Environmental and social risk management
The environmental and social risk management process (including risks related to climate change) for the operations we finance applies throughout the project life cycle.
It is the divisions in charge of Environmental and Social Responsibility in Operations (SER-O) that support and promote higher environmental and social quality in projects through a permanent dialogue between project managers and counterparts:
- They contribute to improving the E&S quality of projects (compliance with international standards; obtaining certifications…) via technical assistance, advice and support;
- They determine the financial leverage that will give the contracting authority incentives to improve its SER performance.
This risk management mechanism meets the objectives of harmonizing the environmental and social procedures of Official Development Assistance agencies set out in the Paris Declaration on Aid Effectiveness. For example, Proparco works with the EDFIs (European Development Financial Institutions) on the harmonization of E&S processes and results measurement, with multilateral institutions that finance the private sector (IFC in particular), and with UNEP-FI to promote good E&S practices for banks. A close partnership has been built up with FMO and DEG.
E&S risks [+]
It is during the project appraisal phase that AFD and Proparco qualify and assess its environmental and social risks and evaluate their level.
Environmentally speaking, projects can have risks in terms of ecology (adverse effect on natural environments and biodiversity), pollution (water, air, soil) and nuisances (noise, waste…) and natural, technological and health risks. They can also have an impact on the health and safety of communities, natural resources (water resources, soil and underground resources, land resources), on the living conditions of communities, and on the natural, historical and/or cultural heritage.
The social risks mainly concern the respect of fundamental human rights for which there are recognized international standards, laws and conventions: human traffic, sex tourism, population displacement, forced labor, working conditions, equity for disadvantaged or excluded social groups (particularly women), non-respect of cultural diversity, adverse effects on the environment, etc.
Reference standards [+]
All operations financed by AFD Group are required to comply with the national regulations of the country where the operation is implemented, including for environmental and social issues.
However, as regulations in the countries where AFD Group operates are sometimes incomplete or being developed, AFD Group uses a number of rules, good practices and directives produced by international standard-setting organizations as a reference.
This mainly concerns:
- The UN Principles for Responsible Investment (UNPRI);
- The World Bank Safeguard Policies for public sector financing;
- The IFC Performance Standards for private sector financing. These standards are applied by Proparco for high-risk projects (A and B+);
- The “Principles for Responsible Financing”. They are used by all European Development Finance Institutions (EDFI Group) and are applied by Proparco.
The major international conventions ratified by the countries where AFD operates are also used as references, mainly:
- The United Nations Universal Declaration on Human Rights;
- The ILO fundamental conventions on labor law;
- The United Nations Convention on the Elimination of All Forms of Discrimination against Women;
- The OECD guidelines.
Project selection [+]
Projects are first and foremost selected on the basis of sectoral and geographical strategies, which are vehicles for the principles of sustainable development.
AFD also has an exclusion list, which was approved by AFD and Proparco’s Boards of Directors in early 2011 and indicates the types of project that the Group refuses to finance on the grounds of ethical, regulatory, environmental and social criteria.
Finally, AFD Group applies a selectivity policy to projects with regard to their impact on the climate. The aim of this selectivity grid is for the Group:
- Not to finance highly emissive projects in emerging countries;
- Not to finance highly emissive projects, i.e. over one million tons of equivalent CO2 emissions annually, in middle-income countries, notably Mediterranean countries, if it is not possible to ensure that the project in question is part of a national and sectoral policy to mitigate greenhouse gas emissions.
It is important to note that AFD Group does not aim to exclude the financing of risky projects a priori. Its objective is to fully ensure that counterparts are committed to mitigating the risks and impacts of their project. Accordingly, the allocation of financing is subject to the contracting authority implementing actions to mitigate these risks and impacts. These actions are defined on the basis of a reasoned E&S assessment (due diligence) of projects.
E&S clauses in bid invitations [+]
The aim of introducing environmental and social (E&S) clauses in the contracts for goods and services financed by Official Development Assistance is to promote a level playing field for international competitive bidding and improve the overall level of E&S requirements.
AFD started taking account of this concern in the contracts it finances in the context of its operations in 2007, but additional efforts must be made to strengthen its scope and effectiveness.
