
tunities.
Type Four orients its business line towards
sustainability.
FIGURE 4.1 B OX 4 . 2 Sustainability in Action 49
ELEMENTS OF AN ENVIRONMENTAL MANAGEMENT SYSTEM (EMS)
While the strategic choice will vary with
the institution’s context, there are never-
theless a number of key elements that
TYPE ONE: DEFENSIVE—Core Elements of EMS in Place are consistent across EMS types. This
a) Objectives and targets: setting the key business goals for the institution
chapter focuses on five central elements
Management of key environmental and social risks b) Applicable standards: identifying the standards acceptable to key stakeholders
of the environmental management sys-
■ Operational procedure
c) Procedures: identifying cost-effective processes to achieve those standards
■ Top management support tem, see Box 4.2, left.
at the project level
d) Roles and responsibilities: allocating roles internally and externally implement
A) OBJECTIVES AND TARGETS
the procedure
An EMS has value for the institution
e) Communications and reporting: periodic monitoring of the system and internal
only in so far as it achieves specific busi-
and external reporting against targets and objectives
TYPE TWO: PROTECTIVE—Fully Operational EMS
ness objectives. For the EMS to provide
Systematic management of environmental and social risk business value it must define a number of
■ Operational procedure priority business objectives, set specific
■ Application to all relevant sub-projects measurable targets for achieving them
and then align key elements of the orga-
nizations formal and informal structure
B OX 4 . 3 to achieve them.
TYPE THREE: OFFENSIVE—Fully Operational EMS POTENTIAL OBJECTIVES FOR RISK MANAGEMENT FOCUSED COMMERCIAL B ANKS
The choice of these priority objectives
Systematic management of environmental and social risk will depend on the business lines, com-
Limited environmental and social value-added petitive positioning and strategy of the
■ Operational targets and objectives of EMS (enhanced portfolio quality, institution. For commercial banks that are
reduced provisions, reduced workout time)
focused on risk management, as the case
RISK REDUCTION of BBA (see chapter 3) illustrates, a core
■ Reduced management workout time
goal may be risk reduction. Box 4.3, left
■ Reduced risk of project rejection at a late stage
TYPE FOUR: SUSTAINABLE—Strategic Focus on Environmental & Social Opportunities ■ Reduced risk to reputation For project finance-focused institutions,
■ Reduced risk of defaults, and lower loss provisioning core goals may focus not only on risk
Systematic management of environmental and social risk
Systematic environmental and social value-added ■ Reduced liability for any environmental clean-up of collateral reduction, but also on managing the
■ Environmental and social opportunities prioritized within existing sectors ■ Reduced legal liability for misrepresentation/negligence environmental and social issues associated
■ New sectors with complex projects, and making those
■ Continued access to IFI capital
projects work effectively. Box 4.4, pg. 50
50 Beyond Risk
For private equity groups, core goals may
focus on both downside risk management
and on creating business value for the
investee company. Box 4.5, right
Key lessons include the following:
■ The choice of objectives will depend
on the competitive positioning and
strategy of the institution.
■ The organization should prioritize,
resisting the temptation to set too many
goals and diffuse the institution’s focus.
■ Go for quick wins that may have a
demonstration effect.
■ Pick objectives that have a measurable
financial impact.
■ Pick growth client segments.
■ Focus on early goals that minimize
intrusion on the bank’s operating
processes.
B) APPLICABLE STANDARDS
Applicable standards are commonly
assumed to be the national and local reg-
ulations set by government. While these
standards apply for all investments, the
global economy has started to introduce
in addition a range of new stakeholders
with their own standards, and potential
to penalize companies for non-confor-
mance. These international stakeholders
include export market regulators, insurers,
SRI investors, NGOs, local communities,
and financial institutions.
B OX 4 . 4
POTENTIAL OBJECTIVES FOR PROJECT FINANCE INSTITUTIONS that offer environmental
advisor y ser vices to high environmental risk clients
VALUE CREATION
■ Increased access to long term capital
■ Reduced cost of capital
■ Fees from environmental due diligence services
■ Positioning for complex structured finance transactions
■ Increased volume of bankable deals
■ Business from new clients
B OX 4 . 5
POTENTIAL OBJECTIVES FOR PRIVATE EQUITY INSTITUTIONS
DOWNSIDE AVOIDANCE
■ Reduced valuation through
environmental stigma
■ Incomplete warranties
■ Legal liability to limited partners
■ Liability for misrepresentation
■ Liability for negligence
■ Directors liability
■ Criminal liability
FIGURE 4.2 Sustainability in Action 51
COMPLIANCE APPROACH
Identifying applicable standards, and
ensuring compliance with them poses a
number of challenges. Relevant stakehold-
DUE DILIGENCE ers may be hard to identify. Stakeholders
may claim the right to involvement in a
➜
project without any legal basis for juris-
diction. In addition, the standards of
CONDITIONS
these stakeholders can conflict. Finally,
➜
they can evolve over time, leaving the
financial institution with outdated criteria
SUPERVISION
to judge acceptability.
➜
In 2001, to address these issues, a number
of banks based in the Netherlands began
“COMPLIANCE”
to implement corporate-wide forestry poli-
cies. A core step in the policy rollout was
to identify key stakeholders, including
NGOs and industry clients. Policy for-
FIGURE 4.3
mulations were then forged in consultation
FROM COMPLIANCE TO VA LUE-ADDED
with these stakeholders and have achieved
broad consensus.
What are the elements of current good
DUE DILIGENCE BUSINESS NEEDS ASSESSMENT practice for financial institutions in setting
VALUE CREATION applicable standards? Key lessons include
➜
■ Access to SRI funding the following:
■ Access to IFI funding
CONDITIONS ENVIRONMENTAL PRODUCTS & SERVICES ■ Identify local, national and interna-
■ Reduced risk pricing at purchase
tional stakeholders whose support is
➜
■ Value added through process efficiency
■ Value added through new markets critical.
■ Valued added through premium pricing ■ Identify the standards that they judge
SUPERVISION FOLLOW-UP BUSINESS NEEDS ASSESSMENT
■ Long term positioning for strategic to be acceptable (for example, national
➜
investors regulations, EU standards, WBG
industry guidelines).
“COMPLIANCE” “ENVIRONMENTAL VALUE-ADDED”
52 Beyond Risk
■ Identify the scope of all relevant oper-
ations for which the institution may
be held liable (for example, company
operations, supply chain, distribution
chain, previous site use).
■ Identify potential areas of conflict
between different stakeholders (for
example, conflict between EU market
requirements and local regulations).
■ Bring relevant groups together and try
to forge a consensus over conflicts in
standards, identifying clearly the group’s
final position and its justification.
■ Keep the institution open to dialogue
on adapting standards over time.
C) PROCEDURE: CONFORMANCE
VERSUS PERFORMANCE
The new stakeholders identified have
the potential to transmit risk to portfolio
companies and their financiers. In response
to this risk, the standard conformance-
based EMS focuses on a due diligence
process designed to ensure project com-
pliance with applicable standards and
thereby reduce the financial institutions
risk. While individual due diligence
processes differ, the standard compliance
approach follows three broad phases
(see Figure 4.2, pg. 51)
Due diligence: During the due diligence
phase the financial institution identifies
potential risk drivers, including non-
compliance with national legislation,
potential contamination of site or col-
lateral, occupational health and safety
concerns.
Conditions: As a condition of investment,
the financial institution requires the client
to agree to a number of legal conditions
designed to ensure compliance with
applicable standards.
Supervision: Following investment,
the financial institution monitors client
compliance with applicable standards.
Standard monitoring tools include client
site visits and annual monitoring reports
submitted by the client.
The performance-based EMS reverses the
process with a three-phased approach:
(see Figure 4.3, pg. 51)
i) Business needs assessment: During
the business needs assessment, instead
of identifying risks to the financial
institution the focus is on looking at
the business risks and opportunities
facing the client.
ii) Product and service delivery: Instead
of issuing a set of legal conditions
with which the client must comply
as a condition of financing, the per-
formance EMS focuses on delivering
to the client a range of environmental
products and services that help the
client address those needs.
