How environmental and social risks were managed in export transactions in 2020
By managing environmental, social and corporate governance (ESG) risks, Finnvera ensures corporate responsibility in its financing operations, but these actions are also an integral part of the risk management of financing operations. Take a look at our review how environmental and social risks were managed in export transactions in 2020.
Export financing transactions are divided into categories A, B or C. Category A means that in its target country, the investment entails significant environmental or social risks, such as impacts on surrounding communities, employees and biodiversity. Each year, there are a couple of major Category A transactions, such as pulp mill, mine or power plant transactions, to be assessed by Finnvera. In general, risk management encompasses the whole transaction even when export financing is granted, for instance, for an individual delivery of equipment.
Transactions were assessed in Chile, China and Brazil
In 2020, Finnvera granted 424 export credit guarantees. Of these, 41 fell within the scope of preliminary environmental and social risk assessment and categorisation. The guarantees were categorised as follows: 2 in Category A, 2 in Category B and 6 in Category C. The remaining 31 transactions were not transactions meeting the OECD definition due to their size, and no actual environmental or social risk assessment was made for them. The transactions to be assessed were located in Chile, China and Brazil, among other countries.
The impact of the coronavirus pandemic could be seen in the fact that the number of new transactions to be assessed decreased clearly last year.
No transactions were rejected, but some of the export transactions in the preliminary discussions did not proceed to the decision-making process. In discussions with exporter clients, the environmental and social criteria necessary for the realisation of the transaction are always reviewed. The aim is to be proactive and to guide the exporter so that the transaction could meet the financing decision requirements. This is sometimes not the case, and reasons may include the transaction’s location in a fragile area and the buyer’s poor reputation, for instance.
In assessments, Finnvera cooperates closely with various stakeholders, such as other export credit agencies, export companies, buyers, and banks. In major Category A transactions, the processing time is typically months or even years.
Major Category A transactions proceed from analyses to monitoring – the coronavirus pandemic influenced site visits
After the application and screening stage of a Category A transaction, a due diligence consultant visits the site of the transaction to be financed and prepares an Environmental and Social Due Diligence (ESDD) report. The report assesses if the transaction meets the requirements of the World Bank Group’s Environmental, Health, and Safety Guidelines and the IFC Environmental and Social Performance Standards. In addition, it lists the measures needed to meet these requirements.
Usually, Finnvera’s expert also visits the site to assess the transaction party’s attitude towards risk management as well as its risk management ability and management approaches. The visit to the site is important as it is an efficient means to also investigate how various stakeholders affected by the transaction, such as NGOs, authorities and people living in the area, view the transaction. In 2020, the coronavirus pandemic completely prevented Finnvera’s site visits. The parties executing the transaction organised virtual site visits over remote connections, using means such as sharing videos shot with a drone camera. Virtual visits made it possible to proceed with the transactions but also involved challenges. As meetings with authorities, employees’ representatives and residents, among others, that are part of normal visits were not possible, it was more difficult to form an overview of the situation. Consequently, it was decided that site visits will be carried out for the transactions with the highest risks as soon as the coronavirus situation allows. In credit agreements, the aim has been to ensure that Finnvera gets sufficient visiting rights to the transaction area.
On the basis of the visit and other information available about the transaction, the expert prepares an assessment report for Finnvera’s internal decisionmaking. The report assesses the transaction’s success opportunities considering Finnvera’s requirements and describes how existing risks can be managed: how they are monitored (e.g. with a consultant’s visit to the site), and what kind of terms and conditions must be included in the loan agreement.
If the ESDD report and the action plan meet the requirements and if Finnvera’s view is that the transaction party is willing and able to execute the actions required by the plan, it is proposed that the transaction be approved. After this, the transaction monitoring plan is agreed on. It could involve, for instance, an external consultant who reports to Finnvera on the basis of visits.
After the loan agreement is signed, the consultant visits the site at agreed intervals and ensures that the level required by Finnvera is reached. In transactions with particularly high risks, the consultant monitors operations throughout the loan repayment period. If problems emerge, the primary means to address them is negotiations. However, the loan agreement has an option for requesting immediate repayment of the loan if terms and conditions are not complied with.
Export transactions guaranteed by Finnvera are published in our Guaranteed transactions -page. See Finnvera's guaranteed transactions.