Indeed, AFD has observed that there is little coordination between the E&S requirements for projects, on the one hand, and the selection criteria for enterprises and the monitoring of these requirements in the performance of works contracts, on the other hand.
Consequently, in order to award contracts with high E&S impacts to responsible enterprises and enforce the E&S requirements during the works, AFD proposes to strengthen the E&S requirements in the bidding documents:
- At the prequalification stage: The aim is to be able disqualify enterprises that do not meet specific E&S criteria;
- At the bid appraisal stage: The aim is to reject bids that technically do not comply with the E&S component;
- During the performance of works: The aim is to impose penalties on enterprises that do not respect their undertakings and the E&S requirements of the contract.
Broad-based consultation has been conducted on these proposals, both in-house and externally, with representations from French companies, NGOs and other donors. AFD is particularly working with KfW (German cooperation) with the aim of jointly finalizing the proposals.
Stakeholder involvement [+]
For category A projects (e.g. large-scale dams), the contracting authority/client must, in association with the local authorities, consult the communities affected and local NGOs concerning the social and environmental impacts of the project and the way in which these impacts will be managed. These stakeholders’ opinions are duly taken into account and reflected in the project planning documents.
Provision must be made for a grievance mechanism to be set up for projects with the highest E&S risks that are cofinanced with multilateral donors. The grievance management mechanism gives communities who may be affected by projects the opportunity to have a mechanism that allows their complaints and concerns about the impacts of the project to be collected and promptly resolved. However, the mechanism to manage grievances caused by the project must not limit the possibility for communities to have access to other existing legal and administrative recourse in the country where the project is implemented.
E&S capacity building [+]
Real progress in the integration of environmental and social issues into projects will only come about if the contracting authority has the capacities to manage and monitor these issues. The capacity building activities must allow the contracting authority to manage the works contracts more effectively, but also to handle the specific activities under its responsibility for which the lack of experience can prevent them from being effectively implemented.
Certain projects benefit from specific E&S support via relevant technical and financial assistance.
AFD Group finances this assistance via the allocation of a grant from the Governance Capacity Building Facility (FRCG) or credit lines with subsidized terms. For example, since 2009, Proparco has financed the implementation of E&S risk management systems in about a dozen banks via technical assistance financed using FRCG grants, its technical assistance fund, or a margin reduction mechanism.
“CSR” credit lines have been allocated in the context of bank financing in order to support the implementation of CSR processes by their SME clients.
This objective also includes the dissemination of good E&S practices in the value chains of beneficiaries/clients.
In-house organization [+]
Specific structures are responsible for managing the environmental and social risks of projects:
- The Environmental and Social Support Division (AES) at AFD. It was set up in 2007 and comprised six experts (Head of Division, three environmental experts and two sociologists) in 2012.
- Proparco’s Environmental and Social Impact Unit (ESI). It was set up in 2010 and today comprises five experts (Head of Division, three E&S experts and an expert in results measurement). This division also handles the measurement of the results and impacts that the operations financed by Proparco have on development.
These E&S entities are tasked with:
- Contributing to the management of the environmental and social risks of the funded operations;
- Analyzing and reporting on the effectiveness of the process and monitoring the implementation of clients’ contractual undertakings;
- Providing SER support to the Group’s other departments for the definition and implementation of specific tools and processes for the E&S assessment of the funded projects, training for officers, defining model SER clauses for AFD and Proparco’s agreements and developing E&S monitoring and ex post evaluation tools;
- Developing partnerships in order to harmonize donor practices, jointly appraising projects as effectively as possible, monitoring practical developments and participating in international debates via working groups or exchange platforms, for example;
- Developing knowledge production and expertise in SER.
Proparco, along with the EDFIs, participated in the definition of the International Finance Corporation’s (IFC) Performance Standards, which were reviewed in 2012. AFD also participates in discussions during inter-donor working groups, which aim to harmonize procedures and tools to measure the carbon footprint and analyze vulnerability to climate change. AFD signed a Charter last year during the Doha COP, which promotes a harmonized approach to footprint measurement.