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Managing ESG risks
Our approach to ESG
By nature, development operations present a risk to a population’s environment and to governance. Proparco’s approach aims to identify and address environmental and social (E&S) risks as well as governance risks (G). This approach also enables us to assist our clients in managing the ESG risks. The aim? Avoid, reduce, or even compensate a financed project’s negative impact and reduce Proparco’s financial risks related to these ESG risks.
Our approach, which is similar to AFD’s and to international financial institutions best practices, is based on IFC Performance Standards, the norms of the International Labor Organization (ILO), the Voluntary Guidelines on the Responsible Governance of Tenure of Land of the Food and Agriculture Organization (FAO), the United Nations Guiding Principles on Business and Human Rights as well as the resources of the Corporate Governance Development Framework (CGDF). This approach consists in evaluating environmental, social and governance risks of each project that is submitted to Proparco’s decision making bodies.
Based on internal or external expertise, we then propose to our financing beneficiaries actions for implemention to manage E&S risks and improve their environmental, social and governance practices. During the operation phase, we monitor the implementation of these actions and ensure that the project properly manages any risk and unforeseen negative environmental and/or social contingencies. Finally, when necessary, we can set up specific, in-depth client support to strengthen its capacity to drive and implement environmental, social and governance performance.
Estimated ESG risks for projects signed in 2021 are split as illustrated in the graphics below.
Ex-ante E&S risk categorization of projects signed by Proparco in 2021 and of the portfolio Governance risks on projects signed in 2021
40%
30%
20%
10%
0%
A B+ B C IF-A IF-B IF-C
% of Proparco portfolio projects at 31/12/2021 % of projects signed in 2021
5% 2%
0%
93% High risk Major risk Low/moderate risk Negligible risk or not applicable
The E&S profiles of projects financed in 2021 shows a lower proportion of high risk projects (IF-A and A) in favour of less risky projects. Regarding governance issues, it should be noted that changing the scope of application for governance analyses (focusing on equity projects from now on ) has reduced the number of analyses carried out vs 2020.
Human Rights due diligences
Applying recognized international standards to its due diligences enables Proparco to apprehend human rights questions, in particular regarding:
• Worker rights: i.e. to work and job conditions, labour protection (notably against forced labour or child labour, discriminations, etc.);
• Community rights, in particular, to health and safety of communities potentially affected by projects (notably potential acts of violence towards these communities); to the acquisition of land and against involuntary resettlement (notably to avoid forced evictions); • Indigenous populations’ rights and the requirement to obtain their free agreement following a prior informed, transparent and inclusive consultation ahead of projects being implemented;
• Environmental rights, in particular the preservation of ecosystems, pollution prevention, etc.
Since 2019, Proparco’s complaints mechanism set up jointly with its DEG and FMO counterparts completes and reinforces the operational system by inviting people affected by a project financed by Proparco to use an independent channel to collect and deal with their claims.
Methodology: ESG risk management tools
Proparco supports the implementation of E&S actions plans (ESAP) and corporate governance action plans (CGAP) and the achievement of better results in the field by providing its clients with advice, introductions and tools.
Tools Methodology: ESG risk management tools
Proparco disposes of a selection of client ESG assessment and support tools.
Contextual research using external databases together with Proparco’s local knowledge is undertaken around a project’s/client’s activities. E&S and G assessment of project/client activities can be done using questionnaires and interviews or by externalizing indepth due diligences. After financing and agreeing to the E&S and G action plan, internal and/or external reporting is set up between Proparco and the beneficiary of the financing to monitor evolutions in ESG performance.
To screen and propose improvements in corporate governance practice to certain clients, Proparco primarily uses:
• Rapid Risk Screening (rating tool for pre-analysis); • The progress matrix (tool to measure governance maturity); • Ad hoc questionnaires; • Results matrix (rating tool for diligence results); • Model documents for companies (e.g. bylaws of a Board of Directors).
Methodology: ESG monitoring indicators
Proparco also uses a series of client E&S and G monitoring indicators.
These indicators are calculated ex-ante, i.e. upon project appraisal, and are monitored throughout the financing/investment life span by Proparco teams.
E&S risk indicators:
• The E&S categorization measures the potential risk at the appraisal phase. This indicator is the only one which does not evolve with time. It ranges from A (high risk) to C (low risk), to which the prefix IF is added for financial intermediaries. Projects noted IF-A, A, B+ as well as certain IF-B rated investment funds undergo an in-depth due diligence. • The residual risk accounts for the E&S risk to date, by comparing the E&S performance and the categorization. It is rated from very high to low.
Training Training ESG practitioners
The community of donors has flagged the fact that ESG practitioners working the closest to clients is insufficient. Training in this field is rare and comes at a cost. Proparco, in partnership with the IFC, the consultancy firm Ramboll and the association, RSE et Développement, launched an innovative programme: a hybrid training programme that is free and that has an integrated practical part destined for current or future IFC standards practitioners in French-speaking Africa. The programme has been followed by one hundred or so practitioners (consultants, clients, partners…) from a dozen French-speaking countries and includes theoretical lessons, B2B (business to business) meetings within the community, workshops, exchange of documents, on-line working groups, as well as field practice. For more information:
More informations here: https://www.youtube.com/watch?v=qvY3w6s9eos https://www.youtube.com/watch?v=8aDNSwAwRWA
E&S performance indicators
These reflect the resources which the client deployed and the evolution of its performance. An initial assessment of these indicators is carried out when the project is signed (T0) thereafter regular up-dates are made: • E&S organisation: measures the level of maturity of the E&S organisation within the companies being monitored. Scores range from 0 (poor) to 3 (excellent); • E&S management system: measures the level of maturity of a monitored project’s management system. Scores range from 0 (poor) to 3 (excellent); • E&S performance: measures the evolution of a project’s compliance with IFC Performance Standards and Proparco requirements. A score of 0 (poor) to 3 (excellent) is attributed based on a series of key questions.
Governance indicators
These indicators not only make it possible to track governance risks more efficiently (risk monitoring matrix), they also measure improvements in governance by monitoring governance maturity (progress matrix). Effective implementation of the main commitments provided for in the Governance action plan is also driven by Proparco by keeping an annual governance monitoring scorecard enabling a better qualitative follow-up grounded in the five main pillars of the governance approach:
• commitment to good governance; • structure and functioning of the Board of Directors; • environment and control procedures; • transparency and dissemination of information; • minority shareholder rights.
