ESG: Environmental, Social and Governance FactorsThe management of Environmental, Social and Governance (ESG) factors is critical to the ability of any organization to generate long-term value.
- ‘Environmental factors consider how an organization performs as a steward of nature’. The ‘E’ refers to the performance of a government, a financial institution, or a company with respect to climate change, use of biodiversity and natural resources, management of waste, among other factors or issues to be taken into account.
- Social factors refer to the relationship of the organization with its different stakeholders; whether employees, customers or suppliers, communities, citizens, etc. The ‘S’ factors involve human rights, labor rights and working conditions, occupational health and safety, equal opportunities, indigenous people rights, and more broadly human rights.
- Governance factors refer, among others, to the allocation of roles, responsibilities and rights between the different stakeholders in the governance of a financial institution or a company, or in the political governance structures of a country. The ‘G’ factors involve issues such as transparency and reporting.
Environmental and Social Management Systems (ESMS)
Each organization faces different ESG risks -or opportunities- which are dependent on, among other notions, its specific sector and context of operations. For a financial institution, for instance, ESG risks derive mainly from its lending or investing activities and are inherent to its clients’ and/or investees’ business activities. Hence, each organization should develop an ESG risks management system bespoke to its ESG risk profile, integrated into its business model, and grounded on policies and internal control systems.
ESG performance assessments
The evaluation and rating of organizations based on their relative ESG performance and readiness is playing a growing role in risk management, investment strategies, and the development of new sustainable finance products. To this end, investors and financiers are building in-house analytical capabilities, directly engaging with clients and investees, and/or relying on third-party providers of ESG data and ESG performance assessment (ESG rating, ESG scoring). The “ESG ratings” are now increasingly being used as a way to structure sustainable debt products – such as the so-called sustainability linked bonds.
Scope of Activities
Scope of Activities
Where it is implemented
Fondo Financiero para el Desarrollo de la Cuenca del Plata (FONPLATA)
The objective of this project was to identify the gaps between the E&S norms and the regulations applicable to FONPLATA; that is to say all Federal and State Environmental, Social Health and Safety regulations of its 5 member countries (Argentina, Brazil, Uruguay, Paraguay and Bolivia) and the IADB safeguards and IFC performance standards.
The objective of this project was to support BICE E&S Unit capacity in the development and performance of E&S supervision field visits and meaningful public consultations.
Central Bank of Barbados (CBB)
- The project aimed to provide support to the Central Bank of Barbados (CBB) in the design of an ESMS to be applied by a guarantee fund for SMEs. It also fostered the integration of such ESMS in an automated system developed to manage the fund.
- The guarantee fund was launched in January 2016 and the ESMS has been fully integrated into the online workflow being used for the management of the partial credit guarantees.
- The project aimed to provide support to the Association of Development Banks in Brazil (ABDE) in order to help its members to comply with a new banking regulation requiring all financial institutions to have an ESMS.
- Training materials and several workshops were developed so the state development agencies could start the process of designing their own E&S policies and systems.
- 20 development agencies took part in the workshops.
- The objective was to support Electrobras in getting an ESG Rating from Vigeo Eiris.
- The results were striking: Electrobras scored 67/100, while the former score was 30/100, which led the company to become #1 among utilities in the world and Top 39 from a universe of almost 5,000 companies covered.
- The objective of the program was to support Bancóldex in designing and implementing its Environmental and Social Risks Management System (ESMS), in the context of a loan operation from the IDB. The objective was met in mid-2013.
- Bancóldex operates a full-fledged ESMS and is entering a second phase of continuous improvement of the system: it is considering lowering the minimum levels of application and developing an online workflow to improve processes (December 2016).
- The project aims at supporting Bancóldex in adjusting its ESMS to include a new sector for small and medium scale renewable energy projects.
- As of December 2016, Bancóldex finalized the specific processes and materials that will be applicable for its E&S analysis of RE projects. Bancóldex is also considering the automatization of the ESMS processes with an online workflow for the first-tier banks.
- The program consisted in providing support to FINDETER in the design and implementation of its Environmental and Social risks Management System (ESMS). The objective was met in July 2015
Fondo para el Financiamiento del Sector Agropecuario (FINAGRO)
- The project aims at providing support to FINAGRO (Fund for the Financing of the Agricultural Sector) in the design and implementation of its Environmental and Social risks Management System (ESMS).
- The project concluded with FINAGRO finalizing a pilot phase conducted in three of its first-tier banks (Bancolombia, Mivivienda and Colpatria).
- The project aimed at supporting BANDESAL in adjusting its ESMS to include its second-tier activities.
- The objective was met and BANDESAL’s ESMS now covers both first and second tier lending activities.
Banco Nacional de Obras y Servicios Públicos (Banobras)
- The program aims at supporting Banobras in the design and implementation of its Environmental and Social Risks Management System (ESMS).
