Environmental Issues and the Environmental Issues and the

Financial SectorFinancial Sector

AMCHAM Environment CommitteeAMCHAM Environment CommitteeWorkshopWorkshop

Warsaw, 17 November 2005Warsaw, 17 November 2005

Robert AdamczykRobert AdamczykEnvironment DepartmentEnvironment Department

European Bank for Reconstruction and DevelopmentEuropean Bank for Reconstruction and Development

Presentation StructurePresentation Structure

• Introduction – EBRD

• Funding sources;– EU– Commercial Banks– What makes a bankable project– Do environmental issues affect investment decisions

• Equator Principles– What is it– Has it any impact

• Conclusion

What is the EBRD ?• An investment Bank with Public Shareholders:

– Owned by 62 countries and international shareholders (EU, EIB)– AAA rated international financial institution founded in 1991– 1000 staff

• Mandate: facilitate the transition to market economies• Capital base of €20 billion and Business Volume of € 24.1

billion to date. Approx € 4 billion/yr:– Largest single investor in CEE and FSU, – 75% debt / 25% equity– 72% private sector/privatisation projects– Co-financing levers € 2.5 for every € 1 the bank invests

• Over € 1 billion in TC funds to manage.• Managing Nuclear Decommissioning Funds

Bank’s Founding Agreement Bank’s Founding Agreement commits the Bank to:commits the Bank to:

““... promote, in the full range of its ... promote, in the full range of its activities, environmentally sound activities, environmentally sound and sustainable development.”and sustainable development.”

EBRD

• Sound banking principles

• Additionality– Will another bank invest?– EBRD will not compete with commercial

Banks

• Transition impact

• Compliance with Environmental Policy

Project Appraisal - Due Project Appraisal - Due DiligenceDiligence

• Financial Approval

• Legal Appraisal

• Technical appraisal

• Environmental appraisal

– Environmental Due Diligence, a tool for

decision-making

Project AppraisalProject Appraisal

• Banks and financial institutions:– are (financially) risk averse– Must continually react to the financial risks posed by

laws and guidelines such as environmental laws affecting clients and both theirs and the banks credit ratings

– Must see to act within the best interest of the communities they serve

– Must return a profit to their shareholders• The main fears of FI are costs and risks.

Financial forecasting and making financial risks transparent are necessary for any loan or investment request

EBRD in PolandEBRD in Poland

• Over EUR 3 bln committed• Ongoing involvement:

– PKN Orlen/Basell project– PAK – Power Plant– BISE

• New Projects:– BOT – Power Plant – Bydgoszcz Water Project– Dalkia – +

EBRD in Poland EBRD in Poland

Financial Intermediaries:

• Banks: BGZ, Pekao SA, BISE

• SME Facilities; ING, PKO BP, Raifaissen,Fortis, BZ WBK etc.

• Leasing Companies: Bankowy Fundusz Leasingowy; SG Equipment Leasing

• Funds: Enterprise Investors, Innova Capital, Novum,

Source of FundingSource of Funding

PolandPoland

OutlineOutline

• Investment needs in Poland and sources of funding

• Impact of Environmental issues on financing– Direct– Indirect

• Case Studies

Investment needs in PolandInvestment needs in Poland

• Infrastructure:– Roads,– Railways– Airports

• Private sector;– Power– Service sector– Industry (new and old)– other

Sources of Funding in PolandSources of Funding in Poland

• European Union– ISPA now EU Structural and Cohesion Funds– European Investment Bank (EIB). Over € 4 bln of

loans since 2001

• Commercial Banks, – Since 2001, 31 loans with a total € 6.5 bln.

• Venture Capital and Equity Investors• IFI (IFC, World Bank, EBRD etc).

– EBRD – approx EUR 3 bln in Poland

• Domestic Funds – NFOS etc– Future of NFOS?

Environment and investment Environment and investment decisionsdecisions

• Investors and funding agencies whether private or public will look into environmental issues as part of project appraisals.

• Different drivers for:– Public Funding Bodies

• EU standards, public participation (EIA, Natura 2000 etc.)

– Private Investment,• Risk and liability (contaminated land, EU ETS)

Risk issues for Financial InstitutionsRisk issues for Financial Institutions

• Corporate Loans

• Working Capital

• Project Finance

• Equity Investment

• Guarantees

• Portfolio management

Internationally driven changesInternationally driven changes

• New IFRS standards – applicable to all publicly quoted companies in EU– e.g. IAS 37 clear investigation of provisions and

liabilities• EU Modernization and Prospectus Directives• Additional national requirements, such as UK

OFR system• Emission Trading (EU ETS) –

– new reporting and accounting requirements could affect P&L account

– opportunities for financial institutions• Increased pressure on disclosure and

reporting

Energy SectorEnergy Sector

• Second Sulphur Protocol– Poland implements KDT (long term electricity

contracts)• Environmental Policy resulting in KDT• Impact on business decisions and government policy

• EU Accession Treaty – SO2 emission limits– 60% reduction of SO2 by 2012,

• more demanding than LCP

– Major investment in the Power Sector– Compliance issue– Value of privatised assets

EU Funding EU Funding • Indirect risk to financing

projects for instance due to poor transposition of EU Acquis.

• E.g. Inappropriate transposition and implementation of EU EIA Directive in Poland:“Komisja Europejska nie przekaze Polsce 1,5 mld EUR z Funduszu Spójnosci, jesli nie otrzyma raportów na temat oddziaływania na środowisko planowanych inwestycji………….Chociaz KE zaakceptowała już w ubiegłym roku 22 projekty inwestycji miejskich, na które miała przekazać ponad 0,5 mld EUR, na razie tylko Kalisz dostanie pieniadze…”. (Rzeczpospolita, Marzec 2005).

