European Bank Corporate Social Responsibility Report

Investing and working responsibly for a sustainable future EBRD SUSTAINABILITY REPORT 2004

EBRD SUSTAINABILITY REPORT 2004

About this report This is the EBRD’s first sustainability report, focusing on how we manage the impact of our operations on the people and the environment in our countries of operations. It describes how we work, both in the countries where we invest and internally.

About the EBRD The European Bank for Reconstruction and Development invests in the businesses and financial institutions that form the core of strong market economies in 27 countries from central Europe to central Asia. Our capital is provided by 60 governments and two intergovernmental institutions.

The EBRD invests in virtually every kind of enterprise and financial institution, mainly in the form of loans and equity.

Investments are designed to advance the transition to market economies, to set the highest standards of corporate governance and to promote environmentally sound and sustainable development. We seek to finance only those projects that will benefit from

EBRD involvement and which cannot be funded on equivalent terms by the private sector.

The EBRD’s Environmental Policy is the umbrella for much of the Bank’s mission to work in a socially and environmentally responsible way.

In support of our investment activities, the EBRD conducts policy dialogue with governments to develop the rule of law and democracy.

For more information about the Bank please see our web site at www.ebrd.com.

Where we operate Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Former Yugoslav Republic of Macedonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Poland, Romania, Russia, Serbia and Montenegro, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

Cover: Khujand, Tajikistan Photographer: Vladimir Pirogov EBRD financing is helping to improve the quality of drinking water in Khujand.

Contents 02 03 04

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President’s foreword Introduction 2004 highlights

06 Investing responsibly 07 Ensuring good governance and sound management 08 Measuring the EBRD’s sustainability footprint 09 Appraising and monitoring EBRD projects 15 Maintaining sustainable investment 24 Working in partnership 31 Harnessing donor funding 32 Financial reporting 33 Investing in capital markets

52 Promoting transparency and accountability 53 Disclosing information on EBRD-financed projects 53 Engaging in dialogue with our stakeholders 57 Setting up a complaints mechanism 57 Listening to expert advice

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Special focus for 2004 34 Helping the poorest countries 46 Addressing climate change

58 59

Working responsibly Managing the environmental impact of our internal operations 60 Developing our human resources

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PRESIDENT’S FOREWORD

President’s foreword Sustainability is the purpose of virtually everything the EBRD does. The EBRD was founded to help countries move from the unsustainable system of planned economies to market economies and democracies that are durable and self-sustaining.

Since 1991, the EBRD has engaged with 27 countries from central Europe to central Asia to help foster a private sector that is sustainable in financial terms and, equally, in terms of sound principles of doing business, including transparency and accountability. It is also part of the EBRD’s Founding Agreement to “promote in the full range of its activities environmentally sound and sustainable development”.

Sustainable investment rests on respect for the people affected and for the natural environment. These are the principles that are built into every EBRD investment.

While the transition process is still very much under way across the region, there has been progress, especially in the eight countries of central Europe that have enshrined these principles as part of becoming members of the European Union.

In the most advanced countries of the EBRD region, the Bank’s role has evolved to undertaking projects that are designed to set new standards. Municipal projects – water, waste disposal, roads, local transportation – are a good example of financing that helps municipalities to operate on private sector principles while, at the same time, incorporating the critical elements of consultation and improving the environment.

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Other EBRD projects are tailored specifically to address environmental safeguards and energy efficiency – for example, in an ammonia production plant in Russia. Donor countries have funded a programme to finance projects that address environmental concerns in north-west Russia. The EBRD administers nearly €2 billion of donor funds to improve nuclear safety by decommissioning or enhancing the safety features of Sovietera nuclear plants. In addition, all the EBRD’s investments are appraised for their social and environmental impact, before financing and during the life of the project.

especially in this last year. We talked to non-governmental organisations, clients, academics, policy makers and others as we set out to develop a new energy policy for the EBRD. The consultation will continue when we invite comments on a new draft policy that gives energy efficiency and renewable energy new prominence in our strategic planning. The EBRD does already have a growing orientation to sustainable energy – for example, through innovations such as the first carbon credit transaction managed by the EBRD on behalf of the Netherlands. A conversion from petrochemicals to biomass at a paper mill in Bulgaria will release carbon credits to the Netherlands under the Kyoto Protocol and dramatically reduce carbon emissions.