iii) Follow-up business needs assessment:
Finally, instead of exclusively moni-
toring compliance with the bank’s
standards, the performance-based
EMS aims to track changing markets
risks and opportunities. Follow up
products and services are then iden-
tified that may boost the clients busi-
ness while renewing the relationship
and generating additional business
value for the financial institution.
Key lessons in terms of implementing
the approach include the following:
i) Business needs assessment
■ Sustainability business needs of
clients will vary with sector, region,
size, and market conditions.
■ Work with priority client market
segments in identifying their sus-
tainability business needs.
■ Key market drivers for the client
include: access to new markets,
access to capital, process efficiency,
brand, enhancement to reputation,
access to insurance, employee
productivity, community relations
and license to operate. IFC’s
“Developing Value” report pro-
vides a detailed breakdown of
business drivers across regions
and sectors.
ii) Environmental products and services
■ Identify products and services
geared towards the clients primary
business needs.
■ Form partnerships that reduce the
cost of product and service delivery.
■ Look for related markets, for
example using the institution’s
environmental and social due
diligence processes to increase its
ability to mobilize co-financing
for complex projects.
iii) Follow-up needs assessment
■ Monitor sector and regional trends
and best practice in terms of both
risk and opportunity.
■ Offer products and services that
respond to evolving market-based
risks and opportunities, renewing
the client relationship, and
reducing attrition.
■ Look for opportunities to use suc-
cessful delivery to one area of a
client’s operations as the basis for
expanding the service, including
delivery across other national or
international plants.
■ Look for operations to cross-sell
products and services across
strategic businesses, for example
linking SME or micro-credit
financing to wholesale/project
finance operations.
D) ROLES AND RESPONSIBILITIES
A key challenge for the performance-
based EMS is delivering this value to
clients and the institution without
significantly increasing operating costs.
The performance EMS therefore aims to
mainstream sustainability, minimizing
the central sustainability unit and maxi-
mizing its leverage of internal partners.
Sustainability in Action 53
Within the institution, a number of
existing functions have the potential to
enhance the value of the EMS, without
adding significantly to operating costs.
Table 4.1, pg. 54, summarizes internal
resources and the potential value added
through mainstreaming.
Key lessons include the following:
■ Identify champions within the relevant
business units.
■ Create a guiding coalition with the
champions across relevant units.
■ Align the institution’s incentive
systems to reward good performance.
■ Publicize success stories internally.
E) COMMUNICATIONS AND
REPORTING
There is a growing trend within the finan-
cial sector towards sustainability reporting.
The British government, for example,
recently outlined requirements for pension
funds to report on their use of environ-
mental performance criteria. A growing
number of bank and non-bank financial
institutions now contain environmental
sections in their annual reports or provide
stand-alone annual environmental reports.
What is the business value of these
initiatives?
54 Beyond Risk
MAINSTREAMING SUSTAINABILITY
The performance EMS aims to use com-
munications and reporting not as an end
in itself but as a means to generate value
for the institution. To achieve this, the
performance EMS focuses on providing
customized data to stakeholders that
will generate specific rewards for the
institution.
As identified in chapter one, there are
a number of stakeholders with the poten-
tial to have a significant impact on the
financial institution and its clients both
positively and negatively. At the same
time, these various stakeholders have
different goals that cannot all be satisfied
by the one-way communication of the
annual environmental report. The per-
formance EMS therefore aims to select
priority stakeholders, identify the objec-
tives and targets relevant to them and
communicate this data to them effectively.
Table 4.2, pg. 55, provides examples of
the core elements of communications
campaigns targeted at stakeholders. In
each case the campaign aims to meet the
specific sustainability information needs
of differing stakeholders, communicating
them cost-effectively and securing a per-
formance benefit for the institution.
TABLE 4.1
INTERNAL RESOURCES
Human resources
Risk/Credit review
Syndicates
Marketing/Corporate relations
Retail relationship manager
Wholesale relationship manager
Treasury
Asset Management and private
banking
Facilities management
Environment and sustainability
TABLE 4.2 Sustainability in Action 55
STAKEHOLDER COMMUNIC ATION NEEDS
Key lessons for implementing a successful
SUSTAINABILITY monitoring and communications program
VALUE ADDED
STAKEHOLDER INFORMATION NEEDS PERFORMANCE REWARD include the following:
■ Use the institution’s good sustainability track record to recruit high
IFIs ■ Sub-project conformance with national ■ Access to IFI finance
caliber business school graduates ■ Identify those stakeholders who will
regulations,World Bank polices and ■ Speed of processing
■ Provide skills training to account officers that focuses on using
applicable guidelines ■ Positive publicity reward sustainability information.
sustainability to win business from priority market segments
■ Examples of best practice projects
■ Provide incentives and rewards for staff that achieve triple bottom line ■ Open a dialogue with key stakeholders
■ Early warning of problem projects
investments (financially, socially and environmentally high performing)
to establish their exact information
Insurers ■ Reduced portfolio risk ■ Access to portfolio coverage
■ Carry out environmental and social risk assessment of investments needs, including the level of detail
■ Reduced risk profile of clients ■ Access to reduced cost insurance
■ Assist loan officers in differential risk pricing of loans
for clients required, preferred timing and format
■ Secure lead management of syndicates for complex projects of reporting.
Raters ■ Data on value added to the institution ■ Enhanced ratings leading to reduced
■ Bring additional co-financing to complex sectors based on the opportunity
(e.g. increased business, increased mar- cost of capital, enhanced expansion ■ Monitor institutional performance
for other banks to rely on the sound environmental and social due
gins through fees and environmental opportunities
diligence of the institution against the required data, rewarding
credit risk reduction)
■ Work with account officers and priority clients to identify client compliance and diagnosing any sys-
Analysts ■ Information on progress in managing ■ Enhanced analyst ratings leading to
sustainability business needs temic faults behind non-compliance.
environmental credit risk reduced cost of capital, enhanced
■ Develop marketing materials and communications tools to approach
expansion opportunities ■ Provide customized data to key stake-
target markets
■ Develop communications tools to mainstream sustainability internally holders in their desired format.
NGOs ■ Transparent communications on ■ Support for client projects
■ Manage SRI communications
institutional policies and project ■ Advisory support on complex ■ Follow up with key stakeholders to
■ Develop communications materials for approaching additional non-client
conformance policy issues
stakeholders (NGOs, raters, analysts etc) confirm that the reports are providing
■ Early warning on problem areas
■ Provide crisis management communications
credible data. Establish desired
SRI investors ■ Application of negative screens ■ Access to SRI financing, access to
■ Identify smaller-cap client base with sustainability needs (e.g. export- changes in communications and
long term institutional investors
oriented agribusiness operations)
■ Lead sector-wide marketing to client base (e.g. seminars on process reporting format.
efficiency or on identifying export market opportunities for sustainable
companies)
■ Complete environmental risk and opportunity screening of the deal flow
■ Compete for complex transactions, using environmental value added as
a differentiator
■ Build in a linkage to retail market operations as part of community
development for wholesale projects
■ Issue green receivables based on the institutions sustainable portfolio
■ Secure access to international funds
■ Establish SRI funds/ethical funds for institutional investors and high net
worth private banking individuals
■ Increase energy efficiency of facilities
■ Provide strategic overviews
■ Provide central environmental and social advisory function
56 Beyond Risk B OX 4 . 6
FOUR B ASIC PHASES OF EMS EXECUTION