EBRD examplesEBRD examples

• A loan to an electronic goods manufacturer in the Czech Republic. Security package included pledge on land. The client went bankrupt and EBRD became the owner of the land, which turned out to be contaminated. The contamination was not properly assessed at the due diligence stage. The National Property Fund requested that the land should be cleaned up. The cost of the clean up exceeded the value of the land and as a result the Bank made loss.

EBRD examplesEBRD examples

• Equity investment in a white goods manufacturing in country X. Due diligence did not identify soil and groundwater contamination. When a strategic investor wanted to buy the company several years later, they brought their own consultants who detected the contamination and the investor asked for a significant reduction of the selling price. As a result the Bank made a loss selling below the level of the original investment.

Equator PrinciplesEquator Principles

Equator PrinciplesEquator Principles

• A major step forward for the banking industry

• A voluntary, private-sector initiative

• Based on IFC environmental and social policies and guidelines

Why did they do it?Why did they do it?

• Increased awareness of the risks– Financial loss– Reputation damage– Shareholder activism

• No longer someone else’s problem• Demonstrate leadership and sound

environmental management practices and social responsibility

• Could not do it alone– Level the playing field– Need a common framework and baseline

The New Industry StandardThe New Industry Standard

• 36 Financial institutions are involved, including:– ABN AMRO, Barclays, Citigroup, Credit Lyonnais,

CSFB, HVB Group, Calyon, Rabobank, Royal Bank of Scotland, West LB, Westpac; ING, Royal Bank of Canada, MCC of Italy, Dresdner, HSBC, Dexia, Standard Chartered, CIBC, KBC, Bank of America, EKF, BBVA, Unibanco, JPMorgan, Mizuho Corporate Bank, Banco do Brasil,

• Equator banks arrange over 80% of global project finance market

ApplicationApplication

• Project finance

• Total capital cost of $50 million or more

• All industries

• Environmental risk categorization & industry standards apply globally.

Equator PrinciplesEquator Principles

• A framework for assessing environmental and social risk in projects including:– A set of baseline policy requirements

– A set of quantitative environmental guidelines

– Some process steps which ensure appropriate application within the context of the project

ScreeningScreening

Equator Principles

• Screen the level of environmental and social risk in each project and assign a risk category– A (highest), B or C (lowest)

• For category A and B projects, borrower completes an Environmental Assessment (EA)

EBRD• Difference in EBRD

Screening:– A – Annex 1 EU EIA

Directive – need for EIA– Equator A level projects

would fall under EBRD A level category

– B level projects require Environmental Analysis

• All Project screened either O or 1 – 1 - Environmental Audit

Environmental Management Environmental Management PlanPlan

• Borrower prepares an Environmental Management Plan for all A’s (and for B’s as appropriate) – Draws on conclusions of the EA– Addresses mitigation and

monitoring– For A’s, the EA and EMP subject to

independent expert review

• EBRD use of EAP and ESAP– Environmental Action Plans

ConsultationConsultation

• The borrower consults with affected groups for all A’s (and for B’s as appropriate):– Includes indigenous peoples and local

NGOs– EA or summary to be made available

by the borrower to the public for a reasonable period

EBRD – consultation period defined – 60 and 120 days (private/public)

CovenantsCovenants

Borrower covenants to:

– Comply with EMP– Provide regular reports on

compliance with the EMP– Where borrower is not in compliance

with EMP, banks will work with the borrower to come back into compliance

– May default the loan

The BenefitsThe Benefits• Provides a global standard for project

finance• Saves borrowers time and money• Identifies and manages risks up-front • Raises global environmental and social

performance• Reduces “loan-shopping” based on

environmental and social criteria• Expedites consensus-reaching among

banks in large loan syndications

Summary and ConclusionSummary and Conclusion

SummarySummary

• Environmental, social and corporate governance issues are increasingly unavoidable

• Many companies are not aware of the risks and opportunities

• Managers are often ill equipped to deal with the new challenges

SummarySummary

• Public attitudes shifting on social and environmental issues

• Strong anti-globalization, anti-privatization sentiments – Impact of corporate governance scandals

• NGO networks more sophisticated

SummarySummary

• Reputation risk is complex and not easy to manage– How do you value reputation

• Not easy to predict• New issues emerge continuously

– Labor issues (ILO), Human Rights, Reporting

• Ability to respond quickly and credibly key to managing these risks

• Affects all sectors and investments

Summary Summary

• Implementation of EBRD environmental procedures and Policy ensures compliance with Equator Principles

• Provides for more tailored approach to environmental issues in CEE

• Access to EBRD environmental specialists – local knowledge

ConclusionConclusion

• Fast changing market• On-going privatization

– Complex sectors remaining (chemical, coal)

• Major investment needs• Substantial losses for financial institutions as

a result of technical issues• In Poland no major reported environmental

liability claim to date

Conclusion (cont.)Conclusion (cont.)• Financial Institutions will only invest in the best

projects– Environmental standing often reflects overall

performance• Environmental Risk is one of the issues more

and more institutions look at.– Stakeholder issues

• Transparency and public consultation are a major focus of many international institutions and EU– Poor consultation can result in major delay to projects

(EU Cohesion Funds?)• Polish financial sector needs to consider

broader European issues.

EBRD web siteEBRD web siteRobert Adamczyk

Principal Environmental Specialist

adamczyk@ebrd.com

Telephone: +44 207 7338 6785 Fax: +44 207338 6848

www.ebrd.com