Social & Environmental Policy - Lending

PURPOSE

The purpose of the SE Policy is to:

Define client responsibilities,
Ensure that NBV activities are in compliance with its Social and Environmental Requirements (defined in Key Definitions).
Ensure that NBV applies sound social and environmental management measures in its business activities. This will safeguard the bank and its client from legal, financial and reputational implications of non-compliance with environmental and social regulations.

KEY DEFINITIONS

Adequate Supervision

Adequate supervision refers to the undertaking of Social Environmental Due Diligence (SEDD) including Social and Environmental Appraisals where applicable to ensure a client meets the banks Social and Environmental requirements.

Corrective Action Plan

The Corrective Action Plan (CAP) is a management plan that corrects and remediates all damage and adverse consequences caused by the failure by a client to comply with any applicable Social and Environmental Requirements. The CAP is a timeline step by step list of procedures of Social and Environmental remediation and management measures that are to be undertaken by the client to rectify conditions to acceptable levels.

Environmental Impact Assessment

Environmental Impact Assessment (EIA) is the term used to describe the formalised investigation process, including public consultation, in which all the relevant environmental consequences of a client's project are identified and assessed before authorisation is given by the Responsible Authority for the project to carry on.

Environmental Impact Statement

The Environmental Impact Statement (EIS) is a formal document that comes after the EIA. The EIS details the anticipated environmental effects of a development on the environment. The aim of the EIS process is to reduce, offset or prevent significant negative environmental impacts of a development. An EIS is prepared by the person, client or organization undertaking the development (the proponent) and is presented to the relevant authority responsible for assessment.

Environmental risk

Environmental risk is to be considered and assessed in all applications for credit in the SEDD process. Assessment of environmental risk is carried out through screening and due diligence of potential impact as result of the project development. Environmental Risk Screening categorizes projects based on their risk levels. In cases of high risk, the review process may include the following:

Client's Environmental Impact Assessment and Environmental Impact Statement
Investigating the assessment of pollution and abatement
Appraisal of the methods of protection of biodiversity and the sustainable management and use of natural resources.

Social and Environmental Due Diligence

Social and Environmental Due Diligence (SEDD), refers to the process of the assessment of a project's social and environmental risk and impact and the identification of appropriate measures to mitigate and manage such risk and impact in order to meet the Social and Environmental requirements. SEDD includes the initial screening process, client public profile history review and review of clients or potential project's EIR and if necessary EIA.

Social and Environment Management Plan

The Social and Environmental Management Plan (SEMP) refers to a documented plan listing social and environmental procedures and management measures that the Client has prepared to mitigate any adverse impacts of a project throughout its life cycle. This should include a sound corrective action plan in the event of non-compliance. The SEMP may be included within the EIS document or a separate Social and Environmental Management Plan document.

When applicable, the client is required to provide a SEMP. The SEMP can be amended from time to time by the Client as appropriate. The SEMP must comply with all legislative and environmental requirements governing the project (or industry) and be confirmed by an Independent Environmental or Social Consultant.

Social and Environmental Management System (SEMS)

SEMS is a framework that integrates social and environmental risk management into NBV's business processes. SEMS is a set of actions and procedures that are implemented concurrently with NBV's existing risk management procedures. SEMS is to be integrated into the appropriate policy and procedures of relevant business processes.

Social and Environmental Requirements

Social and Environmental requirements refer to the applicable laws and environmental health and safety guidelines for the countries in which the bank operates. Additional requirements may apply to high risk or other projects/clients as specified in Section 5.4.

Social risk

Social risk is to be considered and assessed in all applications for credit. Social risk is defined as risk of adversity significantly affecting livelihoods and wellbeing of communities that are directly or indirectly associated with NBV business, or a project carried out by a NBV Client.

POLICY PRINCIPLES

The principles underlying the Social and Environmental Management System Policy:

Ensure that NBV's activities are in compliance with SEMS Social and Environmental Requirements.
Help NBV avoid and or manage loans with potential social and environmental risks by conducting social and environmental due diligence during assessment of applications for credit.
Ensure that NBV performs adequate supervision of projects/clients it has funded during the term of the loan agreement to ensure Social and Environmental Requirements are satisfied.
Ensure NBV's loan agreements contain appropriate covenants requiring that projects are in compliance with social and environmental requirements as established during due diligence and as stipulated in the SEMS.

POLICY REQUIREMENTS

Social & Environmental risk

Failure to identify and deal with social and environmental issues can have serious implications on clients and the bank. Social and Environmental risk issues which the bank may need to consider include:

The customer's ability to continue to operate and meet their obligations under a loan agreement.
The potential for a problem loan management situation to arise.
NBV's ability to realise upon its security.
Financial provision for any clean up or remediation.
Breach of criminal and/or environmental and social laws of the country
Civil actions and damage claims.
Damage to NBV's reputation.

For example, where NBV takes or holds security over a property that has been environmentally contaminated it might not be able to take possession of that security or sell it until an environmental clean-up has been completed.

