ESMS on Mongolia Green Finance Corporation

I. PROGRAM DESCRIPTION

The proposed Mongolia Green Finance Corporation (MGFC) is a joint public-private sector effort to create a national financing vehicle (NFV) to overcome the existing challenges and constraints of climate change mitigation. The MGFC specifically targets the mainstreaming of green, affordable and gender-inclusive financing for households and businesses to switch to low-carbon technologies; and to create an improved policy environment and build the capacity and awareness of stakeholders in support of this mission. Taken together, these measures will induce a paradigm shift towards low-carbon technologies and resilient livelihoods, particularly for low-income, vulnerable households. By doing so, MGFC will become a major institution for effective and strategic financing of climate change mitigation policies and measures, thus supporting the GoM to achieve its GHG emissions reduction targets stated in its INDC and the National Green Development Policy (NGDP) of Mongolia. In its inception phase, the MGFC will target an improvement in the energy efficiency (EE) of households and businesses.

The MGFC is a private sector initiative for public benefits, where the private sector ensures that operations are carried efficiently, and the public sector ensures that its development and policy goals have adequate social co-benefits and are properly financed and achieved. In addition, achieving positive gender impacts through the MGFC is an important characteristic of the Programme, and MGFC plans to develop a gender-responsive governance structure as well as a Gender and Social Inclusion Strategy with the aim of finalizing it before the official launch of the MGFC. The Gender and Social Inclusion Strategy will be guided by and congruent with international agreements and will largely reflect the principles set out in the GCF Gender Policy (and/or forthcoming Gender Equality and Social Inclusion Policy and Action Plan 2018-2020) as well as applicable national policies and guidelines.

II. ENVIRONMENT AND SOCIAL MANAGEMENT SYSTEM (ESMS)

This Environmental and Social Management System (ESMS) is designed to guide the environmental and social management of the MGFC. It describes the processes, roles and responsibilities to manage environmental and social risks and impacts including screening, preparation, implementation and monitoring of sub projects. The ESMS is considered to be the appropriate Environmental and Social Safeguards (ESS) instrument for the MGFC since the activities to be supported are not yet fully defined nor the locations where the activities will be developed.

The ESMS aims to enhance the MGFC by contributing with policies and banking practices that are precursory, demonstrative, exemplary and with multiplier effects in terms of environmental and social responsibility, and that are in line with the Performance Standards of the International Finance Corporation (IFC) which is the interim ESS standards being applied at the Green Climate Fund (GCF), as well as serving as the basis for XacBank’s Environmental and Social Standards, a GCF-accredited entity.

The main purpose of MGFC’s ESMS is therefore to identify and enhance environmental and social co-benefits and other positive impacts in addition to avoiding and managing any potential adverse environmental and social impacts from the Programmes investment projects.

In this vein, the ESMFwill:

Provide a reference tool for selection of Participating Financial Institutions (PFIs) to ensure that only PFIs that are committed and able to comply with applicable environmental and social standards defined by GCF and XacBank as well as applicable national laws receive funding from MGFC.
Provide a reference tool for implementation of investment projects according to environmental and social standards defined by GCF and XacBank and in compliance with the applicable national standards.

III. POTENTIAL ENVIRONMENTAL AND SOCIAL RISKS AND IMPACTS

The program will support the development, installation, and operation of energy efficiency projects in Mongolia. Some of these projects however, pose environmental and social risks and have potential for adverse impacts to the communities and the environment. Avoiding and mitigating these risks and potential impacts are fundamental to the operations at the program level.

Each of the subprojects will be categorized prior to the sub-loan approval based on potential risks associated with it as screened using MGFC-approved risk screening procedure.

All potentially supported subprojects will be screened for their potential environmental and social impacts. The majority of the subprojects might cause some level of environmental and social impacts that would fall under Category B and C risk categories of projects. For Category B, the program requires the subproject proponent to carry out an Environmental and Social Impact Assessment (ESIA) or other appropriate environmental and social assessments that would also include management plans to avoid and mitigate the potential environmental and social impacts. For Category C subprojects, the program will require environmental and social screening by the subproject proponents.