Our particular focus of the past year has been on countries which most need help to develop sustainable market economies that will reduce poverty. Sustainability in the poorest countries fundamentally means reducing poverty. Last year, we launched an initiative for the seven poorest countries of the region under which the Bank accepts higher risk and offers a simplified process for approval of financing. This is just one of the programmes to encourage the birth or growth of smaller businesses that are at the heart of thriving economies.

Through financing to local banks, we support hundreds of thousands of small and medium enterprises. Through donor funding, we provide training in business planning and practice to local entrepreneurs. And we finance smaller businesses to encourage international trading.

This first annual Sustainability Report reports on the EBRD’s work through the prisms of accountability, ethics and integrity, environmental protection, dialogue and democracy … all elements of corporate responsibility. These are the elements that have always driven the EBRD’s mission of building prosperity in the region for the long term. But it is the first time we have devoted a report to describing the EBRD’s contributions to sustainability. I look forward to feedback that will help us to make future reports increasingly useful and relevant.

The Bank’s role in addressing climate change has been another priority,

Jean Lemierre President

Introduction The EBRD invests in almost every sector of the economy in 27 countries from central Europe to central Asia. Underlying all of these investments is a commitment to sustainability. This means that the Bank applies sound banking principles to all of our operations and takes account of environmental, social and governance issues when approving new projects.

The EBRD engages in open dialogue with local communities and encourages individuals and non-governmental organisations to comment on project proposals and new Bank strategies.

The Sustainability Report follows on from the Bank’s 2003 Environmental Report. Broader in scope than the previous Report, this new publication addresses every aspect of the Bank’s commitment to sustainable development and corporate responsibility in our investment activities and internal operations. While many of the topics covered here are also reported in other EBRD publications, this Sustainability Report aims to present, in one document, a comprehensive overview of the Bank’s activities related to sustainability.

The EBRD’s investment activities across our region of operations are examined within the Report’s opening chapter, which outlines the control mechanisms and approval processes in place to ensure that the Bank invests responsibly.

The chapter describes how we integrate environmental and social considerations

EBRD SUSTAINABILITY REPORT 2004

into our investments and promote good governance and integrity. It also outlines how we measure the Bank’s sustainability “footprint” and work in partnership to extend the reach of our investment.

The Report focuses in particular on two areas that were at the forefront of much EBRD activity in 2004: helping the poorest countries and addressing climate change. As part of the Bank’s gradual shift further east, the EBRD launched an initiative in 2004 to help some of the poorest countries where we operate.

The Report covers in detail how the Bank is utilising a wide range of programmes to assist these countries.

The issue of climate change is examined through the prism of the Bank’s energy efficiency projects, the development of a new energy policy and new carbon trading opportunities established by the Kyoto Protocol.

The Report ends by outlining the policies that serve as a framework for our investment activity and our commitment to transparency. Examples of our dialogue with stakeholders are provided along with our most recent consultation activities.

One of the areas covered is the Bank’s newest policy for ensuring that local communities are able to express concerns about EBRD projects.

The final chapter provides an overview of the Bank’s internal activities.

These include environmental practices, training programmes and our health and safety regime.

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2004 HIGHLIGHTS

2004 highlights Estonia Latvia Lithuania Belarus Poland Ukraine

Czech Rep. Slovak Rep. Hungary Slovenia Croatia Bosnia & Herzegovina

Moldova Romania

Serbia & Montenegro Bulgaria

Georgia

Albania FYR Macedonia Armenia

Azerbaijan

n 2004 the EBRD invested €4.1 billion in its 27 countries of operations – from central Europe to central Asia – to support the development of sustainable market economies and democracies.

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Central Europe

Early transition countries

Eight countries of central Europe became members of the European Union in May 2004, advancing their transition to self-sustaining market economies and democracies.

In April 2004 the EBRD launched its Early Transition Countries Initiative to increase support for the seven poorest countries where the Bank operates: Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan (see page 34).

South-eastern Europe The EBRD undertook its first carbon trading agreement, helping a Bulgarian company to reduce its emissions and sell the reduction under the terms of the Kyoto Protocol, which came into force in November 2004 (see page 51).

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EBRD participation in the Baku-TbilisiCeyhan (BTC) oil pipeline project in Georgia and Azerbaijan involved extensive consultation with local communities regarding the environmental and social impact of the project (see page 12).

Russia

Kazakhstan

Kyrgyz Rep. Uzbekistan Turkmenistan Tajikistan

Western CIS

Other developments

The final phase of work began in December 2004 on stabilising the shelter around the Chernobyl nuclear reactor using funding from the Chernobyl Shelter Fund, which is financed by donors and managed by the EBRD (see page 30).