Excluded activities

As per the SEMS Policy, NBV requires its customers to comply with all laws including social and environmental laws. Therefore NBV will not:

Provide a loan where the purpose is known to do something in breach of social and environmental law.
Become involved where it would be unwilling to incur the risk in a problem management situation.
Do anything secondary to its role as a lender that might lead to breaching of any social and environmental law.

Compliance with Social and Environmental Laws

NBV will comply with relevant legislation relating to Social and Environmental matters in Vanuatu or other countries in which the Bank operates:

Employment Act (Cap 160)
Environmental Protection & Conservation Act (Cap 283)
Land Leases Act (Cap 163)
Foreshore Development Act (Cap 90)
Forestry Act (Cap 276)
Framework Convention on Climate Change (Ratification) Act (Cap 218)
Health and Safety at Work Act (Cap 195)
Land Acquisition (Cap 215)
Pesticides (Control) Act (Cap 226)
Preservation of Sites and Artefacts Act (Cap 39)
Water Resources Management Act (Cap 281)

Compliance with the IFC Exclusion activity list

NBV will not finance projects that are found to participate in the following:

Production or trade in any product or activity deemed illegal under the country laws or regulations or international conventions and agreements, or subject to international bans, such as pharmaceuticals, pesticides / herbicides, ozone depleting substances, PCB's, wildlife or products regulated under CITES.
Production or trade in weapons and munitions1.
Production or trade in alcoholic beverages (excluding beer and wine)1.
Production or trade in tabacco1.
Gambling, casinos and equivalent enterprises1.
Production or trade in radioactive materials. This does not apply to the purchase of medical equipment, quality control (measurement) equipment and any equipment of where IFC consider the radioactive source to be trivial and / or adequately shielded.
Production or trade in un-bonded asbestos fibers. This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20%.
Drift net fishing in the marine environment using nets in excess of 2.5 km in length.
Production of activities involving harmful or exploitative forms of forced labour2 / harmful child labour2.
Commercial logging operations for use in primary tropical moist forest.
Production or trade in wood or other forestry products other than from sustainably managed forests.

1. This does not apply to project sponsors who are not substantially involved in these activities. “Not substantially involved” means that the activity concerned is ancillary to a project sponsor's primary operations.
2. Forced labor means all work or service, not voluntarily performed, that is extracted from an individual under threat of force or penalty.
Where services are provided for activities in the above Exclusion List, those activities will together not account for more than 5% of the Bank's total loan and investment portfolio.

NBV Relationship Managers and Credit Managers are to monitor all business portfolios and current lending activities annually to manage compliance and exposure to the above excluded activities list through initial screening and if necessary, site inspections.

Discouraged risks

NBV endorses the principle that a Client's proposed project can be rejected on environmental and social grounds, where there are major environmental and social problems, or when a proposed project fails to address environmental and social issues in a satisfactory way.

Risk Classification and Social Environmental Due Diligence (SEDD)

SEDD assesses the Social and Environmental Action plan, remediation and environmental management plan of a client's project to address social and environmental risks under the Social and Environmental requirements of SEMS.

Social & Environmental risk classifications

When a project is proposed for financing, NBV, as part of its internal social and environmental review and due diligence procedures is to categorise each project based on the magnitude of its potential impacts and risks in accordance with the social and environmental screening criteria.

Classification of a customer's respective activity or project depends on the scale of activity and potential impact. The three risk categories are:

Category 1 - Low Risk activities:

These activities are likely to have minimal or no environmental or social risks associated with it and do not contravene the Exclusions List in any manner.
Category 2 - Medium Risk activities:
These activities may have some environmental or social risks, but they are readily addressed through recognised good practices of a sound Social and Environmental Management Plan. The bank will verify that:
- the supported activities comply with applicable Social and Environmental laws and regulations, and applicable Environmental Health and Safety Guidelines;
- appropriate environmental permits are obtained prior to lending; and
- Investments do not contravene the Exclusion List.
Category 3 - High Risk:
These include all activities with potential significant, controversial, or sensitive issues associated with the lending that go beyond compliance and require careful, expert consideration of impacts, mitigation, and trade-offs.
- Such activities may involve large-scale acquisition of land or permanent loss of income or assets involving multiple households, or directly impact traditional landowners, will be included in this category.
- Large scale activities in the mining sector and agricultural and primary industries are most likely Category 3. A Social and Environmental impact assessment report will be required that focuses on the key issues of concern.
- Category 3 activities must comply with Social and Environmental requirements. Outside consultants may be required to carry out further social and environmental investigation and give advice.

Social and Environmental Due Diligence (SEDD)

SEDD records and reviews a client's projects at the time of appraisal. The extent of SEDD and level of detail will be based on the transaction's environmental and social risk category and will vary by transaction type. The process of SEDD assists NBV and ensures that a prospective project will meet Social and Environmental Requirements and or a current project is expected to continue to meet the Social Environmental Requirement.

