Workshop on Responsible Financing in BRICS DFIs: International Standards and Practices, 23 July 2020, Zoom

The Russia-OECD Center together with the OECD held a large online event on the topic of responsible financing in BRICS Development Financial Institutions.

Antonina Levashenko, Head of the Russia-OECD Center, moderated the first part of the meeting on the practices of BRICS Development Institutions. The expert reported that the VEB.RF and the expert group started working on the Principles of responsible financing in the BRICS countries earlier this year. The BRICS Responsible Finance principles are based on existing international standards: the Equator Principles, the UN Global Compact, the UNEP financial initiative, and the OECD guidelines for MNEs. The main aspects of the BRICS Development Institutions' approaches to responsible financing are improving internal mechanisms for responsible financing and working with clients to promote inclusive solutions, to ensure compliance with international human rights standards, business conduct in compliance with environmental standards, to support local communities, to engage stakeholders, etc. Antonina also spoke about the planned work to promote responsible financing: signing of the responsible financing principles by the heads of BRICS Development Institutions by the end of 2020, improving the quality of life and attracting foreign investment to the BRICS countries by working on responsible financing and developing VEB.RF recommendation on the implementation of the principles of responsible financing by Development Institutions.

Natalia Timakova, Deputy Chairman of the VEB.RF, stressed the importance of responsible financing in interbank cooperation. At the moment all BRICS Development Banks have already received the Memorandum on the principles of responsible financing. The criteria for responsible financing will be developed by the end of the year. Elena Gushchina, Senior Vice President of the VEB.RF added that the VEB.RF seeks to develop cooperation with the OECD and promote such cooperation in Russia. Russian Prime Minister Mishustin said that regardless of whether Russia is a member of the OECD or not, it is important to exchange information and experience between Russia and the OECD.

Andrey Klepach, chief economist at the VEB.RF, noted that the VEB.RF is at the forefront of promoting the principles of responsible investment in Russia. In this field the VEB.RF actively cooperates with the Bank of Russia in developing standards for responsible financing. This year Russia is chairing the BRICS Interbank Cooperation Mechanism, the main goal in the agenda of the VEB.RF is the interaction in the sphere of establishing uniform standards of responsible Finance. The VEB.RF is preparing a Guide on green finance in Russia, which aims to promote investment in projects aimed at achieving the SDGs, the Paris climate agreement, and the OECD Guidelines for MNCs.

Nabil Mura Kadri, a representative of the BNDES Environmental Department, said that BNDES has been known for its results in promoting responsible finance standards and working to promote environmental and social standards in projects for 30 years. Last year, BNDES launched a new corporate responsibility policy, which includes introduction of a three-year plan to implement environmental and social standards. In 2019, a new methodology for screening environmental and social risks in projects was also adopted. The turning point here is the improvement of partnerships at the international level (for example, in November last year the cooperation agreement with IFC was updated, an agreement was signed with the UK Prosperity Fund). In October last year, BNDES launched a special website where it reports on the progress made towards achieving the SDGs. The Bank seeks to ensure transparency in the methodology for assessing progress towards achieving set goals and in providing supporting documents, reports, etc. In addition, BNDES has developed specific financial products - for example, for projects aimed at achieving socially important projects, loan rates are lower than usual by 0.5%. Leonardo Ferreira, Senior Advisor for International Cooperation of the BNDES, also added that BNDES was recently accredited by the Global Climate Fund as a financial intermediary.

Sunita Sindhwani, Chief General Manager in the India Eximbank, noted that India has developed guidelines on ESG of advisory nature. Since June 2009, the Bank has adopted procedures, standards and guidelines for implementing social and environmental management systems. Eximbank is actively working to promote standards of responsible conduct, and the Committee on Responsible Finance has been established to develop measures in response to problems related to sustainable development, including environmental, social and governance problems. Also, the Eximbank of India issues green bonds and creates special financial instruments to encourage responsible financing. According to SEBI, the Top 1000 companies whose securities are listed on Indian exchanges annually publish reports on responsible conduct.

