Fresh on the heels of COP-26, UNEP Climate Finance Unit with UNEP-WCMC organised a series of knowledge exchange events that built upon its predecessors in 2019 and 2021 to discuss this gap, share challenges and find practical solutions.
The three invite-only workshops and two open webinars spread over the week of November 29 to December 3, 2021, brought together different stakeholders operating in the sustainable land-use finance space. They brought attention to issues that are central to environmental and social risk management in investment or lending decisions. The workshops were aimed at building a shared understanding of aims, challenges and solutions in developing appropriate eligibility criteria, risk screening and due diligence processes.
It was found that when setting the minimum bar or eligibility criteria, balancing between inclusion, financial returns and E&S impact is a major concern. Financial institutions should account for geographical and regional differences, from legal requirements to also accounting for smaller players who might face barriers in demonstrating compliance with high standards. Participants expressed that greater emphasis should be placed on transparency and progressive improvement with milestones, rather than strict compliance against some of the common eligibility criteria.
Some specific aspects such as biodiversity and land tenure have remained difficult to assess in terms of risk and impact. This is particularly compounded by the lack of availability of integrated data and limited harmonization of methodologies to assess risk and impact as well as lack of capacity on such technical issues.
The approach to risk screening and due diligence also varies considerably and depends on a number of factors such as how vertically integrated the funds/facilities are, the experience of the funds, risk appetite, target geography and investees, requirements from the investors in terms of compliance, and how concessionalized the funds/facilities are. Most financial institutions take a two-step approach to screening risk and conducting due diligence against risks identified as high. More often than not, for most fund managers the process of risk assessment and due diligence is a journey together with the investees where trust, data and transparency, capacity building are crucial elements.
This series of workshops helped build a shared understanding of challenges and solutions. A summary and guidance document based on the outcomes of the webinars is currently under development and will be shared with the investment community in the coming months.
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