IMPLEMENTING THE EMS

Implementing the EMS also depends on
following a structured approach. Current
good practice in implementing environ- PLAN
■ Determine strategy and obtain top management agreement and approval
mental management systems, as described
in the ISO14000 series, uses a four-phase ■ Secure budgets
Set targets
5.
process covering: ‘plan’, ‘do’, ‘check’ and
CONCLUSIONS AND
■

‘review’. Box 4.6, right, describes the cen- ■ Develop implementation plan

tral elements of the four phases. ■ Internal communication of strategy

RECOMENDATIONS
DO
■ Prepare policy and objectives
For the financial sector in general, the emergence
■ Develop and organize and write EMS procedures and working documents of a new class of stakeholders with sustainability
■ Incorporate procedures into company management practices
expectations has presented a series of challenges
■ Establish monitoring and measurement protocols
■ Train personnel
and business opportunities. ➜
CHECK
■ Audit EMS and check performance regularly against targets set

■ Prepare report

REVIEW
■ Review report

■ Evaluate performance and lessons learned

■ Receive feedback on success and failures
■ Set new (improved) targets
 FIGURE 5.1 Conclusions and Recomendations 59
MAIN ENHANCEMENTS UNDERTAKEN TO ENVIRONMENTAL AND SOCIAL ISSUES following the CEA workshop

➜ The sector’s response is evolving,

ranging from the adoption of a purely
defensive stance in terms of managing
Training of internal staff 36%
risk, to integrating sustainability into
Updating operating policy 35%
business operations. At the same time,
Development of
environmental/social procedures 33% significant barriers to implementation
Rejecting projects with
environmental issues 32% remain, within both developed and
Working with clients emerging markets.
➜
30%
OVERCOMING BARRIERS TO IMPLEMENTATION
Report to Director
on opportunites 29% OVERCOMING BARRIERS
Communications to clients 21% TO IMPLEMENTATION
External reporting of EMS 12% CEA workshop participants were asked
to state whether they had environment-
Providing environmental loans 11%
0% 5% 10% 15% 20% 25% 30% 35% 40% related risk issues and a system in place
to manage them. Prior to the workshops
22% of those surveyed indicated that they
had a formal system in place. Subsequently,
all respondents reported an enhanced
FIGURE 5.2 environmental management capability.2
B ARRIERS TO IMPLEMENTING AN EMS
■ For commercial banks, project financ-
ing and leasing, the two initiatives
most frequently reported actions taken
were training of environmental staff
It's not standard banking practice 22% and updating the environmental policy.
Clients don't want it 15%
Lack of reward from financial markets 15%
Lack of best practice information 15%
No qualified staff 10%
Lack of specific examples 7%
of environmental risk 2
It should be noted that the result may have been
Lack of time 4% affected by selection bias. While IFC sought to
avoid bias by keeping the survey anonymous, par-
No qualified consultants 3%
ticipants who have implemented systems to manage
Lack of internal support 1% environmental risk may have been more likely to
respond to the survey, biasing survey results upwards.
Other 6%
0% 5% 10% 15% 20% 25%
60 Beyond Risk FIGURE 5.3 FIGURE 5.5 Conclusions and Recomendations 61
B ARRIERS —COMMERCIAL B ANKS B ARRIERS—PRIVATE EQUITY INSTITUTIONS

■ For private equity the major action Respondents from leasing companies
60%
reported was working with clients to 50%
35%
31% and commercial banks identified current
help them manage their environment 50% 30% banking practices as the key barrier to
issues, followed by development of 40% 25% implementation. Other factors included
31% 19% 19%
environmental and social procedures. 25% 25% 20% a perceived lack of reward in the market-
30% 13% 13%
13% 13% 13%
■ For leasing, the next key initiatives 19% 15% place and a view that their clients were
20%
reported were reporting to the board 10% unresponsive This was also a major
6% 6% 6% 6%
and communications with clients. 10%
5%
factor for project finance and private
0% 0%
0%
■ For project finance institutions, devel- 0% equity groups.
0%

Lack of best
practice information

No qualified consultants
Lack of reward from
financial markets
Clients don’t want it

of environmental risks

Lack of time
Lack of specific examples
staff internally
No qualified

Other
Lack of internal support
It’s not standard
banking practice
opment of environmental and social