The program will not support high-risk, Category A, subprojects where the environmental risks and impacts may be significant, unprecedented, and irreversible. It is therefore expected that none of the subprojects will be located in protected and/or critical habitats or culturally or socially sensitive areas and require massive displacement of communities including vulnerable population.

IV. INSTITUTIONAL ARRANGEMENT FOR IMPLEMENTATION

Roles of MGFC

MGFC’s role is to support sound Fund structures that have been designed and structured so as to meet MGFC E&S standards and requirements as well as international best practice. This includes:

Assessing the PFIs against the relevant legal framework;
Assessing the operation against MGFC’s investment philosophy, principles and E&S standards;
Advising, and where required, assisting the PFI indeveloping measures to manage the E&S impacts and risks of the operation consistent with MGFC’s standards;
Assessing the capacity of the PFIs to implement all the E&S requirements;
Identifying opportunities to enhance E&S outcomes; and
Monitoring the PFI’s performance in accordance with the MGFC’s E&S standards throughout the duration of the investment.

Role of the PFIs

The PFIs is responsible for achieving compliance with relevant legal standards and policies and managing the environmental and social impacts and risks associated with the investment projects in its portfolio to this end. The PFI is responsible for providing the information required by MGFC to carry out its due diligence on its Programme and for structuring its investment projects to meet MGFC’s E&S standards and requirements. The PFI is also responsible for disclosing project-related environmental and social information, as well as carrying out any stakeholder engagement and consultation activities carried out by third parties (e.g. host government agencies) to meet the standards expected by the MGFC. The PFI may be required to carry out supplemental studies to the satisfaction of MGFC.

V. ESS POLICY BACKGROUND

XacBank has a comprehensive SEMS in place already, based on its established Social and Environmental Management System, and this policy serves as the foundation for the MGFC program. This ensures that sub-projects financed through the program will comply fully with all requirements needed to ensure prevention and mitigation of environmental and social risks related to the implementation of these projects. The MGFC will define roles and responsibility for designated staff members for the oversight and on-going implementation of SEMS.

Mongolia’s Environmental Policies, Regulations, and National Priorities

The program is in line with a number of explicitly stated policy initiatives on the part of both the Mongolian government and the Ulaanbaatar municipality. Mongolia has submitted an Intended National Determined Contribution (INDC). The program here proposed is in line with Mongolia’s INDC as it incentivizes businesses to increase their renewable energy capacity and/or to provide products that allow consumers to increase their renewable energy capacity and their energy efficiency.

In 2016, the Mongolian government approved the Green Development Policy. One of the goals of the plan is to leverage tax, credit, and incentive mechanisms to finance a green economy. This program creates a facility that economically incentivizes green purchases for profit-minded SMEs.

In November 2015, the Mongolian Parliament passed the Energy Conservation Law (ECL). The ECL stipulates that large energy consumers (referred to as ‘designated consumers’) audit their energy usage and make plans to reduce their energy intensity by 15% in the course of 5 years after they have been appointed. The MGFC program will be a new public-private partner to this national policy ordinance, by providing the new designated consumers the financial support they need to implement the required changes.

In October 2012, Mongolia’s Parliament adopted the Law of Mongolia on Environmental Impact Assessment. The law requires that any proposed project that will have an impact on the environment must a) inform and report on the implementation of environmental management plans to the local population, local government, and other stakeholders within the deadline specified by the Ministry of Environment; and b) prepare and submit to the Ministry of Environment a restoration and closure management plan for mining and petroleum projects not less than three years prior to proposed closure. Financiers of projects are legally barred from providing financial assistance to projects which are harmful to environment, society and human health. The EIA law also requires that in preparing an EIA report, the project sponsor must include minutes of meetings at which local people who are to be affected by a proposed project were consulted. The EIA Law authorizes the relevant minister to adopt detailed regulations on such public participation. However, the EIA law contains no objective criteria for what would be considered "harmful.” As such, the ESS policy for this program represents an extension and strengthening of this existing EIA law, with the addition of social elements. The program thus aligns with domestic INCD, NAMAs, and the Green Development Policy as well as the mission of the Green Climate Fund.