The EBRD invested €377 million in municipal infrastructure, energy efficiency and clean-up operations in 2004, representing 9 per cent of the Bank’s total investment for the year. This generated additional environmental investment of €1.5 billion from project sponsors.

Russia

The EBRD began to prepare a new energy policy by holding a series of consultation workshops in London, Moscow and Sofia in January 2005 (see page 47).

The EBRD signed its largest-ever energy efficiency project – a €73 million loan to the Togliatti Azot ammonia production plant to fund the modernisation of the company and a reduction in energy consumption (see page 49).

Eight environmental projects in northwest Russia were earmarked for funding in 2004 through the EBRD-managed Northern Dimension Environmental Partnership Fund, which has received close to €200 million from the donor community (see page 27).

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In 2004, EBRD staff conducted 83 environmental/social due diligence and monitoring trips to 63 projects in 21 countries.

A new municipal and environmental infrastructure policy was approved by the EBRD at the end of 2004 (see page 17).

The EBRD launched the Independent Recourse Mechanism (IRM) in July 2004, giving local communities a procedure for raising concerns about Bank-financed projects (see page 57).

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PART 01: INVESTING RESPONSIBLY

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Investing responsibly n 2004 the EBRD invested ₏4.1 billion in 129 projects across a variety of sectors in 27 countries. This is where the Bank’s greatest contribution to sustainability lies. By maximising the environmental and social benefits of EBRD-financed projects based on sound banking principles, we can help to achieve real, positive change.

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The Bank’s Environmental Policy establishes four strategic approaches for implementing our commitment to sustainability in all the Bank’s activities.

The policy commits the Bank to: • fully integrating environmental and specific social considerations into the project cycle and ensuring that each project considered for financing undergoes environmental and social appraisal • promoting environmentally oriented investments across a variety of sectors and projects to achieve resource efficiency, cleaner production processes, biodiversity and best practice in environmental management • financing projects with primarily environmental objectives, such as water and waste water management, energy efficiency and renewable energy, and urban transport • working in partnership with other institutions to address regional and global environmental issues.

Since its revision in 2003 the policy also includes a social dimension ensuring that we consider the impact of Bank-financed projects on the people and local communities where we operate. The policy covers not only ecological impacts, but also working conditions (health and safety, harmful child labour, forced labour, and discriminatory practices) as well as community impacts.

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In addition, Article 1 of the Agreement Establishing the Bank requires all of the Bank’s countries of operations to promote the development of democracy and market economies. In cases where the EBRD is dissatisfied with progress, the Bank will severely limit its activities in that country and call on the government to undertake reforms.

Sustainability management

Ensuring good governance and sound management

As Chief of Staff of the Bank, the President is responsible for the organisation, appointment and dismissal of staff in accordance with regulations adopted by the Board of Directors and conducts, under the direction of the Board, the business of the Bank.

The Environmental Policy and all other EBRD policies, country strategies and the Bank’s budget are considered and approved at Board level.

Promoting democracy, human rights and market economics Throughout our countries of operations the EBRD remains committed to promoting democracy and market economies. Each new country strategy approved by the Bank includes an assessment of the country’s compliance with Article 1 and with internationally recognised civil and political human rights.

The Bank is concerned about the lack of progress in democratic and economic reform in certain countries. As a result, the Bank is limiting operations in Belarus and Turkmenistan to financing small business in the private sector and is supporting improvements to the investment climate through dialogue at the government level. Because of insufficient progress in Uzbekistan, including ongoing concerns about human rights violations, the Bank is financing only private sector activities and public sector projects with a cross-border dimension or a clear benefit to the Uzbek people.

While all powers of the EBRD are vested in the Board of Governors, the Bank has a resident full-time Board of Directors that has been delegated responsibility for the direction of the general operations of the Bank. The President sits as the Chair of the Board of Directors but may vote only if a deciding vote is required.

In addition, all projects considered for EBRD financing require Board approval. The project documentation presented to the Board includes a summary of the environmental and social issues associated with the project and how these will be addressed and mitigated to ensure that the objectives of the Environmental Policy are achieved.

Responsibility for the implementation of the Bank’s mandate lies with the Executive Committee comprising: the President; the Chief Economist; the First Vice President, Banking; the General Counsel; the Secretary General; the Vice President, Finance; the Vice President, Human Resources and Administration; and the Vice President, Risk Management. Prime responsibility for environmental matters lies with the Risk Management Vice Presidency and its Environment Department.