Lack of best
practice information

No qualified consultants
Lack of reward from
financial markets
Clients don’t want it

of environmental risks

Lack of time
Lack of specific examples
staff internally
No qualified

Other
Lack of internal support
It’s not standard
banking practice
Significantly, a lack of best practice
procedures and working with clients,
materials was also cited as a key factor
both featured highly.
across all the categories. Figures 5.3–5.6,
Figure 5.1, pg. 59, summarizes the post pgs. 60–61, highlight the key barriers to
workshop results. implementation identified by each of the
four institution categories.
The survey went on to ask respondents
to identify what, if any, key barriers were ■ For commercial banks, the main prob-
there to implementing a system. Figure 5.2, FIGURE 5.4 FIGURE 5.6 lem identified was that sustainability
pg. 59, presents an overview of results B ARRIERS—LEASING INSTITUTIONS B ARRIERS—PROJECT FINANCE INSTITUTIONS does not form part of standard banking
across all institution categories surveyed, practice.
indicating that a number of significant ■ For leasing companies, equally, the
70% 40%
barriers were identified. 60% 36% main issues identified were current
60% 35%
53% 29% 29% 29% 29% standard practice and the related
Overall, the most common barriers 30%
50% lack of best practice materials.
40%
identified were the following: 25%
40% 21% 21% ■ For private equity institutions fewer
33% 20%
27%
30% 14% overall obstacles were identified, with
■ It is not standard practice in the 15%
20% potential client resistance highlighted.
financial sector 13% 13% 13% 10%
7%
10% 5% ■ For project finance institutions, client
■ There are insufficient incentives 0% 0% 0%
0% 0% resistance was identified as the major
in the market place
Lack of best
practice information

No qualified consultants
Lack of reward from
financial markets
Clients don’t want it

of environmental risks

Lack of time
Lack of specific examples
staff internally
No qualified

Other
Lack of internal support
It’s not standard
banking practice

of environmental risks
Lack of specific examples
Lack of reward from
financial markets
Clients don’t want it

staff internally
No qualified

Other
Lack of best
practice information

Lack of internal support

No qualified consultants
It’s not standard
banking practice

Lack of time
barrier.
■ Clients don’t want it
■ Lack of best practice materials
62 Beyond Risk
BEST ROLES FOR IFC AND THE DEVELOPMENT FINANCE COMMUNITY
THE ROLE OF THE DEVELOPMENT
COMMUNITY—SURVEY RESULTS
IFC’s survey asked participants to identify
priority initiatives to address these barriers.
Survey respondents suggested a number
of potential initiatives from the develop-
ment finance community as high priority.
These include:
■ Market briefings: signaling environ-
mental value-added to regional analysts,
raters, media, central banks
■ EMS–advanced: Overseas workshops
for coordinators on implementing
performance-focused EMS.
■ Industry risk briefings: providing
updated information on international
risks/opportunities by sector.
■ EMS support: “In-house support on
EMS implementation to individual
institutions, region specific environ-
ment and social good practices and
case studies” (workshop participant)
Figure 5.7, right, summarizes the results.
FIGURE 5.7
CONCLUSIONS
Four major conclusions emerge:
Industry risk briefings 47% 1. New classes of stakeholder are
transmitting both risk and reward to
Market briefings 37%
companies and financial institutions
EMS advanced as a result of their environmental
workshops overseas 31%
and social performance
EMS support to
28% 2. A number of financial institutions
individual institutions
are responding rapidly to these market
Local consultant training 16% drivers, implementing sustainability
initiatives strategically across a range
Other 3%
of internal and external operations.
0 10 20 30 40 50
3. Barriers to implementation, however,
do remain. One key issue identified
is the absence of up to date informa-
tion in the form of industry risk and
opportunity.
4. While supply-side initiatives such as
the CEA workshops play a critical role
in helping to establish best practice,
significant additional barriers include
the perceived low market incentives
for sustainability and as a consequence,
financial sector practices that do not
integrate sustainability systematically
into operations.
Conclusions and Recomendations 63
RECOMMENDATIONS
■ The development community should
explore opportunities to complement
capacity building initiatives with
strategic demand-side initiatives
that enhance market incentives for
sustainable performance
■ A number of market players have
the potential to provide critical
incentives for sustainable financial
sector performance. Performance
drivers identified include insurers,
analysts, raters, co-financiers, central
banks, SRI investors, and long-term
institutional investors.
■ An innovative range of capacity
building programs is necessary to acti-
vate these potential market reward
mechanisms—from new methodologies
for raters and analysts to assess and
reward financial institution perfor-
mance to sustainability criteria for
central bank oversight as a component
of prudential bank management.
 65

ANNEX A
List of boxes, figures, and tables ➜
This is a blank page
66
BOXES, FIGURES, & TABLES
BOXES
Box 2.1 Summary of forms of direct liability for financial institutions . . . . . . .11
Box 2.2 Financial costs of environmental non-performance . . . . . . . . . . . . . .18
Box 2.3 Performance signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Box 2.4 Opportunities for financial institutions . . . . . . . . . . . . . . . . . . . . . . . .20
Box 3.1 Project finance opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Box 3.2 Sustainability business drivers for risk management focused
commercial and investment banks . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Box 3.3 Downside risks for private equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Box 3.4 Upside opportunities for portfolio companies . . . . . . . . . . . . . . . . . . .37
Box 3.5 Upside opportunities for private equity groups . . . . . . . . . . . . . . . . . .37
Box 3.6 Providing environmental value added to SME clients . . . . . . . . . . . .42
Box 4.1 ISO14000 series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Box 4.2 Elements of an environmental management system (EMS) . . . . . . . .49
Box 4.3 Potential objectives for risk management focused commercial banks .49
Box 4.4 Potential objectives for project finance institutions that offer
environment advisory services to high environmental risk clients . . . . .50
Annex A 67
Box 4.5 Potential objectives for private equity institutions . . . . . . . . . . . . . . .50
Box 4.6 Four basic phases of EMS execution . . . . . . . . . . . . . . . . . . . . . . . . . .56
FIGURES
Figure 2.1 Competitive threats to the financial sector . . . . . . . . . . . . . . . . . .11
Figure 2.2 Significant sources of environmental risks for clients identified
by all financing institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Figure 2.3 Export-oriented industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Figure 2.4 Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Figure 2.5 Domestic general manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . .13
Figure 2.6 High-tech industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Figure 2.7 Extractive industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Figure 2.8 Connectivity in 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Figure 2.9 Connectivity in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Figure 2.10 Drivers of environmental risk across the corporate value chain . . . 16
Figure 2.11 Environmental risks for financial institutions . . . . . . . . . . . . . . . .17
Figure 2.12 Risk to the emerging markets financial sector . . . . . . . . . . . . . . . .19
68 Beyond Risk

