Chapter 22

Due Diligence Guidelines –

Environmental

Appendix I

A number of helpful guidelines are available to assist in this initial screening, including an index of industrial sectors published by the European Bank for Reconstruction and Development (“EBRD”) which it uses to assist in reaching its own investment decisions. The Environmental and Social Risk Categorisation List allocates high, medium and low environmental risk ratings to different industrial sectors. The categorisation helps in an assessment of the appropriate level of due diligence that is required.

The EBRD has two further lists, the Environmental and Social Exclusion List and the Referral List. The Exclusion List includes activities that are illegal under national law or subject to international bans or severe restrictions. The EBRD is not permitted to invest in companies undertaking such activities. Activities listed on the Referral List raise significant environmental issues due to their hazardous, complex or controversial nature, and may in certain cases be illegal. Special approval is required in order for EBRD to invest in companies that undertake these activities.

Many international banks also refer to the International Finance Corporation’s (“IFC”) Performance Standards on Environmental and Social Sustainability (“Performance Standards”) which also provide guidance on how to identify environmental and social risks and their impact, as well as how to avoid, manage and mitigate those risks in doing business in a sustainable way. The Performance Standards describe potential environmental and social risks and impacts that may be relevant in assessing environmental issues. The IFC also has an Exclusion List setting out activities that will generally not be financed by the IFC.

A sponsor should tailor its EDD as it thinks appropriate. However, it may be helpful to note that before investing, the EBRD requires that low risk activities be subject to a regulatory compliance check, review of the site history and consideration of indirect environmental risks. Activities with a medium risk rating require further detailed enquiries, including discussions with the potential investee company and, if appropriate, discussions with regulators. If particular concerns are identified, an environmental review or audit may be commissioned. The EBRD requires that activities with a high risk rating be subject to an environmental review or audit and discussion with environmental regulators. Similarly, before investing, the IFC requires assessments of any environmental and social risks and impact, as well an assessments against the Performance Standards and the World Bank Group Environmental, Health and Safety Guidelines.