VI. SCREENING PROCEDURES

In order to be in line with the main goals and E&S eligibility criteria of the MGFC, the E&S Assessment will be structured as follows:

a) Positive impacts

Contribution to GHG mitigation
Social co-benefits including positive gender impacts

b) Risk management, on each of the 8 main themes as listed in the table below, covering

Environmental issues
Social issues

All commercial banks united under MSFA use the E&S risk assessment tool which is compliant with IFC Performance standards before making any decision on loan application of all types of business loans and financing more than MNT 50 million and more than 12 months length. This self-assessment checklist can identify and assess the level of E&S risks and impacts automatically by providing guiding questions and optional answers for users. After assessing all of the risks, the result can be found at the bottom of the page which indicates the level of risk and associated guideline (how to manage or mitigate) or the next steps to make an advanced assessment or direction. Generally, this E&S self-risk assessment checklist consists of assessment questions, excluded, prohibited and sensitive activities, aspects of environmental and social risks, and industrial classifications of all economic activities and their impacts on the environment.

The procedure for the preparation, approval and investment into projects by PFIs will follow the PFI’s Environmental and Social Management System (ESMS) that enables identification of potential environmental and social risks that may arise from proposed investment. The approach to E&S risk management at PFIs should be consistent with relevant national and international standards and practices, and takes into consideration the circumstances specific to the Mongolian context.

With the application of the ESMS, PFIs will systematically identify, assess and manage E&S risks and potential impacts associated with its clients and transactions, and determine whether relevant E&S standards have been adequately applied. Where avoidance of E&S impacts is not possible, the PFI will agree with its clients on a plan to minimize and/or offset identified impacts and will work toward improved E&S performance with tangible goals. PFIs will integrate E&S considerations into its business decision and risk management processes across the institution and will consider E&S risk management is part of the bank’s wider enterprise risk management framework.

The MGFC fully incorporates the IFC’s Performance Standards (and therefore GCF’s interim ESS standards) into all of its operating and investing activities and institutionalizes these through legally binding mechanism to operations and investing activities of its PFIs so as to ensure that they are fully observed on the project level.

VII. ESMS IMPLEMENTATION ROLES

The MGFC will adopt a “dual layer risk management”. This means that E&S assessment will be performed and monitored at the MGFC level as well as the PFI level.

a) MGFC level: In the selection of PFIs, MGFC will verify that the PFIs it invests into are committed and able to comply with the standards and guidelines set forth in this ESMF as part of the due diligence, investment approval and investment monitoring.

b) PFI level: In the selection of investment projects, each project will be screened by PFIs to determine the risks and impacts associated with the project, determine the level of assessment required and ensure that any assessment carried out by the project including mitigation and remediation measures through the application of the mitigation hierarchy and the precautionary principle are in line their own ESMF and fully in accordance with MGFC’s ESMF (and aligned with the GCF and XacBank ESS). PFIs are only expected to support the projects for which they have the appropriate mitigation measures and remediation plans and adequate management systems to implement these plans.

The PFIs will perform environmental and social assessments on all investment project to ensure that potential risks and appropriate prevention, mitigation and compensation measures are identified through an environmental and social screening and, when relevant, an assessment, including satisfactory and meaningful public consultation and participation. As part of the environmental and social due diligence PFIs will categorize the projects based on the type of the project and associated risk as outlined below.

Category A: with potential significant adverse social and/or environmental impacts that are diverse, irreversible, or unprecedented;
Category B: with potential limited adverse social or environmental impacts that are few in number, generally site specific, largely reversible and readily addressed through mitigation measures; or
Category C: with minimal or no impacts.