ANNEX B
Figure 2.13 The risk management gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 5.1 Main enhancements undertaken to environmental Survey, methodology, questionnaire pro-forma,
Figure 2.14 Sustainability opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 and social issues following the CEA workshop . . . . . . . . . . . . . . .59
Figure 2.15 Opportunities for commercial banks . . . . . . . . . . . . . . . . . . . . . . .21 Figure 5.2 Barriers to implementing an EMS . . . . . . . . . . . . . . . . . . . . . . . . .59
uptake of environment initiatives ➜
Figure 2.16 Opportunities for leasing institutions . . . . . . . . . . . . . . . . . . . . . . .22 Figure 5.3 Barriers–commercial banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Figure 2.17 Opportunities for project finance institutions . . . . . . . . . . . . . . . .22 Figure 5.4 Barriers–leasing institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Figure 2.18 Opportunities for private equity institutions . . . . . . . . . . . . . . . . .23 Figure 5.5 Barriers–private equity institutions . . . . . . . . . . . . . . . . . . . . . . . .61
Figure 2.19 Socially responsible investment—growth market . . . . . . . . . . . . .23 Figure 5.6 Barriers–project finance institutions . . . . . . . . . . . . . . . . . . . . . . .61
Figure 3.1 Procedure for environment risk management . . . . . . . . . . . . . . . .27 Figure 5.7 Best roles for IFC and the development finance community . . . . .62
Figure 3.2 Enhancements undertaken to environmental
and social issues following The CEA workshop . . . . . . . . . . . . . . .27 TABLES
Figure 3.3 Drivers for SME business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Table 3.1 Case examples for project finance,
Figure 3.4 Evolution of best practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 commercial banking, private equity and leasing . . . . . . . . . . . . . . . .28
Figure 3.5 Sustainability as a strategic tool for the financial sector . . . . . . . . .44 Table 3.2 Hungarian energy efficiency project examples . . . . . . . . . . . . . . . . .40
Figure 4.1 EMS types according to strategic focus . . . . . . . . . . . . . . . . . . . . .48 Table 3.3 Sustainability as a business driver–illustrative examples . . . . . . . . . .43
Figure 4.2 Compliance approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 Table 4.1 Mainstreaming sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Figure 4.3 From compliance to value-added . . . . . . . . . . . . . . . . . . . . . . . . . .51 Table 4.2 Stakeholder communications needs . . . . . . . . . . . . . . . . . . . . . . . . .55
70 Annex
Annex A
B 71

COMPETITIVE ENVIRONMENTAL ADVANTAGE WORKSHOP: QUESTIONNAIRE

(Please photocopy and complete the following questionnaire on finance and environment.This data, which will be used only at the aggregate level, will
help shape IFC’s program for financial markets capacity-building on environment. Please return to ctefmfeedback@ifc.org, or fax to 1-202-974-4348
by October 8th. Many thanks for your help.)

PART 1: INSTITUTIONAL PROFILE

➜ 100% OF RESPONDANTS REPORTED MEASURES TO ENHANCE THEIR

ENVIRONMENT AND SOCIAL MANAGEMENT CAPABILITY AFTER THE WORKSHOP
1. Main operations a) Leasing c) Project finance e) Commercial banking
of institution b) Insurance d) Private equity f) Other (please specify):

2. Main sectors financed a) Extractive industries d) Infrastructure

b) Export-oriented industries e) Hi-tech
c) Domestic general manufacturing f) Other (please specify)

3. Main countries

4. Employees a) 1–20 b) 20–300 c) 300+

5. Branches a) 1–20 b) 20–300 c) 300+

6. New transactions a year a) 1–20 b) 20–300 c) 300+

7. Average US$ deal size a) <$50k b) $50k–$500k c) $500k–$2 m d) $2 m+

8. Max. US$ deal size a) <$50k b) $50k–$500k c) $500k–$2 m d) $2 m+

9. Max. term of transactions a) <1 yr b) 1yr–3yrs c) 3yrs+

10. Current Int’l Financial Please list: (FMO, EBRD etc.)

Institution (IFI) partners

11. Which of these officers a) None c) Finance executive responsible

deal with environmental/ b) Full-time envtl. manager for environment part-time
social issues at your d) Top management e) Environmental consultant
institution? g) Other (please specify):

12. What level of staff a) Top manager d) Designated envtl manager

attended the IFC/partner b) Senior manager e) Corporate relations
workshop? c) Account officer f) Other (please specify)

Continued on page 72
72 Beyond Risk Continued from page 71 Annex
Annex A
B 73

PART 1I: LESSONS OF EXPERIENCE 5. Following the workshop, how has your institution enhanced its environmental and social management?

a) Report to Director/Board on environmental risks/opportunities h) Rejecting projects with environmental issues

1. What are the most significant long-term sources of environmental/social risks for clients in your country?
b) Communications to clients i) Working with clients to manage envtl impacts
a) Export market regulators: Loss of markets (EU, US etc.) f) Media: reputational risk
c) Media events j) Hiring of internal environmental consultant/staff
b) International NGOs: issue-based campaigns g) Customers: loss of market share
d) Update operating policy of institution k) Development of environmental/social procedure
c) Supply and distribution chain partners: Loss of contracts h) Government: shutdown, fines
e) Training of internal staff l) External reporting of EMS
d) Employees: recruitment and retention costs i) Financiers: Loss of financing
f) Providing environmental loans m) Other (please specify):
e) Community: protest over impacts on critical resources j) Insurers: Loss of coverage

k) Other (please specify):

6. What are the greatest barriers for your financial institution in implementing an EMS?

a) No qualified staff/consultants to operate EMS internally f) Lack of support internally

2. What are the major potential environmental risks for financial institutions of your type?
b) Lack of best practice techniques/materials on environmental g) Lack of reward from financial markets (analysts, raters etc)
a) Non-performing loans/investments/leases from environmental/social risks f) Liability for clean up of contaminated property/collateral
management for financial institutions
b) Civil or criminal liability for negligence g) Loss of depositors
c) No qualified environmental consultants to support clients h) Clients don’t want it
c) Reduced access to capital from private financial institutions/international h) Increased Central Bank/MOF regulation
d) Lack of specific examples of environmental risk i) Lack of time
bond market
e) It’s not standard banking practice j) Other (please specify):
d) Loss of IFI funding i) Devalued collateral

e) Reputational risk/Negative publicity j) Other (please specify):

PART 11I: FOLLOW UP & RECOMMENDATIONS

3. Before the IFC workshop, did your institution have a procedure for managing environmental risk? 1. What would be the most valuable role for IFC to play?

a) Formal b) Informal c) None a) Market Briefings: signaling environmental value-added to regional analysts, raters, media, central banks

b) EMS Advanced: Advanced overseas workshops for coordinators on implementing performance-focused EMS

c) Consultant training:Training of local consultants to assist clients

4. What are the major environment-related opportunities for your financial institution?
d) EMS support: In-house support on EMS implementation to individual institutions
a) Accessing intl. financial institution funding e) Providing loans for environmental projects
e) Industry risk briefings: provide updated information on international risks/opportunities by sector
b) Providing risk management services to high-risk industrial sectors f) Providing eco-efficiency and cleaner production advisory services
to small and mid-sized clients f) Other (please specify):

c) Attracting new depositors g) Attracting improved terms of insurance 2. Do you have any additional comments or suggestions?

d) Accessing ethical investment funds h) Other (please specify):

Many thanks for all your input.

