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Environmental and Social Impact Assessment Process

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

For ESIAP, our 2021 targets are:

  • Succesfull implementation of the revised Environmental and Social Loan Policies
  • Performing  project environmental and social performance monitoring with remote monitoring methods in line with Covid 19 Pandemic Restrictions
  • 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

 

Compliance with our Fundamental Policies2 and Legislation

Advanced Environmental and Social Criteria

 

Description

Consumer Loans

%100

%03

BSAsaddress compliance with our fundamental policies and legislation. Advanced Environmental and Social Criteria are not applicable to this segment. Yet, there are a number of practices regarding our customers’ financial health within the scope of our Bank’s plain, transparent and responsible banking practices

SME Loans

%100

Partial

BSAs and GLAsaddress compliance with our fundamental policies and the legislation. More detailed criteria specific to a given transaction may be applicable under various borrowing agreements..

Commercial

Loans

%100

Partial

BSAs and GLAs address compliance with our fundamental policies and legislation. Loans above the limit values specified in the related Risk Management System are subjected to advanced environmental and social criteria. The Green Loan structure may introduce additional criteria specific to a given deal. Sector Norms are also applicable.

Corporate Loans

%100

Partial

BSAs and GLAs address compliance with our fundamental policies and legislation. Loans above the limit valuesspecified in the related Risk Management System are subjected to advanced environmental and social criteria. The Green Loan structure may introduce additional criteria specific to a given deal. Sector Norms are also applicable.

Mortgage
Loans

%100

Partial

BSAs address compliance with our fundamental policies and legislation. Additional environmental criteria are applied for Green Mortgage.

Project Finance Loans

%100

%100

In addition to compliance with general policy and legislation in contracts, advanced environmental and social criteria are applied in all project finance loans, regardless of financial limits or any criteria.

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.

Risk Assessment Breakdown of New Investment Projects Assessed According to ESIAM in 2015-2020

 

Loan Amount (USD, million)

Number of Projects Assessed According to ESIAM

2015

 

2017

2018

2019

2020

2015

2016

2017

2018

2019

2020

Category

Category A

925

1687

531

254

4.479

190

6

3

3

6

3

2

Category B

766

392

-

27

-

117

6

2

0

2

0

3

Category C

0

-

-

-

6

-

0

-

0

-

1

-

Risk Rating

R1

950

1934

436

143

4.435

145

4

3

1

1

2

1

R2

219

30

95

67

-

162

1

1

2

5

0

4

R3

522

115

-

71

50

-

7

1

0

2

2

-

R4 

0

-

-

-

-

-

0

-

0

-

0

-

Final Score

1

1.169

1934

531

195

4.435

190

5

3

3

5

2

2

2

342

145

-

74

44

117

3

2

0

2

1

1

3

180

-

-

12

6

 

4

-

0

1

1

-

ESIAM results are reported as part of project assessments and actions taken to ensure compliance of the projects to senior management. The results of environmental and social impact assessments are submitted to the Loan Committee and Responsible Banking and Sustainability Committee. If deemed necessary by the Responsible Banking and Sustainability Committee, related  policies and the assessment process including investment threshold within the scope of ESIAM are to be updated.

Raising Awareness on Environmental and Social Risks

Along with our responsible financing efforts, we establish cooperation to realize sustainability development agenda through common efforts. Thanks to our collaborations with various stakeholders and memberships to international platforms, we can share information and experience, thus taking the opportunity to follow current developments closely. Then, we take necessary steps to apply these developments within our Bank, and assume the role of thought leadership to mainstream similar good practices in our country. We lead the way in the Turkish banking sector with our non-financial risk assessment mechanisms. We reinforce our pioneering position in responsible finance by sharing our ESIAP approach and system on various platforms. Thus, we contribute to the improvement of sustainability parameters in the banking sector and contribute to increasing knowledge and awareness, building capacity of external stakeholders in the finance sector and private sector.

Garanti BBVA contributes to raising awareness regarding non-financial risks in the finance and other sectors by explaining its ESLP to its external stakeholders via a variety of platforms. Some examples are as follows: 

