Appropriate Environmental & Social (E&S) measures reduce risk to workers, the environment and local communities and provide business benefits which increase our impact. The management of environmental and social risks is therefore an integral part of Norfund’s investment process.
Our sustainability commitments
Norfund’s Environmental, Social and Governance Policy (ESG Policy) is approved by the Board of Directors. The policy sets direction for Norfund’s E&S work and presents our sustainability commitments and the main standards we use in our work. The policy also describes how we work to identify, assess and manage the environmental and social risks associated with the operations of our clients, and provides an overview of the cross-cutting issues that guide our work.
IFC PERFORMANCE STANDARDS
The IFC Performance Standards for Environmental and Social Sustainability and the World Bank Group Environmental, Health and Safety Guidelines are the main standards for operationalising Norfund’s sustainability commitments. These standards are globally recognised benchmarks for environmental and social risk management in the private sector. The standards are used by development finance institutions, commercial banks and other similar institutions.
The eight Performance Standards define clients’ responsibilities for managing their environmental and social risks. The following aspects are included:
1: Assessment and Management of Environmental and Social Risks and Impacts
2: Labour and Working Conditions
3: Resource Efficiency and Pollution Prevention
4: Community Health, Safety and Security
5: Land Acquisition and Involuntary Resettlement
6: Biodiversity Conservation and Sustainable Management of Living Natural Resources
7: Indigenous Peoples
8: Cultural Heritage
Clear roles and responsibilities
Our Environmental and Social Management System (ESMS) describes roles and responsibilities relating to E&S risk management, including governance, oversight, and E&S day-to-day working practices. Investment staff take part in a training programme which includes modules on our ESMS, the IFC PS and how to identify environmental, health and safety issues on site-visits.
Integrated part of investment process
E&S risk management is an integrated part of our investment process and specific actions are required for each step of the project cycle: initial screening, due diligence, legal agreements and monitoring.
Understanding the risk profile of our portfolio companies
In the initial screening phase, Norfund evaluates the project against the EDFI Exclusion lists and performs a high-level assessment of key E&S risks. An inherent risk category is assigned which will determine the depth of due diligence and the degree of E&S expert involvement. Our approach is aligned with EDFI’s E&S Standards and was revised in 2022 to include new tools and training modules.
Assessing E&S risks and impacts
If the project is approved by our investment committee, the E&S due diligence commences. This includes a comprehensive assessment of E&S risks and performance based on document reviews, site visits and interviews with key stakeholders. Gauging the potential client’s capacity and commitment to E&S risk management is an important aspect of this process. Shortcomings and value add opportunities identified in due diligence are described in an Environmental and Social Action Plan (ESAP) which forms part of the investment agreement.
E&S requirements included in legal agreements
Our portfolio companies are required to comply with applicable national laws and regulations as well as international standards such as IFC Performance Standards and World Bank Group Environmental Health and Safety Guidelines. This includes a requirement to develop an Environmental and Social Management System (ESMS) containing an ESG policy, procedures for identifying, managing and monitoring risks, sufficient organisational capacity, emergency preparedness measures and stakeholder engagement.
Monitoring compliance and supporting capacity building
Norfund is a responsible owner and monitors portfolio companies’ compliance with our E&S requirements. Investees are required to report at least annually to Norfund on their E&S risk management performance. In 2022, we revised our approach for assessing the E&S performance of the projects in our portfolio and created a new E&S monitoring system. This helps us better understand the E&S risk and performance of the portfolio and analyse changes over time. Our business support facility is an important tool for building E&S capacity and is often used to strengthen portfolio companies’ ESMS and provide training.