© SIFCA
Development finance institutions such as Proparco help the companies they finance to improve their environmental and social (E&S) practices. Their role is not limited to E&S risk management: they also encourage their partners to engage in continuous E&S performance improvement to boost the quality of their projects.
As a creator of jobs and source of national tax revenues, the private sector plays a key role in social and economic development. Its commitment to acting responsibly on economic, social, environmental and governance issues is crucial to supporting sustainable growth, a view that underpins the mission of development finance institutions (DFIs) such as Proparco.
In addition to providing financing, the role of DFIs is to support an emerging innovative private sector committed to promoting sustainable development in the global South. They therefore encourage the companies they finance to improve their environmental and social (E&S) management. This also enables these companies to limit their financial, legal and reputational risks and enhance their overall performance. The main contribution of DFIs like Proparco is their ability to support their partners’ E&S initiatives, helping them enhance the standard and performance of their projects. By strengthening economic stakeholders’ ability to meet the challenges of E&S management, Proparco seeks to increase E&S momentum across the private sector. It encourages its partners – and the local economy more generally – to be proactive in improving their E&S practices.
DFIs drive action in many ways. Their strict E&S requirements help promote high standards and best practice within the businesses they finance and their supply chains. They are also able to offer their clients advisory services and technical assistance.
Promoting high standards
Countries where DFIs operate often lack an adequate regulatory and corporate social responsibility framework for businesses. Only a few sectors are regulated, and regulation is often insufficiently enforced because of a lack of resources and capacity to monitor implementation. Although environmental regulations exist in virtually all African countries, they mainly target pollution (air, water and noise) and barely touch on protecting biodiversity. Very often, environmental impact studies – the main environmental assessment tool for a project – are essentially administrative documents produced at an advanced stage of the project with the main objective of obtaining the environmental permit needed to start the work. The measures to mitigate a project’s environmental impact set out in such studies are rarely taken into account in the way the project is designed and will be implemented. It is also rare for populations to be considered in these studies. There are no similar social impact studies, so a project’s risks and impact on company employees, on its supply chain, or on local communities are not properly assessed. Furthermore, no analysis is made of the company’s ability to manage appropriately its E&S risks and impact.
In response, over the past four decades, DFIs have been developing E&S standards that are more stringent than local regulations and are gradually incorporating the principles laid down by international organisations to govern company operations. These include in particular the Fundamental Conventions of the ILO (International Labour Organization), the United Nations
Guiding Principles on Business and Human Rights, the OECD (Organisation for Economic Cooperation and Development) Guidelines for Multinational Enterprises, and the FAO (Food and Agriculture Organization of the United Nations) Voluntary Guidelines on the Responsible Governance of Tenure.
The International Finance Corporation (IFC), a member of the World Bank Group, has also been developing performance standards since 2003. These are now a recognised benchmark for all E&S issues that a company might face. The standards also define E&S review and management procedures (Figure).
For more than a decade, DFIs have been working to harmonise their approaches so that their clients are not overwhelmed by a profusion of standards. In 2009, for example, European development finance institutions (EDFIs), including Proparco, adopted a common set of principles defining the conditions for responsible financing. DFIs have also harmonised their E&S assessment and monitoring procedures for jointly financed projects, basing them on IFC standards, the ILO Fundamental Conventions and the UN Guiding Principles on Business and Human Rights. As a result of these efforts, the DFIs have a more effective collective impact on the development of E&S responsibility in the economies of the regions where they operate.
In addition, DFIs sometimes encourage their clients to seek certification of their company’s management systems (e.g. ISO 14001¹) or to apply for industry-specific certifications (e.g. RSPO [Roundtable on Sustainable Palm Oil certification for palm oil production], FSC [Forest Stewardship Council for logging], or BONSUCRO for sugar production).
A strict definition of improvement measures
When a DFI such as Proparco analyses an application for project financing, the first step is to identify the company’s strengths and weaknesses, define E&S priorities and help the company structure its E&S responsibility approach. The ultimate goal is to enable the company to pursue these efforts on a long-term basis.
Proparco plays a key role during this assessment phase. Its teams, supported by qualified consultants, identify the project’s E&S risks (in accordance with Proparco’s standards) and assess the company’s practices and ability to properly manage those risks. The assessment also identifies the company’s capacitybuilding needs. Lastly, in addition to supporting solely E&S risk management, the assessment also identifies ways in which a company can optimise its impact on its environment, for example by reducing its environmental footprint (water and energy savings) or providing goods and services to local communities (improved access to drinking water, energy and sanitation, dispensaries and schools for local communities, etc.).
The measures required to improve a company’s E&S practices are determined on the basis of the results of this assessment. Proparco prepares an action plan that will enable the company to achieve the expected E&S performance level. This plan defines priorities, the funding required, deadlines for implémentation and the performance indicators to be tracked.
It must be agreed upon by the lender and the company prior to signature of the legal contractual documents, to which it will be appended. It summarises the lender’s requirements of the company and the company’s commitments to the lender. The company must keep Proparco regularly informed of its progress in this area. After the financing agreement has been signed, the Proparco teams and independent consultants follow up to ensure that the E&S action plan is being properly implemented, identify any difficulties encountered by the client and correct malfunctions (Box).