74 Beyond Risk FIGURE B1 FIGURE B3 Annex B 75
TYPE OF FINANCING INSTITUTION SURVEYED REGIONAL DISTRIBUTION OF INSTITUTIONS

SURVEY METHODOLOGY INTERVIEWS

IFC surveyed 60 institutions, selected Structured interviews were carried out
for diversity in region and business type. World with representatives from over 30 insti-
Other
Figures B1–3, right, illustrate the break- Middle East & North Africa tutions who had participated in the CEA
down of the sample into the following Commerical Banking workshops. Annex C presents a list of
Central & Eastern Europe 6% 4% Southern Europe & Central Asia
10%
categories: a) the main type of business 27% those institutions visited. For the selection
26% 8%
Project Finance
operations undertaken, b) types of process, three criteria were applied:
20% Africa
investments financed, and c) location. 8%
■ A focus on regional diversity: covering
9% Africa, Europe, Middle East, Latin
23% East Asia & Pacific
21% 19% America and Asia
Private Equity 19% South & Southeast Asia
■ A focus on diversity of financial
Leasing institution type, covering commercial
Latin America & banking, project finance, private
Caribbean
equity and leasing.
■ For cost-effectiveness, a focus on
countries where there are a number
of IFC client institutions.
FIGURE B2 FIGURE B4
MAIN BUSINESS SECTORS MOST COMMONLY FINANCED BY THE INSTITUTIONS COMMERCIAL B ANKS

56% 56%
60%

50%
Other 44% 44%
Extractive 38%
40%
Industries
9%
Domestic General 30% 25% 25%
4% Manufacturing
Hi-tech 19% 19%
8% 37% 20%
13% 13%
6%
10%

Infrastructure 18% 0%

Working with
clients to manage
environmental impacts

Providing
environmental loans
Hiring of internal
environmental/staff
consultants
environmental issues
Rejecting projects with
procedure
Updating
operating policy
Development of
environmental/social

Other
Training of
internal staff

External
reporting of EMS
Communications
to clients

Media events
Report to Director/

risks/opportunities
Board on environmental
24%

Export-oriented
Industries
76 Beyond Risk FIGURE B5 FIGURE B7 Annex B 77
PRIVATE EQUITY INSTITUTIONS PROJECT FINANCE INSTITUTIONS

The objective of the interviews was to SUMMARY OF INSTITUTIONAL

build on the information generated by UPTAKE OF ENVIRONMENTAL
90% 90%
81% 79%
the questionnaires and that provided by 80% 80% MANAGEMENT
the participants during the course of the 70% 70% 100% of respondents institutions
56% 57%
60% 60%
workshops. In particular they addressed 50% reported that they implemented measures
50% 44% 50%
the following issues: 38% 38% 36% 43% to enhance their environmental and social
40% 40%
31% 31% 25% 29% 29% 29%
30% 30% management capability after the workshop.
■ The institution’s background and 14%
20% 20% Figures B4–7, pgs. 75–77, provide a break-
operations 10%
6% 6% 6% 10% 7% 7% 7%
0% down according to institution type.
0% 0%
■ Potential environment-driven risks Specific initiatives varied across institu-

Working with

Working with
clients to manage
environmental impacts

clients to manage
environmental impacts
Providing

Providing
consultants

environmental loans

consultants
environmental loans
Hiring of internal
environmental/staff

Hiring of internal
environmental/staff
environmental issues

environmental issues
Rejecting projects with

Rejecting projects with

procedure

procedure
Development of
environmental/social

Other
Updating
operating policy
Development of
environmental/social

Other

Updating
operating policy
Training of

Training of
internal staff

External

internal staff

External
reporting of EMS

reporting of EMS
Communications
to clients

Communications
to clients
Media events

Media events
Report to Director/

Report to Director/
risks/opportunities

risks/opportunities
Board on environmental

Board on environmental
to the institution, and its clients tions as indicated.

■ Any identified opportunities for

the institution

■ The major barriers, if any, for imple-

mentation of environmental manage-
ment measures and how they have
FIGURE B6
been overcome and,
LEASING INSTITUTIONS

■ The role potentially that IFC could

play in supporting the process

90% 80%
80%
70% 60%
60%
53% 53%
50%
40% 40%
40%
27%
30%
20%
20%
13% 13%
10% 7%
0%
0%
Working with
clients to manage
environmental impacts

Providing
environmental loans

consultants
Hiring of internal
environmental/staff
environmental issues
Rejecting projects with
procedure
Updating
operating policy
Development of
environmental/social

Other
Training of
internal staff

External
reporting of EMS
Communications
to clients

Media events
Report to Director/

risks/opportunities
Board on environmental
 ANNEX C
List of field interviews ➜
This is a blank page
 Annex C 81

➜ IN ADDITION TO THE SURVEY A REPRESENTATIVE LIST OF FI’S WERE VISITED

LIST OF FIELD INTERVIEWS
PHILIPPINES ARGENTINA INDIA
1. BPI 11. Banco Roberts 22. IL & FS
2. Planters Bank 12. Bansud 23. IDFC
3. DBP 13. BGN 24. IndAsia
4. Walden 14. Latin American Enterprise Fund
5. H & Q TURKEY
HUNGARY 25. Garanti Bank
BRAZIL 15. OTP 26. Garanti Leasing
6. Icatu 16. Budapest Bank 27. Alternatif Bank/Leasing
7. Unibanco 17. Raiffeisen Bank 28. TEB bank
8. Banco Real 29. Ottoman
9. Bradesco CZECH REPUBLIC 30. YKL
10. Terra Capital 18. CSOB 31. Rant Leasing
32. Finans Leasing
BULGARIA 33. Demir Bank
19. Caresbac
20. BACB
21. Black Sea Fund
 ANNEX D
CEA Workshop Participants: Phase I and II ➜
This is a blank page
 Annex D 85

WASHINGTON DC, USA, November 1997 WASHINGTON DC, USA, June 1998

Banamex Banco Bilbao Vizcaya

Banco Axial S.A. Banco del Suquia
Banco Bansud Banco Roberts
Banco Icatu Garanti Leasing
Banco Mercantil Georgia Microenterprise Bank
Garanti Bank Honeywell Inc.

