Sustainable Finance And Our Customers

Environmental and Social Impact Assessment Process

Banks may face risks that may cause significant environmental or social impacts (for example, oil spills, etc.) in the projects they support through lending activities. Failure to address these risks in a timely and appropriate manner may result in negative environmental and social impacts as well as reputational damage and consequently a loss of investor support and customer loyalty, among other challenges.

 Garanti BBVA considers the proactive management of such risks not only as a critical issue for success in risk management, but also as one of its most fundamental duties towards its stakeholders. Through its effective sustainability approach embedded throughout its organization, Garanti BBVA monitors its resource consumption, takes steps to reduce it, raises the awareness of employees and collaborates with suppliers. Moreover, to extend its work to a larger scale, Garanti BBVA also developed an Environmental and Social Impact Assessment Process (ESIAP) including Environmental and Social Impact Assessment Model (ESIAM) within the scope of Environmental and Social Loan Policies (ESLP) to help drive similar improvement across its loan portfolios.

Garanti BBVA has in-house ESG experts in its Sustainable Finance Team, which resides under the Investment Banking and Finance Department. Therefore Garanti BBVA can monitor the projects that are included in ESIAM, review and approve the routine monitoring reports and attend the site visits of projects that are classified as high risk in terms of potential environmental and social impacts. The consultant to be appointed when deemed necessary is determined in accordance with the criteria specified in the Guidance on Garanti BBVA Independent Consulting Service Requirements and Consultant Firm Selection Criteria. The environmental and social due diligence is carried out by the independent project consultant on the agreed scope of work. The due diligence period is followed by all lenders through the reports produced by consultants. The communication between lender/lenders’ consortium and consultant is provided by the green agent of the project.

Garanti BBVA ensures that the projects it finances meet the social and environmental standards required by legislation and the Bank’s policies that an impact assessment is undertaken by the project owner(s), if necessary, that prescribed measures are taken by the project owner(s) and that project owners have effective internal audit systems. In 2015, 2016 and 2017, 2018 and 2019 Garanti BBVA conducted 26, 22,28,37 and 29 site visits respectively to ensure the environmental and social action plans are being implemented by customers. Due to the COVID-19 Pandemic in 2020, site visits were carried out with remote monitoring methods such as online meetings, drone footages and more. Four site visits were completed in 2021 where the audit scope of physical site visits is achieved by establishing more than 100 virtual meetings per year.

For ESIAP, our 2022 targets are:

• Succesfull implementation of the revised Environmental and Social Loan Policies
• Performing project environmental and social performance monitoring
• Supporting the customers in taking corrective-preventive concrete actions on environmental and social issues in the projects financed by Garanti BBVA.

^{Environmental and Social Risk Management System Implementation Scope 1}

1 Based on systems that are  in place as of June 2021. / 2 One of our core policies, Environmental and Social Credit Policies, includes a list of prohibited activities and customers./ 3 Not applicable. / 4 Banking Service Agreements.  / 5 General Loan Agreements. / ⁶ Corporate Loans (Business Loans) for a new project or the capacity increase of the existing project and that meet all of the listed  five criteria are subject to ESIAM. i.The majority of the loan must be linked with the project on which the debtor has effective operational control  (directly or indirectly). ii.The total amount of the loan and the participation of Garanti BBVA (before syndication sales) is USD 50 million or more. iii.The term of the loan is two years at minimum. iv.The lender anticipates that the primary funds for repayment of the loan are derived from the project. v.The scope also includes export financing  to be granted as buyer credit to private sector or public enterprises. On the other hand; it does not apply to other financial instruments that are not linked to any project, such as asset finance, acquisition financing, hedging, leasing, letter of credits, general purpose corporate loans and general working capital expenditure loans (for a company to continue its operations).

Garanti BBVA developed Environmental and Social Impact Assessment Model (ESIAM) to systematically assess the projects in terms of classification and risk according to their nature, scale, sensitivity, location and environmental and social impacts.

The projects with investment amount over 20 million USD were evaluated in ESIAM since 2012. In 2016, the investment limit was reduced to 10 million USD and included financial consultancy. In 2020, ESIAM  was applied to all Project Finance loans without any cost criteria which is even below the limits defined in the Equator Principles.

