Managing ESG risks

Our ESG approach

Development operations carry risks by nature with regard to the environment, communities and governance. Proparco’s approach aims to identify and address environmental and social (E&S) risks as well as governance (G) risks. The process also allows us to assist our clients in managing the ESG risks. The objective: avoid, reduce, or compensate the negative impacts of funded projects and reduce the financial risks for Proparco related to these ESG risks. Our approach, similar to that of AFD and to best practices of international financial institutions, is based on IFC Performance Standards, the norms of the International Labour Organization (ILO), the Voluntary Guidelines on the Responsible Governance of Tenure of Land of the Food and Agriculture Organisation (FAO), the UN Guiding Principles on Business and Human Rights as well as the resources of the Corporate Governance Development Framework (CGDF). This approach involves assessing the environmental, social and governance risks of each project submitted to Proparco’s decision-making bodies. Based on internal or external expertise, we then propose to the financial beneficiaries’ actions to implement in order to manage these risks and to improve their environmental and social practices. During the operation phase, we monitor the implementation of these actions and we ensure that the project properly manages any risks and unforeseen negative environmental and/or social contigencies. Finally, when necessary, we can provide specific in-depth support for the client to strengthen their capacities in the management and implementation of their environmental, social and governance performance.

63 projects subject to an ESG risk categorization in 2020

Methodology: ESG monitoring indicators

Proparco also uses a set of E&S and governance monitoring indicators for its clients.

These indicators are calculated ex ante, i.e. upon project appraisal, and are monitored throughout the duration of the financing/investment by Proparco’s teams.

E&S risk indicators

• The E&S categorization reflects the potential risk at the appraisal phase. This indicator is the only one which will remain indentical over the financing/ investment period. It ranges from Category A (high risk) to Category C (low risk). The prefix FI is added for financial intermediaries. Projects rated FI-A, A,

B+, as well as certain investment funds rated FI-B, are subject to more detailed 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.

Ex ante assessment of ESG risks of projects financed in 2020

The ESG risks estimated for projects financed in 2020 break down as shown in the following graphics. Proparco supports the implementation of E&S Action Plans (ESAPs) and Corporate Governance Action Plans (CGAPs) and the achievement of better results in the field by providing its clients with advice, networking and tools.

E&S categorization (63 projects)

24% 10%

17%

A B+ B

24% 3%

22%

IF-A IF-B IF-C

Tools

Governance risks (63 projects)

75%

13%

9% 3%

Low/moderate risk Major risk High risk Negligible risk or not applicable*

ESG risk management tools

Proparco has several tools for the ESG assessment and support. Contextual research, using external databases as well as Proparco’s local knowledge, is conducted on the activities of the project/client. The E&S and G assessment of project/client activities may be carried out in the form of desk reviews and interviews or of comprenhensive E&S due diligence assessments done by independent experts. After financing and agreement on an E&S action plan for the project/client to carry out, internal and/or external reporting is set up between Proparco and the beneficiary of the financing to monitor the evolution of E&S performance. To assess governance practices and suggest improvements to some of its clients, Proparco mainly uses: • Rapid Risk Screening (a pre-analysis rating tool) • The progress matrix (a tool to measure the maturity of the governance) • Ad hoc questionnaires • The results matrix (a rating tool on the results of the due diligence) • Model documents for companies (e.g.: bylaws of a Board of Directors).

E&S performance indicators

These indicators reflect the ressources which the client deployed and the evolution of its performance. An initial assessment of these indicators is conducted upon project signature (T0) and a regular update is subsequently made: • E&S organization: measures the maturity of the E&S organization. The indicator uses scores from 0 (low) to 3 (excellent). • E&S management system (ESMS): reflects the management system’s maturity of monitored project. The indicator uses scores from 0 (low) to 3 (excellent). • E&S performance: takes account of the progress in the compliance of projects with the IFC Performance

Standards and Proparco’s requirements. A score of 0 (low) to 3 (excellent) is attributed based on a set of key questions.

Governance indicators

These indicators improve the monitoring of governance risks (risk monitoring matrix). They also measure the improvement in governance by monitoring the maturity of the governance (progress matrix). The effective implementation of the main commitments set out in the Governance Action Plan is also managed by Proparco, with the preparation of an annual governance monitoring sheet to improve the qualitative monitoring and concerns 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; • Rights of minority shareholders.