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Barclays has a strong and longstanding commitment to managing the environmental and social risks associated with commercial lending.
Our approach and governance
Barclays has a strong and longstanding commitment to managing the environmental and social risks associated with commercial lending. We recognise that a bank’s major environmental impacts tend to be indirect, via business relationships, arising from the provision of financial services to business customers operating in sensitive sectors. We also believe that appropriate risk management of these environmental and social impacts is not only the right thing to do, but also makes good business sense.
Our approach to environmental and social risk management is based on a combination of policy, standards and guidance. This enables us to adopt a robust approach, while maintaining the flexibility to consider potential clients and transactions on their respective merits.
Barclays has a dedicated global Environmental Risk Management team. This team is a part of the central Credit Risk Management function in Group Risk, recognising that environment is a mainstream credit risk issue. Environmental and social risks are required considerations in risk assessment for credit facilities and capital market transactions, and an Environmental Risk Standard is included in the Wholesale Credit Risk Control Framework. The team reviews any project finance application for more than US$10m, as stipulated by the Equator Principles, and may also review applications below this threshold and any other types of transaction referred to it when these relate to sensitive sectors or regions, or where deemed appropriate.
The team also provides support for our KYC teams across the group in assessing the environmental management credentials of clients operating in environmentally sensitive sectors. Barclays support for the Banking Environment Initiative, ‘Soft Commodities’ Compact has also been coordinated through the Environmental Risk Management team. The initial focus is on the palm oil sector, and in this context, the team additionally provides enhanced due diligence in the meeting the ‘Haze Diagnostics’ screening requirement of the Association of Banks in Singapore.
Barclays' approach to environmental credit risk management addresses both direct and indirect risks:
Direct risk can arise when the Bank takes commercial land as collateral. In many jurisdictions, enforcement of a commercial mortgage by the Bank, leading to possession, potentially renders the Bank liable for the costs of remediating a site if deemed by the regulator to be contaminated, including for pre-existing conditions. In the UK, the Group’s approach requires commercial land, if being pledged as collateral, to be subject to a screening mechanism. Assessment of the commercial history of a piece of land and its potential for environmental contamination helps ensure any potential environmental degradation is reflected in the value ascribed to that security.
It also identifies potential liabilities which may be incurred by the Bank, if realisation of the security was to become a possibility. Our panel of property and land valuers use our bespoke environmental screening product, Barclays Siteguard, to assess the commercial history of a piece of land and its potential for contamination, as well as the operational implications of a site’s current or intended commercial use. Where appropriate, cases are then referred to Environmental Risk Management for review. In 2015, 4,053 commercial properties were screened using Siteguard with 1,381 cases referred. Lending managers also have access to a dedicated intranet which provides comprehensive information and guidance on managing environmental risk factors.
Indirect risk can arise when environmental issues may impact the creditworthiness of the borrower. For instance, incremental costs may be incurred in upgrading a business’s operations to meet emerging environmental regulations or tightening standards. In other circumstances, failure to meet those standards may lead to fines. Environmental impacts on businesses may also include shifts in the market demand for goods or services generated by our customers, or changing supply chain pressures. Environmental considerations affecting our clients can be varied. The Bank has developed a series of environmental risk briefing notes, covering 10 broad industry headings ranging from Agriculture and Fisheries to Oil and Gas, from Mining and Metals to Utilities and Waste Management. These briefing notes are available to colleagues in business development and credit risk functions across the organisation, outlining the nature of environmental and social risks of which to be aware, as well as the factors which mitigate those risks.
Environmental Risk Assessment Process
Barclays has a governance structure in place to facilitate clear dialogue across the business regarding issues of potential environmental and social risk.
There are established lines of communication between Barclays lending managers, the credit teams, the central Environmental Risk Management team and business level reputation risk committees. Initially, the lending manager will liaise with the credit teams and, if a proposed transaction is judged to have material environmental or social sensitivities, guidance can be obtained from the Environmental Risk Management team. Further escalation to regional risk management committees and to Group-Wide Risk Committee, a sub-committee of the Board Reputation Committee, will be recommended in cases where the sensitivities are likely to remain significant.
Employees involved in business operations and credit applications that provide funding to clients with potentially high environmental risks, receive environmental risk training through presentations and direct engagement with subject specialists. During 2016, 63 employees in London, Mumbai and South Africa, attended Environmental Credit Risk presentations and/or information training.
Our industry-specific risk guidance notes cover more than 50 environmentally and socially sensitive activities across 10 different sectors, which can be found below. We undertake enhanced due diligence for agribusiness, forestry and forest products, infrastructure, oil and gas (conventional and unconventional), coal fired power, hydropower, nuclear power, and sensitive mining.
This Environmental and Social Risk Briefing covers Agriculture and Fisheries incorporating the harvesting of crops, fruits, vegetables, trees, rearing livestock, and dairy farming. It also covers the operation of Fish Farms and Fish Hatcheries.
