Environmental and Social Risk Management. Managing strategic risk and doing business ethically, sustainably and responsibly

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1 Environmental and Social Risk Management Managing strategic risk and doing business ethically, sustainably and responsibly

2 Impact Research 2 What are the risks and what is the impact on FirstRand? Best practice nationally and globally Adapting the best practice methodology to FirstRand internal processes

3 The Equator Principles 3 The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance. It is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making. Project finance is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project. The standards are commonly known as the International Finance Corporation Performance Standards on social and environmental sustainability and on the World Bank Group Environmental, Health, and Safety Guidelines. The Equator Principles apply globally, to all industry sectors and to four financial products 1) Project Finance Advisory Services 2) Project Finance (>10 million USD) 3) Project-Related Corporate Loans and 4) Bridge Loans.(> 100 million USD)

4 IFC Performance Standards 4

5 How are E&S risks a banking problem? 5

6 ESRA 6 Q: What does ESRA mean? A: ESRA = Environmental and Social Risk Assessment process. Q: Yes, but what does that mean? A: ESRA is the review conducted by lending officers, when reviewing a loan or credit application, of the direct environmental and social risks that may be associated with a client of the bank or their activities, in order to determine what indirect environmental and social risks the bank might face by lending to the client and how well the client manages these risks. Q: But what if the client is a high risk client based on the ESRA review? A: We may still provide finance to the client if the risk is high, however, we may introduce clauses and requirements to the loan agreement that will improve the management of the direct environmental and social risks identified, and monitor the client periodically to ensure that they are still in compliance with those clauses and requirements.

7 FSR ESRA Programme 7

8 ESRA Screening Application for credit/investment Type of Transaction ESRA applicable? ESRA Categorisation Referral to ESRA Specialist Review and analysis of ESRA risks and controls Referral to ESRA Specialist Cat A Cat B Cat C Control and Mitigation Suggestions for conditions, warranties for loan documentation Credit Committee Approval Monitoring Ongoing monitoring of covenants and warranties

9 Risk Categorisation 9

10 Sustainable Development Goals 10

11 The effects of managing natural capital poorly 11 Current business as usual ; population growth and exploitation of resources causes degrading/ decreasing stocks of natural capital The effect of decreasing natural capital is increased market price of natural resources and extensive damage to ecosystems. Examples of effects include : High GHG emissions; decreased carbon sequestration; rise in global temperatures; changes in weather patterns and extreme weather events; rising sea levels; continuous adjustment of terrestrial and aquatic ecosystems; changing land usability patterns; pollution/contamination and an overall decrease in quality of human life

12 The effects of managing natural capital poorly 12 Biodiversity continues to degrade as species are going extinct The environment continues to deteriorate Environmental laws and policies have so far been insufficient due to population and consumption growth Environmental groups challenge resource management plans and practices Society is lacking to establish and shape a new relationship with nature.

13 Natural Capital Declaration 13 Understanding natural capital risks for finance institutions and embedding them in credit risk assessment The profits of high impact sectors could be wiped out if the cost of environmental damage and unsustainable natural resource cost/ impact is not included The NCD is an initiative that goes beyond sustainability. It is about the materiality of natural capital to the health of finance institutions Clarifying how finance institutions are exposed to material natural capital risks through companies and to encourage FI s to allocate capital to natural capital positive business opportunities

14 Questions of the NCD 14 How can FI s accurately evaluate risks that portfolios are exposed to between different asset classes? (project finance, corporate finance, equity, guarantees) How can FI s accurately evaluate performance against key natural capital indicators and link NC performance indicators meaningfully to credit risk in a structured, quantitative approach/benchmark encouraging better performance through riskadjusted financial premiums? How can FI s who provide debt or equity capital facilities to agri-businesses and clients, better understand how to embed factors such as ecosystem degradation and water scarcity into credit risk management to control exposure to deforestation and related GHG emissions?

15 Natural Capital Declaration 15 Develop an evidence based business case for natural capital as a material risk Identify methodologies for mapping natural capital risk across portfolios Develop approaches to integrate natural capital considerations into credit risk assessment

16 Commitments of the Natural Capital Declaration 16 Understand Embed Investment Lending Insurance Account Disclosure

17 Commitments of the Natural Capital Declaration 17 Understanding Build an understanding of the impacts and dependencies on natural capital relevant to operations, risk profiles, customer portfolios, supply chains and business opportunities Embedding Supporting the development of methodologies that can integrate natural capital considerations into decision making processes of all financial products and services

18 Benefits for Commercial Banks 18 Address credit risks from clients and investments that are exposed to lower cash flows/ EBITDA and loss of license to operate due to resource-intensive or polluting activities in operations or supply chains Reduce exposure to unanticipated risks and cash flow fluctuations from underlying resource scarcity, commodity price volatility, and loss of market share Manage reputational risks. Enhance transparency and develop evidence-based environmental credentials Develop new loan products that incorporate material NC factors within credit risk analysis of clients, including exposure of clients to their wider supply chain

19 Business response 19 Measure, manage and mitigate risks and impacts Improve decision-making by undertaking ecosystem valuation to quantify business risks and opportunities Innovate and help develop new markets for ecosystem services and eco-efficient goods, services and technologies Encourage suppliers and purchasers to adopt best practices Enter into local partnerships to address on-the-ground issues Promote smart ecosystem regulation that leverages market forces and business solutions that halt degradation and levels the playing field for all

20 Discussion 20