  • In 2013, Garanti BBVA has started a series of sustainability workshops aimed at building capacity among its customers and the Turkish banking sector. The first workshop was held on March, 2013 in which Garanti BBVA presented its environmental and social risk management process in detail to Turkish banks and real sector companies.
  • In May, 2015, Garanti BBVA organized the 2nd workshop together with Boğaziçi University on environmental and social risk management to its corporate customers and presented the bank’s approach and best practices. In the workshop, besides Garanti BBVA, a specialist from the EBRD, a responsible investment specialist and two international independent advisor companies presented their knowledge and experiences.
  • In December 2016, Garanti BBVA hosted 3rd Sustainability and Risk Management Workshop during which the Ministry of Environment and Urbanization, CDP and international consultancy companies presented their experiences in environmental and social risk management systems.
  • In September 2017, Garanti BBVA hosted the 4th Sustainability and Risk Management Workshop, where corporate customers from energy and infrastructure industries were informed on cutting edge sustainable business topics such as TCFD (Financial Stability Board’s Task Force on Climate-related Financial Disclosures) recommendations, carbon pricing and disruptive technologies.
  • In April 2018, Garanti BBVA delivered a ‘Sustainability in Finance’ course within the curriculum of Corporate Sustainability Certificate Program by REC Turkey in collaboration with Boğaziçi University Lifelong Learning Center.
  • In December 2018, Garanti BBVA hosted the 5th Sustainability and Risk Management Workshop. The workshop  was focused on  The Responsible Banking Principles of the United Nations which were established by the gathering of 28 banks  around the World including Garanti BBVA. The agenda included the effects of Responsible Banking Principles for the real sector, digital risks, trends in reporting non-financial issues, innovative environmental, social and governance practices and green financing alternatives in Turkey, and innovative practices and risk perception on sustainability in the insurance sector.
  • In October 2019, Garanti BBVA, together with the Business Council for Sustainable Development Turkey (BCSD Turkey) of which it is a corporate member and Chairman of the Board, took part as a speaker at the 6th Sustainable Finance Forum, on new generation finance tools that support growth with social and environmental goals.
  • In March 2020, Garanti BBVA participated in the 11th Climate Change Virtual Conference of CDP Turkey, of which it is the main sponsor, and announced that it is the only bank from Turkey to be included in the CDP Global A List.
  • In 2020, Garanti BBVA published its first Impact Report in the Integrated Annual Report within the scope of the Responsible Banking Principles of the United Nations Environment Program Finance Initiative (UNEP FI), of which Garanti BBVA is one of the founding members.

Practices Related to  Combatting Climate Change and Transition to Low Carbon Economy

Practices related to Climate Change Prevention and Transition to Low Carbon Economy, carried out by Garanti BBVA within the scope of Environmental and Social Credit Policies, are summarized below.

Coal Policy

Garanti BBVA makes the following commitments in line with its Coal Policy, which aims to combat climate change and transition to a low-carbon economy.

  • No new coal fired power plant will be financed.
  • No new coal mine will be financed.
  • No  limit increase on coal  related business will be provided.
  • All coal exposure (except NPL) projects will be closed by 2040.

Carbon Pricing

Garanti BBVA reflects the carbon cost in its feasibility assessments for new power plant investments that are subject to project financing transactions. With this method, renewable energy projects are prioritized.

The following items explain the carbon pricing method for the shadow price of carbon.

  • Positive or negative shadow carbon pricing is applied to financial assessments of all projects for new fossil fuel-based  and renewable energy investments / capacity increases.
  • If the country where the project is implemented has an ongoing emission trade (both voluntary and mandatory) program or a carbon tax in place, the actual carbon price is used. Otherwise, current price in the EU Emissions Trading System per tonne CO2 equivalent emitted will be  taken into account in the  feasibility.

Deforestation Impact Management Process

Garanti BBVA conducts a detailed due diligence on the impact of projects on deforestation for the new investments that are determined to be high-risk as a result of the Environmental and Social Impact Assessment Model assessment, especially linear projects such as highways, and requests the following measures to be taken if they have an impact on deforestation.

  • The sponsors are expected to use all their reasonable and necessary efforts to minimize deforestation (rerouting, moving the trees, etc.).
  • If such impact cannot be prevented, the debtor is required to give a Commitment of Reforestation for planting trees based on the environmental and social risk score of the project, unless approved otherwise by Garanti BBVA.
  • This commitment includes both total area in hectares (ha) and total number of trees.
  • Estimation methodology for number of trees/area (ha) must be defined in detail in the Commitment and approved by the Bank. The number of trees and reforestation area are determined in accordance with the risk level of the project. The Commitment must entail planting trees at least 4 or 5 times the number of trees impacted by the project and its auxiliary units, even if the relevant area is not considered a forest land under national and international definitions.
  • As an alternative, the debtor may propose to offset carbon emission via conservation of biodiversity or buying carbon credit. Such proposals are evaluated by the Sustainable Finance Team and/or environmental consultant of the Bank, and may replace the commitments mentioned above if the Bank deems appropriate.

Sectoral  Principles

All projects are assessed to check their compliance with Garanti BBVA’s policies and  sectoral principles.