SEDD includes:

Review of the Project
Review of project's Social and Environmental impacts; review of the EIR, EIS, if applicable an EIA and a SEMP.
Discussions with the Project Officials.
And may also include site visit and discussions with Project Officials on site.

For high risk projects (Category 3), external consultants may be sought to assist Relationship Manager and SEMS officer to carry out SEDD.

SEDD ensures evaluation of social and environmental risks, including:

Compliance with National Laws on Environment
Labour and Work Place Health and Safety
Full scale Social and Environmental Impact Assessment review; which would be undertaken as part of SEDD for Category 3, high risk activities.

The proposed client must provide an EIR, EIS to the Relationship Manager in accordance with Vanuatu regulations and procedures for NBV to review during the SEDD.

SEDD helps to identify potential adverse social and environmental impacts and ensures Category 3 high risk projects are in compliance with policy.
SEDD assesses the Social and Environmental Action plan, remediation and environmental management plan of a client's project to address social and environmental risks under the Social and Environmental requirements of SEMS.

Lending Requiring Land Acquisition or Change in Land Use

For proposed projects that involve the acquisition of large areas of land or change in land use specifically under customary land tenure further screening of human impacts should be undertaken if a project attracts a category 2 or 3 rating.

Approval

Client Applications are to demonstrate compliance with all local applicable regulatory environmental requirements, social and environmental requirements; performance standards as a condition of approval.

Additional Social and Environmental Requirements

NBV's business activities will be undertaken in compliance with IFC's Performance Standards for all long term corporate and project finance transactions. The standards require the bank to manage its environmental and social risks and impacts in accordance with the said standards:

Assessment and Management of Environmental and Social Risks and Impacts
Labour and Working Conditions
Resource Efficiency and Pollution Prevention
Community Health, Safety, and Security
Land Acquisition and Involuntary Resettlement
Biodiversity Conservation and Sustainable Management of Living Natural Resources
Indigenous Peoples
Cultural Heritage

The following additional conditions that are consistent with IFC Performance Standards apply to all long term corporate and project finance:

A social and environmental management process / plan appropriate to the nature and scale of the project and commensurate with the level of social and environmental risks and impacts must be in place.
The borrower should demonstrate appropriate human resource policies and procedures are in place to ensure all local regulatory requirements are complied with, the health and safety of workers is appropriately managed and there are mechanisms in place to review and address employee complaints or problems.
Appropriate pollution, prevention and abatement policies need to be in place to ensure that any pollution or waste management issues can be dealt with quickly and in compliance with all local regulatory requirements.
Community health and safety policy and procedures reflective of the nature of the business activities must be in place to ensure that communities in close proximity are not at risk from the company's activities.
Where the transaction or project requires large scale land acquisition and involuntary resettlement, the interests and needs of any communities affected are managed appropriately to ensure living standards are maintained or improved as a minimum, the cultural heritage of the areas are preserved and indigenous peoples are appropriately compensated for any loss of access or rights.

Documentation of loan conditions

Any special terms and conditions concerning social and environmental risk, including ongoing external monitoring processes are to be included in any letter of offer or loan agreements.

Non-compliance with the Social and Environmental Requirements

Should an NBV staff member become aware of any breach of social and/or environmental requirements by a customer, the staff member is to contact their Credit Manager immediately and seek advice as to the required response.

Where the breach triggers an event of default entitling NBV to withdraw financial support, and continuation of that financial support is likely to lead to further breaches, any continuation of the existing financial support should only be considered if it is without prejudice to the bank's rights to withdraw its support. The following procedures will be undertaken:

NBV is to require the client to remedy breaches within an appropriate timeframe. (any costs of remediation are the responsibility of the client.)
The customer must provide or NBV will obtain written confirmation from an appropriate environmental authority or independent consultant that they are satisfied with the steps being taken to resolve the non-compliance; and/or
The customer certifies that it is taking all reasonable and practical measures to minimize harm and resolve the non-compliance.
NBV is to continue to monitor the issue and be satisfied that the situation is remedied in line with requirements outlined in the original SEMP and/or any revised management or action plans.
In the event that the client has not rectified the issue, the bank is to act in terms of its policies following the occurrence of an event of default.
Loan disbursement is only made after loan conditions precedent have been satisfied and the social and environmental assessment are satisfactory to the Bank.

Monitoring and review

Social and Environmental performance for clients are to be reviewed annually or more often if deemed necessary.

Copies of regular status reports provided to the regulatory authorities on the social and environmental performance and compliance status of projects are to be provided to the Bank and reviewed by relationship managers. Where non-compliance or problems are identified, situation is to be reported to Credit and appropriate actions taken to resolve the issues as per the SEMS/SEMP policy.

During customer annual reviews, assessment and/or confirmation of compliance with social and environmental requirements are to be undertaken to confirm that the risk remains at an acceptable level to NBV.