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The Vice President, Human Resources and Administration, is primarily responsible for health and safety aspects relating to bank staff, human resources management and the management of the Bank’s premises and transport.

Senior management within the Banking Vice Presidency ensure that environmental issues are taken into consideration in project preparation and implementation and in the preparation of country strategies and sector policies.

Quality control mechanisms A key element of good governance is the need to ensure that independent mechanisms exist to verify that the Bank’s operational policies, procedures and other requirements are being met

by Bank staff. Secondly, it is important to evaluate the Bank’s performance against its mandate. Apart from periodic overview of various aspects of the Bank’s activities by the Board of Directors, the Bank has three in-built mechanisms to provide additional checks and balances: • Internal Audit Department conducts reviews to evaluate the extent to which the Bank complies with its policies and other operational requirements.

• Chief Compliance Officer (CCO) holds ultimate responsibility for all integrity issues, both project-related and within the Bank. The CCO investigates circumstances where Bank staff may not be complying with procedural requirements and the Bank’s Code of Conduct. The CCO also plays a key role in the Bank’s new Independent Recourse Mechanism (see page 57).

• Project Evaluation Department evaluates projects on completion in a comprehensive manner which includes their environmental impact and the environmental

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performance of the Bank and its client in terms of addressing environmental issues (see page 13).

Measuring the EBRD’s sustainability footprint One of the challenges for the EBRD is to find key performance indicators to measure how the Bank implements its Environmental Policy commitments and to assess the environmental and social impact of the projects we finance.

In this Sustainability Report, we have been guided by the approach recommended for financial institutions by the Global Reporting Initiative (GRI) and pioneered by a number of commercial financial service providers.

This approach involves developing a set of indicators for the systems and processes used to assess and monitor environmental and social issues associated with our investments (see table below).

For example, it records how many project monitoring visits were undertaken and

how many staff received environmental training. A second set of indicators relates to the Bank’s portfolio of investments. For example, it measures the proportion of EBRD finance devoted to environmental/social improvements, and the types of financing available that deliver significant environmental or social benefits.

In addition, the Bank is developing a set of performance indicators that it can use to measure the actual environmental and social change ‘on the ground’ as a result of our investments. One of the most important indicators is the amount of greenhouse gases (GHG) associated with our projects.

The EBRD started assessing significant project-related GHG emissions in 2002, and the 2004 results are included in this report, together with comparative data for previous years. In addition, we are in the process of exploring other indicators that might be used to complement the GHG data. Some of these might be sector specific.

For example, this could include the number of people newly connected to clean water and sewerage systems.

Key performance indicators This report includes the following indicators of the EBRD’s performance: Management/ process indicators • appraisal process • monitoring process, including monitoring visits • staff training on the Bank’s Environmental Policy • performance rating of EBRD-financed projects • disclosure and consultation process

Portfolio and environmental change indicators • sector breakdown of portfolio • environmental expenditure • proportion of projects with high environmental benefits • proportion of projects with high social benefits • greenhouse gas emissions • environmental change rating

Appraising and monitoring EBRD projects Sustainability considerations are fundamental to the EBRD’s entire business cycle. Project appraisal and monitoring systematically cover the environmental and social issues stated in the Bank’s Environmental Policy and take full account of integrity issues, such as corporate governance, bribery and corruption.

Project appraisal All potential EBRD projects are reviewed by the Bank’s Operations Committee, which is chaired by the First Vice President, Banking. The Committee comprises: the Vice President and Director of Risk Management; the Vice President, Finance; the General Counsel; the Chief Economist; and a Business Group Director from Banking.

The Committee meets weekly and the agenda is prepared by the Secretariat.

Prior to discussion of project proposals, the Secretariat provides a preliminary risk rating and comments from all departments involved in project appraisal. It also prepares questions to guide the discussion at the meeting.

Other departments represented in the Committee also prepare briefing notes which focus on issues relating to their areas of responsibility.

The Operations Committee approval process is normally based on two reviews (a Concept Review and a Final Review) before a project is submitted to the Board of Directors for approval. In 2004 the Committee reviewed approximately 250 new project proposals.

EBRD SUSTAINABILITY REPORT 2004

The purpose of the Concept Review is to ensure that the project complies with the operating principles and policies of the Bank and is consistent with the relevant country strategy and sector policy.

At Final Review, the Committee approves the detailed structure of the project and decides whether it is ready to be submitted to the Board for approval.

The Committee also ensures that specific issues previously identified have been adequately addressed. Final Review takes place after due diligence has been completed (see below) and once a summary of terms have been agreed with the client but before the preparation of detailed legal documentation.