➜ UP TO THE END OF 2002, SINCE 1997 21 CEA WORKSHOPS

HAVE BEEN HELD IN THE U.S., SOUTHEAST ASIA, EUROPE AND AFRICA
ICATU Equity Partners
Interbank
IDFC
Russian Technology Fund
Latino Leasing S.A. Shorebank Advisory Services
Rant Leasing TCW/ICICI India Private Equity Fund
Suinternacional Trust Company of the West
Suleasing Internacional S.A. Tuninvest Private Equity Fund
Unibanco
Zephyr Management L.p CAPE TOWN, SOUTH AFRICA, October 1998
Advent International plc.
Accuro AG
PARIS, FRANCE, April 1998
Banco de Galicia
Brait Capital Partners
Alternatif Bank A.S. Development Bank of Southern Africa
ANZ Investment Bank Ecobank Transnational Inc.
Azerigazbank Joint-Stock Investment Bank FMO—Netherlands Development
Baku Banks/Azerdemiroylbank Finance Company
Black Sea Fund Galicia Capital Markets S.A.
BMCE Garanti Leasing
CA-Kiev Groundwork Environmental
Demir Romlease S.A. INCA—Infrastructure Finance
Demirbank (Romania) S.A. Corporation Ltd.
Finans Leasing International Bank of Southern Africa
Inkombank Limited
PEF-Advent Santiago del Puerto y Asociados
PROPARCO Swaziland Industrial Development
RabitaBank Company Ltd.
Raiffeisen UNIC-Lizing Yapi Kredi Leasing
Yapi Kredi Leasing Zader Financial Services
86 Beyond Risk Annex D 87

WASHINGTON DC, USA, November 1998 WASHINGTON DC, USA, May 1999 MILAN, ITALY, November 1999 WASHINGTON DC, USA, March 2000

Bancomer
Bulgarian-American Credit Bank
CSOB Ceskoslovenska Obchodni Banka
Global Trust Bank
ANZ Investment Bank
Asian Infrastructure Fund
Banco de la Exportación
Banco General de Negocios (BGN)
Led by the IFC in partnership with the
Giordano Dell’Amore Foundation
Barclays Bank of Botswana Limited
Bjelovarska Banka d.d.
Advent International
Asaka Specialized State Joint-Stock
Commericial Bank
Banco BBA Creditanstalt S.A.

WASHINGTON DC, USA 2000

WASHINGTON DC, USA 1999

Hungarian Foreign Trade Bank Ltd. Banco Mercantil Banco Cuscatlan

Kula Fund
Lac Enterprise Fund
Raiffeisen UNIC-Lizing
TEB Leasing
Tower Fund
Tuninvest Private Equity Fund
Turk Ekonomi Bankasi
Vilniaus Bank
MANILA, PHILIPPINES, March 1999
Bank Austria Creditanstalt Slovakia A.G.
CEAT Financial Services
Ecobank Transnational Inc.
Far East Bank & Trust Co.
Hambrecht & Quist Philippine Ventures
IL&FS Venture Corporation Limited
Mercantile Leasing Limited
Midway Infrastructure Holdings Ltd.
Nations Trust Bank
Pt Rabobank Duta Indonesia
Demirbank (Romania) S.A.
Barings Mexfund II Banco del ISTMO, S. A.
Diamond Bank Limited
Byblos Bank Syndicated Ecobank Transnational Inc. Bank of Shanghai
CAL Merchant Bank Ltd. Finance Bank Zambia Ltd. Capital Alliance Nigeria
Carribean Loan Facility Finans Leasing E & Co
Demirbank (Romania) S.A. Finansbank A.S. EIF Group
Environnemental Qualité International (EQI) Generale de Banque de Mauritanie Energy Global International Ltd.
Finans Leasing Guaranty Trust FEFAD Bank
FINARCA—Financiera Arrendadora HC Securities & Investment Company Garanti Leasing
Centroamericana S.A. Hussein Choucri Investment Bank Guyana Bank for Trade and Industry
Hana Bank NAL Merchant Bank Interbank
Hungarian Foreign Trade Bank Ltd. SEF Kazkommerts Kazkommertsbank
India Direct Fund MBA Private Equity SSA
Trust Merchant Bank
International Expeditions Inc. National Bank for Foreign Economic
NIS Restructuring Facility Activity of the Republic of Uzbekistan
Ottoman Bank National Development Bank
Romania & Moldova Direct Fund OTP National Savings and Commercial
TCW/Latin America Partners. L.L.C Bank Ltd.
Wilderness Gate Ottoman Bank
Peace Technology Management Ltd.
Stopanska Banka A.D.
TbilComBank
UBS
88 Beyond Risk Annex D 89

WASHINGTON DC, USA, June 2000 ISTANBUL, TURKEY, November 2000

American Bank of Albania
Credit Lyonnais
Raiffeisen Bank
IL&FS Infrastrcuture Leasing and Financial
WASHINGTON DC, USA 2000
Compass Capital Management LLC
DELTA LEASING HABITACIONAL, S.A.
MSB Bank Argentina, S.A.
Nuevo Banco Santa Fe
Led by IFC in partnership with the Black Sea
Trade & Development Bank, the German
Investment and Development Company,
the European Bank for Reconstruction and
Development, the Netherlands Development
Nordic Investment Bank
MarocInvest Finance Group
Middle East Investment Bank
Muslim Commercial Bank Ltd.

Services Ltd. HSBC Bank Argentina S.A. Finance Company, the Nordic Investment ORIX Leasing Egypt S.A.E.
Energia Global International Ltd. Bank, and the United Nations Environment JSCB “Parvina-Bank”

H&Q Asia Pacific MILAN, ITALY, November 2000
IndAsia Fund Advisors Pvt. Ltd.
IBTC Investment Banking & Trust Co. Ltd. Led by the IFC in partnership with the
Giordano Dell’Amore Foundation
Komercijalna Banka a.d.
Korea Development Leasing Corporation Agricultural Credit Corporation
Oyak Bank A.S. Agricultural Development Bank
Planters Development Bank Amity Bank Cameroon Plc.
Scotiabank Bank of Eritrea
Provident Group Banque de l’Agriculture et du
Developpement
BUENOS AIRES, ARGENTINA, October 2000 Banque due Liban
Central Bank of Egypt
Led by the IFC & IIC
Central Bank of Jordan
ABN AMRO Commercial Bank of Eritrea
ISTANBUL,TURKEY
Programme-Division of Technology, Industry Small Enterprise Assistance Funds
and Economics. Neftebank Plc.
SREI International Finance Limited
Akbank
Tuninvest Finance Group
American Bank of Albania
VUB Vseobecna Uverova Banka
Baltic American Enterprise Fund
Banca Romaneasca S.A.
DAKAR, SENEGAL, March 2001
Banque Saradar, sal.
Baring Vostok Capital Partners Limited
Led by IFC in partnership with the African
CSOB Ceskoslovenska Obchodni Banka Development Bank.
Demirbank (Romania) S.A.
Energy House Capital Corporation, ACEP
A Sibsidiary of E&Co Arab Banking Corporation
ECO Solutions Co. Ltd. BHM Banque del’Habitat du Mali
Global Finance S.A. BICEC Banque Internationale du