As of 2021 ESIAM is applicable for the five main financial transactions described below:   

1. Project Finance: All project finance loans that meet the criteria specified in the Asset and Project Finance Admission and Monitoring Procedure, regardless of cost,
2. Corporate Loans utilized for a Particular Project or Investment: Corporate Loans (Working Capital Loans) that involve construction of a new project or capacity increase of an existing one and that satisfy all of the following criteria¹
• The majority of the loan must be linked with the project on which the debtor has effective operational control² (directly or indirectly).
• The total amount of the loan and the participation of Garanti BBVA (before syndication sales) is USD 50 million or more.
• The term of the loan is two years at minimum.
• The lender anticipates that the primary funds for repayment of the loan are derived from the project.
• The scope also includes export financing³ to be granted as buyer credit to private sector or public enterprises. On the other hand; it does not apply to other financial instruments that are not linked to any project, such as asset finance, acquisition financing, hedging, leasing, letter of credits, general purpose corporate loans and general working capital expenditure loans (for a company to continue its operations).
3. Bridge Loans⁴: Bridge loans with maturity less than two years, which are intended to be refinanced via Project Finance or Corporate Loans in relation to a Project satisfying the criteria defined in the articles 1 and 2 above, and 
4. Consultancy Services⁵: Consultancy Services regarding Project Finance transactions defined in the article 1 above.
5. Refinancing or acquisition loans used for a specific project or investment: Those projects that meet all of the following three criteria:
• Such Project has been financed in accordance with the Equator Principles framework.
• There has been no significant change in the scale or scope of the Project.
• Project Completion has not yet occurred at the time of the signing of the loan agreement

1. As defined in the Equator Principles 4, 2020

2. Effective Operational Control refers to the customer’s power to intervene directly in the main elements of the project. This definition does not cover financing requests from subcontractors/supppers of the main project (unless they are the main operator). Financing requests that do not meet this criteria include financing requests from subcontractors that supply equipment, perform construction, contracting or electricity works, etc. for the project. 

• Example of Direct Effective Operational Control: If the customer is the main shareholder (>50%) or operator of the relevant project, then the customer is considered to have a direct Effective Operational Control on the relevant Project.
• Example of Indirect Effective Operational Control: If a subsidiary of the customer runs the entire operation, then this indicates that the customer has an indirect Effective Control on the Project.

3. Export financing (or export loans) involves supporting an exporter and / or a buyer to whom the exporter will ship goods, by means of financing and/or insurance during pre-shipment and / or post-shipment periods.Export financing is classified in various categories such as short, medium or long term according to its duration, buyer or seller credits according to the party whose risk is taken and pre-shipment or post-shipment financing depending on place and purpose of utipzation.Such support may be in the form of financial support, pure cover, etc.

4.  Comppance with Equator Principles is not required due to the nature of the bridge loans. On the other hand, a commitment clause is inserted in the Bridge Loan Agreement for comppance of the Project with Equator Principles. 

5.  Due to the nature of consultancy services, comppance with Equator Principles is not required. However, a commitment clause stating that the Project will comply with the Equator Principles is included.

Within the scope of the model, projects that comply with the Environmental and Social Loan Policies are primarily evaluated in terms of compliance with the Sectoral Principles specific to each sector. In ESIAM projects are categorized, classified and graded. Required actions are taken according to the risk score reached as aresult of ESIAM. The ESIAM process, in which the environmental and social impacts of the projects are determined and evaluated, consists of the following 3 stages:

• Categorization: The project is classified to be included in one of the A, B and C categories

• Determination of the project risk rating: Project risks are evaluated through the risk rating model, which has different question sets specific to each sector and is based on an algorithm based on international standards.

• Determination of the action group according to the category and risk rating: As a result of the ESIAM implementation, the final risk score is determined and certain actions are requested on environmental and social issues according to the risk rating. In this context, the owner of the projects with a certain risk score is requested to prepare an Environmental and Social Action Plan (ESAP), put it into practice and periodically report it to the bank.