The initial categorization reflects the extent, significance and the complexity of potential impacts and risks of the project, its ancillary/associated facilities/infrastructure and its areas of influence, thereby determining the appropriate environmental and social assessment and due diligence requirements for the selected operation.

VIII. STAKEHOLDER ENGAGEMENT PROCESS

The MGFC will operate within the framework of Stakeholders engagement plan as shown below.

Stakeholder group	Discussion points	Engagement strategy
Stakeholder group	Discussion points	Strategy or Actions	Actors	Timelines
Steering Committee	MGFC concept, Capitalization plan and structure, market assessment and product development, funding proposal inputs and feedback, NOL issuance, National stakeholders consultation meeting guidance etc.	Ensure stability of MGFC's steering committee members Keep members up-to-date MGFC operations and the members' rights and responsibilities Design the frequency and number of engagement events to maximize stakeholder involvement and avoid disruption to ‘daily business’ and stakeholder ‘fatigue’ Take into account the members' preferences and choose most effective meeting type Avoid conflict of interest and corruption Provide equal involvement and rights among SC members	Steering committee Establishment team MSFA MGFC staff	The meeting will be organized depending on the availability of SC members, but it should be organized at least once in every 3 months.
Public and Private sector - Local banks and other financial institutions	MGFC concept, participation in the MGFC, consultation on the construction plan and product development, capacity building and knowledge sharing on the loan products to be financed through MGFC, market assessment, green loan product development	Maintain pleasant relationship with the banks that are investing in MGFC Keep parties up-to-date Avoid risks and disputes by formalizing and contracting inter-financial and financial relationships with financial institutions Establish level playing ground to secure equal participation, and collaboration over competition. Ensure that financial institutions are not using funds for different purposes. Provide technical assistance and capacity building activities for the banks' green product development and ESG risk assessment	PFIs MSFA MGFC	It will be organized at least once in every 6 months.
Private and public sector - Project developers	Product development and technical criteria, incentives for green projects, local capacity, potential partnership with pilot project developers, pilot project preparation	Have a good relationship with cooperating companies Keep parties up-to-date Being transparent about policies and decisions Avoid risks and disputes by formalizing and contracting inter-financial and financial relationships with relevant companies Consider to ensure that parties are well connected Provide equal participation Capacity building series on energy efficiency, heat loss, house insulation, and energy and water savings	Project developers (construction companies, manufacturers, importers of EE techs, etc.) Product development officers of PFIs MGFC MSFA	The meeting will be organized at least once a year.
Government authorities and regulators	GoM's priority, targets, relevant policies and strategies to support the MGFC concept. Effective institutional arrangement and information sharing	Consider to ensure that parties are harmonious, well connected Timely information sharing Being transparent Provide and organize workshops and capacity building activities on effective cooperation between public and private sector, and improving inter-policy coordination	Ministry of Environment and Tourism Ministry of Finance Central Bank of Mongolia FRC (Financial Regulatory Commission) MGFC MSFA	The meeting will be organized at least 3 times a year.
International organizations	Potential collaboration and partnership on the project preparation, Product development and investment. Potential integration with existing lending facility, knowledge sharing, capacity building. Advisory and consultation on technical analysis of the selected projects	Consider to ensure that parties are harmonious, well connected Timely information sharing Parties are to share information and best practices, and seek opportunities to collaborate in possible way Help and support each other on organizing capacity building and technical assistance related activities	International NGOs International donor organizations International Banks and Financial Institutions MGFC MSFA	The meeting will be organized at least once a year.
Civil society organizations	Integration of potential consideration and benefits from economic, social and environmental prospective. Consultations on the direct beneficiaries (women in ger area etc.) Potential pilot project preparation	Consider to ensure that parties are harmonious, well connected Timely information sharing Parties are free to compete, share information and best practices, and seek opportunities to collaborate in possible ways Help and support each other on capacity building and technical assistance related activities	International NGOs Domestic NGOs Mongolian Bankers Association MSFA MGFC	The meeting will be organized at least once a year.