Garanti BBVA’s Sectoral Principles are established taking into consideration the highest risk sectors in terms of sustainability and the sectors that constitute the majority of the Bank’s credit portfolio.

The measures set forth in the principles include recommendations for best practices alongside prohibited activities and prohibited customers. Specific examples of Sectoral Principles are provided below.

 Energy Projects

  • New coal-fired power plants and expansion of existing power plants  will not be financed.
  • Arctic exploration, production and transport of oil and gas projects will not be financed. Exploration, production and transport of tar sands will not be financed.
  • Single hull oil transport vessels will not be financed.
  • Large dams that are required to be built under the World Commission on Dams  ( WCD) framework.
  • New hydroelectric plants are required to have an adequate environmental and social risk management systems in relation to dam safety, environmental impact, labor regulations and population resettlement. Oil and gas extraction operations in areas of armed conflict will not be financed.
  • Environmental flow water is regarded as one of the critical issues in hydroelectric power projects. Garanti BBVA places emphasis on ensuring that basin water rights are observed and that environmental flow is sufficient to sustain the basin ecosystem and preserve river hydrology. It should be ensured that environmental water is calculated specific to project location considering Ecosystem Assessment Report by related technical experts besides meeting minimum standards set by official authorities. Furthermore, based on the results of these studies, the Bank may request that the project technical design be amended. Environmental water release data and impacts on river habitat are monitored periodically by Garanti BBVA.
  • In order to preserve groundwater equilibrium, 100% reinjection is required in geothermal projects. In addition, necessary precautions should be taken during the process to prevent contamination of groundwater in relation to reinjection.

Transportation/ infrastructure Projects:

  • Facilities are required to comply with the Hong Kong Ship Recycling Convention
  • Desalination plants are required to have adequate measures to mitigate the impact of brine removal and/or extraction of sea water.
  • Impacts on aquatic / marine ecosystem should be assessed, and should be included in the mitigation and monitoring plan.
  • Oceanographic/hydrographic reports should be prepared for ports/coastal facilities, filling/ dredging impacts should be assessed
  • Emergency Action Plans should be prepared for events like as accidents, collisions or leakages to the sea and systems to prevent dispersion of contaminants in the marine environment such as barriers, foams, etc. should be in place in case of any such event.

Mining Projects

  • New coal mines or expansion of coal mines will not be financed.
  • Water management strategies are prioritized. Reduction measures regarding project water requirements as well as recycling and re-use strategies are assessed.  Prevention of acid rock drainage needs to be assured through a water management plan.
  • Producers for whom there is evidence of controversies related to Mountaintop Removal mining will not be financed.
  • Companies for whom there is evidence of controversies related to artisanal or small-scale mining will not be financed.
  • Extraction, processing and marketing of asbestos will not be financed.
  • Mines are required to have site closure and recovery plans.
  • Mines are required to have occupational health and safety management plan.
  • Mining waste is required to be managed according to industry best practices.
  • Mine projects that dispose of tailings in coastal or shallow waters will not be financed.
  • Seabed mines will not be financed.
  • Mines in areas of armed conflict will not be financed.

Agribusiness Projects

  • Clients for whom there is evidence of controversies related to the production or trade ofsubstances subject to international prohibitions will not be financed.
  • Clients engaged in the production, processing and marketing of palm oil through companies thatare not members or are not in the process of becoming members of the Roundtable forSustainable Palm Oil (RSPO) will not be financed.
  • Clients engaged in non-health related animal testing will not be financed.
  • Clients for whom there is evidence of controversies related to the production or trade of products regulated by the Convention on International Trade in Endangered Species of Wild  will not be financed.
  • Projects including burning of natural ecosystems to clear land for the development of agricultural projects will not be financed.
  • Projects  clearing of high conservation value and high carbon forests will not be financed.
  • Production of first generation biofuels will not be financed.
  • Use of substances prohibited by the Stockholm Convention, listed in Annex III to the Rotterdam Convention, WHO Class 1A or 1B or listed in the SIN list will not be financed.
  •  Exploitations of palm oil not certified or in process of certification by the Roundtable on Sustainable Palm Oil (RSPO) will not be financed.
  • Palm oil exploitation in swamps and peat-rich areas will not be financed.
  • Vessels operating with drift nets longer than 2.5 km or using drift nets intended for the capture ofspecies listed in Annex VIII of EU Regulation 1239/98 will not be financed.
  •  Deep Sea Bottom trawling (deeper than 600 m below sea level) will not be financed.

Other Projects

  • In industrial projects, management plans are necessary for industrial effluent water discharge. Best Available Technologies (BAT) should be preferred with respect to treatment facilities. Projects that enable efficient use, recycling and re-use are prioritized.