Proparco’s support for an energy project in Cote d’Ivoire
Along with the International Finance Corporation (IFC), BOAD (West African Development Bank) and other European DFIs, Proparco financed the third tranche of the Azito thermal power station in Côte d’Ivoire. This major project, which is still under construction, will eventually use “combined cycle” technology to generate around 1,000 GWh of additional electricity per year without using additional gas or producing greenhouse gases. The additional low-cost energy produced will improve access to energy for Côte d’Ivoire residents and provide the energy needed to support the sub-region’s growth. The E&S assessment made in respect of this financing led to an action plan whose main improvement measures focused on managing the plant’s discharges into water, mitigating the noise generated by the facilities and managing waste. One of the action points, for example, was to ask the plant’s constructor to adopt technical specifications that would guarantee compliance with national and international noise standards. Every quarter during the construction phase, an independent consultant reporting directly to the DFIs monitored the implementation of these measures. This ensured that E&S actions were being properly implemented to and helped improve all on-site management practices, including those of subcontractors.
Technical assistance can also be put in place to finance the costs involved in obtaining certification (ISO 14001, SA 8000, and so on), implementing specific policies (AIDS policy, for example), or producing preliminary studies of energy-efficiency investments or calibration studies of a rail operator’s vast soil clean-up operation. Similar support is offered to the financial institutions and investment funds financed by Proparco (Box).
Financial intermediaries help disseminate good practice
When DFIs provide funding to financial intermediaries (mainly banks and investment funds), they expect them to encourage their clients to adopt E&S responsibility principles equivalent to the DFIs’ own. Banks finance a large number of local businesses, while investment funds often prioritise promotion of a competitive private sector. The fact that such key local financing actors take E&S responsibility principles into account substantially increases lenders’ efforts to disseminate them throughout the local economy. Development finance institutions such as Proparco encourage financial intermediaries to define and implement, within an acceptable timeframe, an E&S risk management system for the projects they finance, based on high standards. In the long term, the banks or investment funds will have to analyse the E&S risks of the projects they are financing or the companies in which they are investing, define the actions required to mitigate those risks, make their loan or investment conditional on the implementation of the defined actions and monitor their effectiveness. As it does with companies, Proparco helps financial intermediaries develop these management systems by offering advisory services or technical assistance. For example, since 2012 Proparco has been supporting a Kenyan bank and its subsidiaries in Uganda and Tanzania in implementing an E&S management system to prevent risks and improve the E&S performance of the projects the bank finances. In addition, since 2013 a number of lenders, including the IFC and European DFIs, have been supporting the Kenyan banking association in promoting and developing guiding principles for responsible lending and best-practice tools for the entire Kenyan banking sector.
Opportunities and key success factors
Most companies financed by DFIs welcome requirements for improvement, since they are only too aware of the significant Financial and reputational cost of a project rejected by a local community, social discontent within a company, warnings from local or international non-governmental organisations, the halting of a project, or legal proceedings. They also recognise such requirements as an opportunity for greater access to international markets and financing and, in the long term, an opportunity to improve their productivity and profitability. However, while they generally welcome lenders’ requirements for improvements, this is not always the case for the financial and human resources that must be mobilised in order to achieve the required levels of E&S performance. For lenders, the main challenge is to convince the company to deploy the resources needed to engage in E&S responsibility on an tive action plan is put in place and future disbursements are made contingent on its implementation. Proparco has already encountered one such case: serious failures regarding employee health and safety had been identified in an energy infrastructure construction project. In the face of the company’s lack of responsiveness, Proparco and its cofinanciers halted payments. Corrective measures – organisational and operational measures and monitoring – were established with the company, and payments resumed after these measures were implemented and improvements noted. Nevertheless, as a rule, Proparco prefers to dialogue with companies or financial intermediaries to help them overcome their difficulties and continue to strengthen their E&S practices. ongoing and long-term basis. They can do this by demonstrating to the company the associated benefits. However, they still need to be pragmatic and factor in the time it takes for the company to implement these measures.
The E&S commitments must be respected. If clients do not comply, this can be marked as a default on the agreement and may result in a demand for early repayment of financing or the withdrawal of Proparco’s capital in the company. Similarly, disbursements may be frozen or delayed until the company fulfils its commitments. In such cases, a corrective action plan is put in place and future disbursements are made contingent on its implementation. Proparco has already encountered one such case: serious failures regarding employee health and safety had been identified in an energy infrastructure construction project. In the face of the company’s lack of responsiveness, Proparco and its cofinanciers halted payments. Corrective measures – organisational and operational measures and monitoring – were established with the company, and payments resumed after these measures were implemented and improvements noted. Nevertheless, as a rule, Proparco prefers to dialogue with companies or financial intermediaries to help them overcome their difficulties and continue to strengthen their E&S practices.
The role of DFIs is to help the businesses they finance to engage in E&S responsibility in a long-term perspective. Companies that do this reap benefits in terms of operation, competitive advantage, access to international markets, relations with their stakeholders, and image. Through such action, the partners help promote sustainable, inclusive growth in the global
South. However, the efforts required on the part of the companies may be substantial,
so DFIs like Proparco must establish a genuine partnership with them. The added value represented by DFIs lies in helping their clients achieve greater E&S responsibility.
Footnote:
¹ ISO 14001 specifies the requirements of an organisation’s environmental management system.