After a project has been Board approved and signed, with financing fully or partially disbursed, the Committee remains involved by approving material changes to the project – for example, an exit from an equity position. In 2004, the Committee approved approximately 250 material changes to projects.

Focus on integrity Integrity is fundamental to the EBRD’s operations as the Bank wishes to demonstrate the highest standards in the way we do business.

Ethical behaviour and integrity The EBRD follows standard procedures to review the shareholders, corporate governance and procurement processes of a client company before approving financing for a project. We also review the client’s audited financial statements based on best practice. We pay particular attention to identifying the ultimate beneficiaries of any company seeking to receive Bank finance.

Integrity investigations involve identifying suspicious or unethical behaviour by the client, its management or shareholders.

We carry out a legal check to evaluate a client’s status, assets and liabilities.

Ultimate responsibility for all integrity issues rests with the Bank’s Chief Compliance Officer (CCO). In 2004 additional resources were provided to enhance the effectiveness of the CCO office.

Integrity and money-laundering issues are an integral part of project appraisal and due diligence. In its appraisal procedures, the Bank has established compulsory check lists to be filed by the Project Team prior to submission to the Operations Committee. Documents submitted to the Committee and the Board of Directors for final approval include a specific section on integrity and money laundering.

Money laundering and terrorist financing The EBRD is committed to combating money laundering and terrorist financing.

Before providing any funds, the Bank confirms that prospective clients are not on the lists prepared by the United Nations (UN) Security Council of those suspected of supporting terrorist activities.

The Bank refuses financing to anyone who, according to UN Security Council committees, may be supporting terrorist activities. The Bank does not finance contracts awarded to such people for the supply of goods, works or services on Bank-financed projects. We also closely follow the work of the Financial Action Task Force, the international body that oversees the fight against money laundering and the financing of terrorists.

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PART 01: INVESTING RESPONSIBLY

The Bank regularly organises anti-money laundering and counter-terrorist financing seminars for staff members. Furthermore, staff appointed to a supervisory board of a company in which the EBRD has an equity stake receive special training covering corporate governance and money-laundering issues. Via active participation at board level, the EBRD nominee director makes use of this expertise in the best interests of the company. All EBRD project-financing staff will attend a new anti-money laundering training course in 2005, designed in cooperation with an external consultancy firm.

To promote international anti-money laundering requirements to clients, the Bank provides technical cooperation funding or independent consultants to help clients improve their internal anti-money laundering procedures.

A specific training initiative to raise awareness of the importance of a proper legal framework for anti-money laundering and counter-terrorist financing and to help local financial institutions review and improve their policies has been designed with the support of the Swiss government and the European Community. A consultancy firm has been appointed to deliver anti-money laundering training seminars in 15 of the Bank’s countries of operations.

Corruption In 2004 the EBRD increased its cooperation with other international financial institutions (IFIs) in the fight against corruption. On the first anniversary of the signing of the United Nations Convention against Corruption, a meeting was held in Washington D.C.

in December 2004 between the African Development Bank, the Asian Development Bank, the EBRD, the InterAmerican Development Bank and the World Bank. The participants agreed to reaffirm the institutions’ shared commitment to fight corruption in our respective activities. The EBRD also works closely with our countries of operations to promote institutional reforms that will tackle the problem of corruption in the region.

the promotion and dissemination of the Principles.

In addition, the EBRD is a member of the Steering Committee that developed the Business Principles for Countering Bribery, an initiative facilitated by Transparency International and Social Accountability International.

Following the publication of the Principles in December 2002, the Steering Group is focusing on

The Bank’s Environmental Policy covers not only the ecological aspects of EBRD-financed projects but also worker protection issues and the impact on local communities.

Many EBRD-financed projects are designed specifically to make environmental improvements.

From 2005, the Bank’s Chief Compliance Officer will publish an anti-corruption report, which will broadly follow those published by the World Bank and the Asian Development Bank. It will set out what the EBRD is doing to combat corruption.

Environmental and social appraisal

Environmental categories in 2004 Each EBRD-financed project receives two environmental classifications. The first indicates the type of analysis needed to assess the expected environmental impact of the project. Category A indicates the most sensitive projects. Financial intermediaries are classified simply as FI. Of the projects signed by the EBRD in 2004: • 8 per cent were classified as category A (requiring an environmental impact assessment) • 34 per cent were classified as category B (requiring an environmental analysis) • 20 per cent were classified as category C (requiring comprehensive due diligence but neither of the above) • 38 per cent were classified FI. The second classification indicates whether an environmental audit is needed to assess the environmental performance of an existing facility. Of the projects signed in 2004: • 40 per cent were classified as 1 (requiring an environmental audit as part of the due diligence process).