This Environmental and Social Risk Briefing (ESRB) covers Chemicals and Pharmaceuticals. Both industries manufacture products that are effectively the basis for almost every other manufacturing activity. It is therefore, a highly complex sector.
This Environmental and Social Risk Briefing covers the Forestry and Logging industry. Forestry is the practice of managing and using, for human benefit, the natural resources that occur on and in association with forested lands.
Infrastructure includes the design, construction, operation and decommissioning of industrial, commercial and residential facilities. These are addressed by this Environmental and Social Risk Briefing (ESRB).
This Environmental and Social Risk Briefing (ESRB) covers the general manufacturing sector. Manufacturing activities comprise the transformation of raw materials into finished goods for sale by means of tools and machinery and include all intermediate processes involving the production or finishing of components parts.
This Environmental and Social Risk Briefing covers Mining and Metals (including Quarrying). Mining is the extraction and development of sub-surface solid resources. Core mining and quarrying products are metals and minerals, precious and semi-precious gemstones, building and road materials and industrial non-metal products.
This Environmental and Social Risk Briefing covers the oil and gas industry from exploration to production to refining to retail. It includes natural and petroleum gas, fuel oils, petrochemicals, lubricants, petroleum and other by-products as well as the emerging market of bio fuels (biodiesel).
This Environmental and Social Risk Briefing (ESRB) covers the power generation industry and includes power stations and the use of fossil fuels, nuclear power and renewable energy sources: such as hydroelectric power, wind farms, geothermal energy, photovoltaics and energy generation from biomass and waste.
This Environmental and Social Risk Briefing (ESRB) covers selected sub-sectors of the Service Industry (i.e. those that can have appreciable environmental and social “footprints”) including industrial health care, telecommunications and tourism. Dry Cleaning has been included in the Chemical and Pharmaceutical ESRB due to the intensive use of chemicals in the process.
Where the Bank is financing infrastructure projects which have potentially adverse environmental impacts the Group’s Client Assessment and Aggregation policy and supporting Environmental Risk Standard will apply. This policy identifies the circumstances in which the Bank requires due diligence to include assessment of specialist environmental reports. These reports will include consideration of a wide range of the project’s potential impacts including on air, water and land quality, on biodiversity issues, on locally affected communities, including any material upstream and downstream impacts, and working conditions together with employee and community health and safety.
Adherence to the Environmental Risk Standard is the mechanism by which Barclays fulfils the requirements of the Equator Principles. These Principles are an internationally recognised framework for environmental due diligence in project finance. Barclays was one of the four banks which collaborated in developing the Principles, ahead of their launch in 2003 with 10 adopting banks. There are now over 85 banks worldwide which have adopted the Equator Principles (see www.equator-principles.com).
The Equator Principles have established greater consistency and transparency around banks’ requirements for non-financial organisations engaged in project funding transactions. This in turn has prompted such organisations – for example, law firms, construction companies and project sponsors themselves – to consider environmental and social factors in their approaches to these developments.
We remain actively engaged with the initiative, having been re-elected as members of the steering committee of the Equator Principles Association. Barclays was involved in the latest update of the Equator Principles, launched in June 2013, and we have updated our policies to reflect the new requirements.
Barclays requires an Environmental and Social Impact Assessment (ESIA) to be undertaken for all transactions that fall within the scope of our Environmental Risk Standard. This must comply with Barclays minimum requirements for an ESIA and be undertaken by an independent consultant that appears on our preferred panel.
If an ESIA has already been undertaken in connection with the relevant project, but does not meet the above requirements, then Barclays may require a second opinion of the ESIA be commissioned and undertaken by an independent consultant that appears on our preferred panel, in accordance with our minimum requirements for a second opinion of an ESIA.
Our aim is to ensure we have access to an objective, comprehensive and professional report on the environmental and social risks associated with the project.
The independent consultant will confirm whether the project currently meets the requirements of our Environmental Risk Standard and the Equator Principles. They are required to highlight areas where full compliance is not clear, alongside recommended actions that will need to be taken in order for the project to work towards compliance. The consultant is also expected to provide guidance on the associated costs and timescales. Barclays will then work with the consultants and our client (the borrower) to understand whether the recommended actions to attain Equator compliance are achievable in the project and commercial context. If this is so, the actions will be incorporated into an Environmental and Social Action Plan. The implementation and monitoring of such plans is covenanted in the loan documentation i.e. it becomes a condition of the loan agreement.
If we feel that that the required action may prove too challenging to implement, or the client is unwilling to implement such plans, we will decline to support the project. However, as a general rule, we prefer to collaborate to improve project standards rather than simply step aside to allow a potentially less environmentally or socially inclined financial institution to support the transaction.