FIRA (Fideicomisos Instituidos en Relación con la Agricultura)
- The program aims at supporting FIRA (Fideicomisos Instituidos en Relación con la Agricultura) in the design and implementation of its Environmental and Social risks Management System (ESMS). Project concluded in December 2016.
- The IDB is supporting AFD in building their ESMS.
- The IDB is supporting COFIDE in building their ESMS.
- The project aims to support the development of a business model for green finance, based in the identification of opportunity and actionable areas, and assisting BROU in being one of the key actors at the country and region in supporting sustainable finance.
- The Project focused in: i) providing environmental and risk management of the BROU’s portfolio; ii) seeking opportunities to improve efficiency; iii) analysing and ascertaining sectors, zones or structures that may be riskier, iv) exploring the development of potential financial instruments to address identified risks; v) promoting BROU’s Management Environmental and Social Risks System (ESMS) in order to reduce risks while increasing credit volume, so as to identify and mitigate those risks in the lending activities.
The integration of Environmental, Social and Governance ("ESG") factors continues to expand globally. According to J.P. Morgan, “the year 2020 proved to be a remarkable year for ESG investment flows. Asset managers have been prioritizing the integration of material ESG factors into existing investment solutions, while the development of new sustainable investment solutions continues to accelerate in response to the ever-growing investor interest”.
Environment is, of course, only one aspect of the equation. The Covid-19 pandemic crisis emphasizes the importance of social and governance factors, as companies with a long-term focus have proven to be more resilient to date.
Organizations managing ESG risks are showing a stronger financial and operational performance and a better capacity to attract capital. Sustainable funds have shown to consistently outperform non-ESG funds in different time periods, over one, three, five and ten years. Initial evidence indicates that they also attracted greater interest among market participants and demonstrated heightened resilience when stock markets began to fail due to the Covid-19 pandemic.
Regulators, investors, and financiers are steadily demanding transparency on organizations’ ESG risks profile and management capabilities. Regulators are increasingly recognizing ESG-related risks, and climate-related risks, in particular, as a source of potential material impact on firms’ performance and, more broadly on the stability of the entire financial system. As such, the number of regulatory-related initiatives calling for ESG risk management and disclosure is growing. Examples include the EU’s regulation on sustainability-related disclosures and Non-Financial Reporting Directive, the Statement on disclosure of ESG matters by issuers of the International Organization of Securities Commissions (IOSCO), or Brazil’s Resolution CMN 4.661/2018. Investors’ interest in and demand for ESG information is also growing.
Beyond regulatory compliance, investors realize the value of integrating ESG factors into their investment and voting decisions in order to mitigate risks and detect new business opportunities. This is evidenced by the growing development of ESG guidance and reporting requirements for thematic bond issuers and listed companies respectively. It is also documented by the increasing number of ESG-related shareholders proposals.
- During the year 2020, the IDB, with consulting firm SITAWI, was providing support to Electrobras in the creation of their Green Bond Framework. Vigeo was engaged to provide a Second Party Opinion (SPO) on the Framework. A SPO assesses the issuance: its sustainability and its compliance with international standards, such as the International Capital Markets Association (ICMA) Green Bonds Principles; but it also considers the issuer’s broader sustainability profile.
- It quickly appeared that Vigeo’s view on Electrobras ESG profile did not reflect the E&S performance level that IDB was assessing for the Institution. After discussions, Electrobras realized that Vigeo was basing its evaluation on an assessment dated from 2018 when Vigeo had done a sectorial review. It appeared that an email requesting information had been sent to a generic email address that had not been attended by Electrobras. The ESG assessment had, therefore, been done only on publicly available information which did not provide an entirely fair picture of Electrobras sustainable performance at the time.
- Fortunately, it all coincided with Vigeo’s 2020 review of its sectorial assessment and IDB decided to support Electrobras in the process – with the help of the consulting firm SITAWI. The results were striking: Electrobras scored 67/100 in the Vigeo Eiris rating, while the former score was 30/100, which led the company to become #1 among utilities in the world and Top 39 from a universe of almost 5,000 companies covered.
- The IDB has been working with Bancóldex since 2012 in the sustainable finance field. First by supporting the Institution to design and implement its Environmental and Social Management System - ESMS, then to issue green and social bonds.
- In August 2017 and May 2018, Bancóldex became the first public development bank in Colombia to issue green bonds (COP 200MM) and social bonds (COP 400MM), in the local market, with a 2 to 4 times oversubscription.
- As a result, Bancóldex has become a champion of the transition to a sustainable financial sector in Colombia. In 2020, while Bancóldex was chairing the Protocolo Verde – the Colombian green finance roundtable – IDB provided technical support to Bancóldex and four other private banks to review and enhance their respective ESMS. A roadmap was design for 4 different institutions.
- The templates that were created will soon be made more widely available through an IDB publication so that more Financial Institutions in the region can benefit from the best practices and lessons learned from that collaboration in Colombia.
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