Environmental Issues and the Financial Sector AMCHAM Environment Committee Workshop Warsaw, 17...

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Environmental Issues and the Financial Sector AMCHAM Environment Committee Workshop Warsaw, 17 November 2005 Environmental Issues and the Financial Sector AMCHAM Environment Committee Workshop Warsaw, 17 November 2005 Robert Adamczyk Environment Department European Bank for Reconstruction and Development Slide 2 Presentation 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 Slide 3 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 Slide 4 Banks Founding Agreement commits the Bank to:... promote, in the full range of its activities, environmentally sound and sustainable development. Slide 5 EBRD Sound banking principles Additionality Will another bank invest? EBRD will not compete with commercial Banks Transition impact Compliance with Environmental Policy Slide 6 Project Appraisal - Due Diligence Financial Approval Legal Appraisal Technical appraisal Environmental appraisal Environmental Due Diligence, a tool for decision-making Slide 7 Project 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 Slide 8 EBRD 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 + Slide 9 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, Slide 10 Source of Funding Poland Slide 11 Outline Investment needs in Poland and sources of funding Impact of Environmental issues on financing Direct Indirect Case Studies Slide 12 Investment needs in Poland Infrastructure: Roads, Railways Airports Private sector; Power Service sector Industry (new and old) other Slide 13 Sources 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? Slide 14 Environment and investment decisions 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) Slide 15 Risk issues for Financial Institutions Corporate Loans Working Capital Project Finance Equity Investment Guarantees Portfolio management Slide 16 Internationally 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 Slide 17 Energy 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 SO 2 emission limits 60% reduction of SO 2 by 2012, more demanding than LCP Major investment in the Power Sector Compliance issue Value of privatised assets Slide 18 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 Spjnosci, jesli nie otrzyma raportw na temat oddziaywania na rodowisko planowanych inwestycji.Chociaz KE zaakceptowaa ju w ubiegym roku 22 projekty inwestycji miejskich, na ktre miaa przekaza ponad 0,5 mld EUR, na razie tylko Kalisz dostanie pieniadze. (Rzeczpospolita, Marzec 2005). Slide 19 EBRD 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. Slide 20 EBRD 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. Slide 21 Equator Principles Slide 22 Equator Principles Equator Principles A major step forward for the banking industry A voluntary, private-sector initiative Based on IFC environmental and social policies and guidelines Slide 23 Why did they do it? Why did they do it? Increased awareness of the risks Financial loss Reputation damage Shareholder activism No longer someone elses 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 Slide 24 The New Industry Standard The 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 Slide 25 Application Application Project finance Total capital cost of $50 million or more All industries Environmental risk categorization & industry standards apply globally. Slide 26 Equator 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 Slide 27 Screening 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 Slide 28 Environmental Management Plan Environmental Management Plan Borrower prepares an Environmental Management Plan for all As (and for Bs as appropriate) Draws on conclusions of the EA Addresses mitigation and monitoring For As, the EA and EMP subject to independent expert review EBRD use of EAP and ESAP Environmental Action Plans Slide 29 Consultation Consultation The borrower consults with affected groups for all As (and for Bs 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) Slide 30 Covenants Covenants 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 Slide 31 The Benefits The 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 Slide 32 Summary and Conclusion Slide 33 Summary 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 Slide 34 Summary Public attitudes shifting on social and environmental issues Strong anti-globalization, anti- privatization sentiments Impact of corporate governance scandals NGO networks more sophisticated Slide 35 Summary 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, Re