DAKAR, SENEGAL
Banco Aleman Paraguayo Commercial Bank of Malawi ICICI Limited Cameroun pour l’Epargne et le Credit
Banco de Galicia y Buenos Aires ElNilein Bank for Industrial Development IDLC Industrial Development Leasing BMCI Banque Mauritannienne pour le
BANCO DEL DESARROLLO Housing and Commerce Bank of Eritrea Company of Bangladesh Limited Commerce International
Banco del Istmo, S.A. Metropolitan & Allied Bank (Ghana) Ltd. Industrial Promotion and Development Bank of Africa
Banco Ficensa Ministry of Finance, Ethiopia Company of Bangladesh Limited CBAO Compagnie Bancaire de L’Afrique
MILAN, ITALY

Banco General de Negocios Ministry of Finance, China
Banco Montevideo National Bank for Development
Banco Nacional de Desenvolvimento National Bank of Ethiopia
Economico e Social Nile Bank
Banco Suquia, S.A. Palestine Monetary Authority
CII T.C. Ziraat Bankasi
Tanzania Investment Bank
The Treasury, Kenya
ILFC International Leasing and Finance
Co. Ltd.
IBTC Investment Banking & Trust Co. Ltd.
Kenya Commercial Bank Ltd.
Kocbank Azerbaijan Ltd.
Lebanese Leasing Company
Occidentale
Ecobank—Senegal
Generale de Banque de Mauritanie
Ministere de l’Economie et des Finances,
Senegal
Environmental Tropicana Consultants
SODIDA Societe de Gestion du Domaine
Industriel de Dakar
90 Beyond Risk Annex D 91

MIAMI, USA, June 2001 BUDAPEST, HUNGARY, June 2001 JOHANNESBURG, SOUTH AFRICA, November 2001 MANILA, PHILIPPINES, November 2001

Led by the Inter-American Investment Led by the IFC in partnership with the Led by IFC in partnership with the Asian Led by IFC in partnership with the Asian
Corporation in partnership with the Black Sea Trade & Development Bank, Development Bank, Development Bank Development Bank and the Japan Bank for
Corporación Andina de Fomento and the IFC. the German Investment and Development of South Africa and United Nations International Cooperation.

JOHANNESBURG, SOUTH AFRICA

Company, the European Bank for
A2R Ltda Reconstruction and Development, the
Amigos da Terra Netherlands Development Finance Company,
and the Nordic Investment Bank.
BUDAPEST, HUNGARY
Environment Programme.
AIF Asian Infrastructure Fund
Banco de Microfinance de Mozambique Management Ltd
BHM Banque del’Habitat du Mali

Andrade Gutierrez Concessoes Ltda Asia Opportunity Fund L.P.

Banco Cuscatlan Bioventures Bank NISP
Advent International
Banco del Bajio Brait Merchant Bank Ltd. Bank of South Pacific (BSP)
Axon Leasing
Banco del Pichincha C.A. Citibank BNP Paribas Asset Management Asia Ltd.
Banc Post S.A.
Banco Grupo el Ahorro Hondureno DFCU Bank Dragon Capital
Banca Romaneasca S.A.
Banco Impropsa S.A. DFCU Leasing Company Limited Hambrecht & Quist Philippine Ventures
Bank TuranAlem
Banco Interfin S.A. Diamond Bank Limited J.P. Morgan Partners Asia
Citibank
Banco Nacional de Obras y Servicios Ecobank Ghana Ltd. Liberty Pacific Direct Investments Ltd.
Croatia Banka
Publicos. S.N.C. Ecobank Nigeria Plc. Lombard/APIC (HK) Limited
Croatian Bank for Reconstruction and
Banco Popular Ecobank Togo Muslim Commercial Bank Ltd.
Development
Banco Santos EFG-Hermes Holding-SAE Oman Orix Leasing Company SAOG
Demir Romlease S.A.
Brazilian Mortgages Emerging Markets Partnership Prudential Asia Infrastructure
Finansbank A.S.
First City Monument Bank

MANILA, PHILIPPINES
BBVA Bancomer, S.A. Investors Limited
Hipoteku banka—Latvian Mortgage and
Citibank First Merchant Bank of Zimbabwe SME Loan Hong Kong Ltd.
Land Bank
Caja Los Andes S.A. Limited The Vysya Bank Limited
Raiffeisen Bank
Comprartamos FRB/RMBID United Bank For Africa Plc.
EFM (Slovak Post Privatization Fund)
FSB International Bank Plc. Futuregrowth Asset Management United Leasing Company Limited
TBC Bank
Wamex S.A. de C.V. Gensec Bank
Turk Venture Partners
Nuevo Banco de Santa Fe Investment Banking & Trust Co. Ltd.
VUB Vseobecna Uverova Banka
Small Enterprise Assistance Funds Novo Banco
Environmental Enterprises Assistance Fund ORIX Leasing Egypt S.A.E.
Suleasing Internacional S.A. Rand Merchant Bank
TCW/Latin America Partners. L.L.C. The Mauritius Commercial Bank Ltd.
Royal Merchant Bank and Finance Tuninvest Finance Group
Company Limited
The Royal Bank of Trinidad and
Tobago Limited
92 Beyond Risk

MIAMI, USA, February 2002 MIAMI, USA, September 2002

Led by the Inter-American Investment Led by the Inter-American Investment

Corporation in partnership with the Corporation in partnership with the IFC.
Corporación Andina de Fomento and the IFC.
Bancentro
Alliant Energy International Banco Cuscatlan
America Leasing Advent International Banco Interfin S.A.
Banamex Banco Latinoamericano de
Banco Bradesco S.A.
Banco Caja Social
Exportacion—Bladex
CEA Latin American Communciations
ANNEX E
MIAMI, USA

Banco de Credito Centroamericano Communication Equity Associates

Banco Interfin S.A. Darby Overseas Investment Lt.
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Banco Itau S.A. Deutsche Asset Management
Brazilian Securities Inter-American Investment Corporation
Cori Capital Partners, LP Negocios Regionales
Corporacion Financiera Nacional y Republic Bank Limited
Suramericana S.A. Scudder Investments
Corporacion Interamericana para el. Suleasing Internacional S.A.
CIFI—Financiamiento de
Infrastructura, S.A.
Financiera Calpia S.A. MOSCOW, RUSSIA, October 2002
FINARCA—Financiera Arrendadora
Centroamericana S.A. Organized by IFC
FondElec America Latina Inc. Agroindustrial Finance Company
Grupo Financiero Banorte Alenir
Latin America Agribusiness Development Baltiskii Leasing
Corporation Delta Leasing
Mibanco Deutsche Leasing Vostok
Small Enterprise Assistance Funds KMB Leasing
Su Casita Hipotecana KNK Leasing
Suramericana De Inversiones Microleasing
Trust Company of the West Moscow Leasing Company
Unibanco
Walden International
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96 Beyond Risk
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