Barclays sets out a minimum scope for an ESIA and has a separate scope for a second opinion of an existing ESIA. These contain details of our requirements in relation to aims, data collection and assessment, baseline assessment, treatment of subcontractors, risk assessment, monitoring/mitigation plan, environmental and social management, and training and reporting. The scope includes a review of the following (as relevant):
An assessment of the project against the IFC Policies and World Bank Guidelines as prescribed by the Equator Principles (for non-designated countries, as defined in the Equator Principles)
An assessment of the financial impact on the project of applicable, currently foreseeable and reasonably anticipated environmental legislation (both national and international) relevant to the proposed scheme
The level and adequacy of public consultation, including consultation with vulnerable groups and Indigenous Peoples. This should include details of:
- Public meetings/hearings and attendance,
- Press releases; a list of questions asked and the project responses to these;
- Notifications/consultation with the principal community/interest groups,
- Timing of consultation and whether it would constitute prior, informed consultation, (or Free, Prior and Informed Consent in the case of Indigenous Peoples)
A review of material relating to the assessment of project alternatives
Commentary on whether the proposed standards are considered appropriate and to what degree the project design incorporates scope for improvement or upgrading to meet higher standards which may be imposed upon the project sponsor in the future
Confirmation the project is working to recognised best practice, (e.g. the World Commission on Dams guidelines, Voluntary Principles on Security and Human Rights)
Commentary on current and reasonably foreseeable government policies which may affect this sector, including sector-specific policies, e.g. forestry, water infrastructure, which are proposed/supported by internationally recognised non-governmental organisations
The materiality of impacts should reflect relevant assumptions on shifts in weather patterns affecting the project site, and the impact of the project on GHG emissions
Physical resources - landscape, topography, soils, air quality and climate (including COP21, Nationally Determined Contributions), surface water, ground water, geology/seismology
Ecological resources - flora, fauna, habitats and species, fisheries, aquatic biology, wildlife, forests, rare/endangered species, wilderness or protected areas (for example UNESCO environmental World Heritage sites)
Human and economic development - including, but not necessarily limited to, population and communities (numbers, locations, composition, resource dependency, employment); industries; infrastructural facilities (including water supply, sewage, flood control, drainage); transportation (roads, harbours, airports, navigation) and traffic (particularly during construction); land use planning (including dedicated area uses); power sources and transmission; agricultural development; mineral development; tourism resources
Quality of life values - including, but not necessarily limited to, socioeconomic values; public health; noise disturbance; recreational resources and development; aesthetic values; archaeological or historical treasures (for example UNESCO cultural World Heritage sites).
Below we report our project finance activity, in line with the Equator Principle III requirements, and additionally other transactions that were also subject to environmental and social risk review, for the period of 1 January–31 December 2016.
In 2016, six transactions were subject to scrutiny against the Equator Principles’ due diligence framework, including one project finance related advisory services and two project related corporate loans. 398 other referrals were made to the Environmental Management Team. These relate to transactions outside of the Equator definitions or scope, or may relate to other product types, such as bonds, trading facilities or client annual reviews.
We were approached by an existing client to provide long term funding against three ground mounted solar photovoltaic parks, located in the south of England. The parks were already operational, so the project fell outside the scope of the Equator Principles; however we applied the requirements of our internal Environmental Risk Standard. The parks were assessed against relevant host country laws, regulation and permits, as the applicable standards for the UK. The project was assessed to ensure that each park had been fully permitted and was compliant with the permissions received. Following a review of the size, scale, locations and potential impacts of the project by the appointed Technical Advisor, the deal was found to have limited adverse social and environmental impacts. The process of due diligence confirmed that appropriate environmental and social assessment and mitigation measures were undertaken as part of the UK planning process. The Environmental Risk management Team supported the transaction following these confirmations.
Land Use Questionnaire Case Study, UK
Our UK Barclays Business Team was approached to provide a long term loan to a vehicle repair business in the Midlands. As part of our due diligence and valuation processes, a desktop Environmental Report was commissioned. This revealed some potential environmental risks associated with a car breakers yard on part of the site, which was being offered as a security for the loan. As such, the case was referred to our central environmental risk team. Further enquiries with the prospective customer revealed that it was unclear whether the site held the appropriate environmental permits to operate and so a specialist environmental risk assessment was commissioned. The customer did not wish to accept this assessment, and so the loan was declined.
We were asked to provide a letter of credit for a new client, which was a mining company in Africa. The company had faced a number of significant environmental and social challenges in the past, and it was vital that we understood how they were managing these risks before we accepted them as a client.
We reviewed their approach to environmental and social risks, and had a number of detailed conversations with senior management. As a result of these discussions we asked for a number of additional documents, and until we received them the relationship remained on hold.
Following ongoing engagement with the team, we received an independent environmental assessment report from the client. This demonstrated the progress and the resolution of many of the issues that we had previously highlighted. Work was ongoing and was supported by quarterly monitoring reports. This progress and disclosure allowed Barclays to provide facilities to the client. We included in the facility agreements the requirement for all applicable environmental laws and regulations to be fully met and for monitoring update reports to be provided to us.