Libby Dreyer, Head Environmental and Social Sustainability, the Development Bank of South Africa (DBSA), stressed the importance of such topics as sustainable development. DBSA's investment strategy reflects a commitment to sustainable development at several levels: at the national (Integrated Urban Development Framework), regional (Regional Infrastructure Development Master Plan, Agenda 2063) and international (SDG Goals, COP21). DBSA has experience in financing projects that meet the principles of responsible financing. The introduction of responsible investment in infrastructure projects has a positive socio-economic impact and contributes to the achievement of the SDGs. It was also noted that ESG principles are of particular importance for effective management: when making decisions, the DBSA Board is guided by ESG principles: all investment proposals must pass environmental and social screening and approval in accordance with Environmental and social standards and the DBSA guidelines on the structure of environmental, social and institutional assessment. In addition, the DBSA publishes a quarterly sustainability report. Also Libby Dreyer presented DBSA tools for implementing ESG principles: DBSA Environmental and Social Safeguard Standards DBSA environmental assessment guidelines DBSA social & Institutional assessment Guidelines DBSA Climate Change Policy Framework Grievance Redress Mechanism DBSA Furthermore, the representative of DBSA spoke about the mechanism for assessing the environmental and social risks of all projects funded by the Development Institution. Special attention is paid to the supply chain. DBSA Environmental and Social Safeguard Standards contain due diligence requirements for the client in the supply chain, even for the smallest contractors.

Zhou Zhenheng, Deputy Director, International Finance Department of the China development Bank (CDB), have provided information about the work of the China Development Bank. The expert noted that CDB was the first Bank with state participation in 2006, which joined the UN Global Compact. Commitment to sustainable development and responsible financing make positive contribution to the socio-economic development and well-being in the country. The speaker mentioned some social projects of the CBD, such as student loans, regional development, and support measures provided by the Development Institution in context of COVID-19.

At the end of the session, the question was raised whether the adopted principles will remain recommendations or they will become mandatory for investors. Representatives of development institutions were differed in their opinions. Thus, representatives of the DBSA and the CDB noted that the mandatory nature would contribute to the effectiveness of the principles, and the representatives of the BNDES, on the contrary, take the position on the need to preserve the Advisory nature of the guidelines, as currently all BRICS countries are at different stages of development and is the bindingness of the principles must be weighed against the national requirements of the Central banks of the BRICS countries. The representative of EXIMBANK noted that until an agreement is reached on this issue, it is necessary to maintain the recommendatory nature of the Principles.

The second part of the webinar was devoted to the topic of leading international standards for responsible financing and respective experiences in responsible finance with BRICS countries and organizations.

Barbara Bijelik, legal expert at the OECD Responsible Business Conduct Centre, highlighted the OECD's work to promote RBC standards in the financial sector. The OECD has extensive experience in developing sectoral guidelines. In the financial sector the OECD has already developed Guide on die dilligence for institutional investors (2017), Guide on due diligence for corporate lending and financing (2019), and the Guide on due dilligence for asset, trade and project finance (2020). The expert stressed that the focus on the financial sector reflects increased public expectations of financial institutions: according to Sigwatch, the number of public campaigns against financial institutions increased by 70% over the period 2011-2018. The expert explained that, in contrast to traditional E&S risk management, RBC-based due diligence covers a much wider range of risks (both actual and potential) and a larger number of involved parties (risks are assessed not only for the client and the Bank, but also for stakeholders, society and the environment). The expert identified five unique elements of due diligence: 1) no time limitation of monetary thresholds; 2) various approaches to leverage are available; 3); stakeholder engagement; 4) expansive reporting obligations for financial actors; 5) establishment of grievance mechanisms and contribution to remedy.