IX. GRIEVANCE REDRESS MECHANISM (GRM)

MGFC Grievance and Redress Mechanism

A detailed GRM mechanism will be developed as part of MGFC’s Operational Manual, which will be in line with international best practices and the UN Guiding Principles for Business and Human Rights. XacBank’s GRM Policy (below) will be used as a model when developing the MGFC’s policies and procedures. Details on the GRM policy will be readily available through MGFC/PFI websites and provided by loan officers during the consultation process with the sub-borrower.

XacBank Grievance and Redress Mechanism

Grievances from stakeholders and potential affected communities and households are received by the Bank through dedicated channels, including a dedicated phone line, 24-hour online chat system, as well as an email address.

After receipt of any complaints, they are to be handled in accordance with the Bank’s internal policies and procedures, including, but not limited to, the Investigation Procedure, which outlines step-by-step the process of receiving grievances, categorizing them, investigating the case, complaint resolving, dispute settlement, and the appropriate corrective actions to be taken.

Sub-loan level:

All grievances received by XacBank regarding any sub-loans under the consumer loan program will be entered into a register with the date, name, contact details and the reason for the complaint. A duplicate copy will be made and given to the complainant for the record at the time of registering the complaint. Minor complaints, which can be resolved quite easily and acted upon immediately, can be addressed at the sub-loan level by the sub-loanee and/or the Bank, if necessary. Where the complaint is of a more serious nature, the sub-loanee and/or the Bank has up to 20 business days to resolve the complaint.

There will be no costs associated with making any complaints. Should the complainant not be satisfied with the measures taken to address their grievance, they may, at their discretion, go through the appropriate channels to pursue further action, at the complainants’ own cost. If requested, the complainant has the right to their anonymity. The resolution of complaints will be handled in a fair, transparent and inclusive manner and will be guided by stakeholder engagement and dialogue. After the complaint has been resolved, the situation will be continually monitored to ensure that the same issues will not arise again.

The Bank will keep a register of all received complains along with their status and will ensure that they are resolved.

PFI Grievance and Redress Mechanism

PFIs are required to prepare a Stakeholder Engagement Plan for its investment projects, including grievance mechanism. This Plan should include:

Stakeholder analysis and engagement process, including all formal consultations (dates, at which stake of the project, stakeholders consulted, type of consultation) carried out under the plan so far as well as summarize the main issues raised to date through the engagement and consultation activities;
Explanation how project information was disseminated, and how stakeholder views, in particular those of project-affected individuals and communities have influenced the design and the formulation and implementation of the environmental and social management plan, the level of project support or opposition among the affected communities and what on-going community engagement and communication strategies are in place; and
GRM system, designed to receive, evaluate and address grievances from affected communities, will be introduced at the outset of the project design and line during the life of the project.

Programme-related grievances may be filed by any affected party through the Grievance Redress Mechanism (GRM) found here. Grievances will be handled in accordance with the bank’s procedure on receiving and resolving complaints and feedback which may be consulted here. Grievances related to the programme may also be filed to the GCF directly through their Independent Redress Mechanism (IRM) at https://irm.greenclimate.fund/.

X. MONITORING ARRANGEMENTS

MGFC is committed to the highest possible standards of monitoring and supervision and enforces these at the PFI level through the relevant investment agreements.

MGFC’s E&S Team works closely with all PFIs through a monitoring system that includes formal reporting on a quarterly and annual basis, from which it produces its own reports, and regular visits to the PFI’s offices and portfolio companies and projects in situ. E&S Team reviews all E&S reports from the PFIs, which are produced at both portfolio and investment project levels, and periodically checks their ESMF implementation for adequacy. During the investment project implementation, PFIs will have overall supervision responsibility for assuring that their projects comply with the standards.

MGFC E&S Team together with appropriate technical experts can also carry out ad hoc on-site monitoring visits to ensure the compliance at the project level with the IFC Performance Standards and XacBank/GCF ESS. MGFC is also committed to appropriate communication to stakeholders and other external parties while protecting confidentiality at PFI and project level.