Julian Paisey, senior policy analyst at the OECD Export Credit Division, spoke about the OECD's work on developing legal instruments in the field of responsible Finance, and particularly highlighted the implementation of common approaches to officially supported export credits, which form the basis for intergovernmental regulation of sustainable finance. The recommendation which systematizes approaches in the context of social and environmental due diligence was adopted by the OECD in 2012. The expert noted that this is not a single document, but a framework approach, which is based on a sequence of risk screening, project classification, conducting due diligence on risky projects, creating conditions for monitoring, and maintaining transparency "ex ante" and "ex post" each stage of the project.

Piotr Mazurkiewicz, Lead FI Risk Officer, Environmental & Social Policy and Risk in International Finance Corporation (IFC) gave details of the organization of responsible financing in the IFC. The expert paid special attention to the performance standards, compliance with which has become mandatory for funded companies since 2012. The standards cover 8 areas: 1) risk management; 2) respect for labour rights; 3) resource efficiency; 4) well-being of local community; 5) land resettlement; 6) biodiversity conservation; 7) interaction with indigenous peoples; 8) preservation of cultural heritage. The expert stressed that the special value of these IFC standards lies in the fact that most of them are not covered by the norms of national legislation, so international standards allow to bridge gaps in legal protection in certain sensitive issues.

Tyler Gillard, Manager of Sector Projects, the OECD Responsible Business Conduct Centre, moderated presentations of representatives of commercial financial institutions. The expert noted the comprehensiveness of the concept of due diligence in the financial sector, both in thematic and institutional terms. As the expert put it in the words of the New Zealand Prime Minister: "Success in social or any other field at the expense of the environment is not a success, it is a failure". Due diligence is aimed at balancing all areas of funded projects. Moreover, common due diligence standards help to remove the risks associated with mismatch of public and private funding, as well as to neutralize political factors in decision-making by public institutions.

Stefan Götzinger, MBA Vice President, Structured Trade & Export Finance, Deutsche Bank AG, shared the experience of his financial organization in conducting social and environmental management. The secret is that all employees are guided by the principles of sustainable development in their work. The expert explained that the risk-based approach and the principles of sustainable financing are not an artificial tool that can be applied mechanically, but a mindset. Answering the audience's question about his bank's approach to divestment in th basis of the RBS criteria, the expert explained that there are no exactly "sustainable" and "unsustainable projects". Every financial institution can always help a project to take steps for strengthening sustainability. For example, projects in the field of hydrocarbon energy have little chance of being "sustainable", but nevertheless they can have the social significance (for example, thousands of jobs) and are able to transform their activities so that they can receive funding on a par with the least risky projects.

Steven Munting, representative of ING Bank, spoke about the Bank's pioneering experience in implementing social and environmental standards since 2001. The advantage of the "early start" approach is that the financial institution has more opportunities for gradual integration of standards in all areas of the organization's activities and uniform distribution of standards in all the organization's offices in the world. The expert also stressed that despite strong association of ‘sustainability’ with ‘greenness’, financial institutions should equally pay attention to the social issues.

Olga Puntus, Head of Environmental and Social Risk Management, Wells Fargo, raised the issue of differences in the legal framework of different countries for implementing international standards. For financial institutions that finance projects in various socio-economic, geographical and environmental conditions, it is necessary to develop an individual approach for the correct assessment of each project. The expert gave an example of the rights of indigenous peoples in Russia. Indigenous peoples of Russia make up 0.2% of the total population of the country, while their historical habitat covers almost 2/3 of the country's territory. This means that the main risks in the field of indigenous peoples ' rights are related to the land management. Whereas, for example, in the US, the main risks are associated with illegal resettlement. However, in each country, risk management for indigenous peoples should engage indigenous peoples themselves and be based on the principle of prior consent. Thus, due diligence recommendations serve as the basis, but the content is developed by the financial institution itself.

Presentation of the Russia-OECD Center is available at: https://yadi.sk/i/mPZHnqEnl8G_nA