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We also include environmental conditions in projects where the main objective is to build a new factory or to develop new technology.

appraisal and the results are considered by management and ultimately the Board at each stage of the project approval process.

We incorporate environmental considerations into our sector and country strategies, technical cooperation activities and our work with project sponsors to help improve environmental awareness and economic performance.

Every project undertaken by the Bank is classified according to its likely impact on the environment.

A priority in 2004 was to increase the EBRD’s resources for assessing social issues and to better integrate social appraisal into the overall appraisal process. With support from the UK government, a new position was created in the Environment Department to focus on social issues. The post was filled in February 2005.

A detailed description of the environmental and social appraisal process is contained in the Bank’s Environmental Policy and Environmental Procedures (see www.ebrd.com/enviro).

The environmental and social appraisal is fully integrated into a project’s overall

In accordance with the Environmental Policy, the EBRD implemented a procedure to screen and monitor all investments for adherence to certain core labour standards: forced labour, non-discrimination and child labour standards. We now collect key

The EBRD’s Environment Department A specialist team of 20 professionals ensures that the EBRD takes account of environmental issues in all its activities. The team’s role is to: • appraise EBRD-financed projects and technical assistance projects to ensure they meet Environmental Policy commitments • advise banking teams and project sponsors on public consultation • monitor the implementation of environmental and social requirements for each project, including reporting, site visits and interim audits • initiate investment and technical assistance projects with specific environmental aims

information to identify any risk of not complying with these core labour standards in relation to a project. If the Bank identifies a risk, we ask detailed questions of the sponsor and others to establish the nature of the risk.

The project sponsor must respond detailing how the likelihood of labour violations taking place is being minimised.

EBRD-financed projects are expected to meet applicable provisions of the relevant International Labour Organization (ILO) conventions as well as all applicable national laws and standards on employment.

If necessary, the Bank seeks undertakings about actions that the project sponsor or others must take to meet these requirements and to report periodically on implementation.

In developing the new procedure, the Bank used the services of international labour rights consultants, who continue to advise the Environment Department. We also worked with the ILO and specialists in other IFIs and relevant organisations.

To support implementation, the Bank has put in place due diligence procedures and a range of guidance materials. We have also developed a training module and trained all of the Bank’s Environment Department on labour issues. Training of other Bank departments is scheduled for 2005.

• provide policy and project-related guidance to the Bank on environment, health and safety, and other social issues • train banking teams and other support departments in the implementation of the Environmental Policy.

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Construction of the BTC pipeline

BTC pipeline The EBRD’s decision to provide finance for the Baku-Tbilisi-Ceyhan (BTC) oil pipeline project in February 2004 concluded over 10,000 hours of project preparation, extending over a two-year period, by the Bank’s bankers, lawyers, environmental advisers and NGO Liaison Unit.

The project Statistically, pipelines are the safest way to transport oil. However, regional investment projects of the scale of BTC present complex social and environmental challenges.

The Environmental and Social Impact Assessment (ESIA) detailed every aspect of the design, construction and operation of the project, including its rationale, route selection, design process, construction planning, identification of environmental and social impacts and measures to avoid or reduce the risks.

Why the EBRD is involved In keeping with its aim to promote longterm economic development in Georgia and Azerbaijan, the EBRD wishes to help ensure that the BTC project will benefit local communities in the long term. As well as providing financing for the main investment project along with other lenders, the EBRD and the International Finance Corporation (IFC) helped to develop a Community Investment Programme (CIP) to ensure that local communities benefit from the project.

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The CIP focuses on areas such as community health care, microfinance, improving local infrastructure, agricultural support and energy efficiency.

The Bank’s involvement in this project has also contributed to a very high level of transparency, in terms of environmental and social due diligence and regarding the oil revenues that will flow to the host governments and ultimately benefit local people.

Negotiation and consultation Listening to local opinion was critical.

Environmental concerns about the project related to pipeline safety, oil spill response plans and compensation for damage caused by a potential oil spill. A number of social concerns were also expressed.

These related to land compensation, the political environment, access to information and the disclosure process, monitoring of the project and benefits for local people.

Because of the risks involved and complexity of the project, the EBRD undertook financial, legal, economic and environmental due diligence as well as dialogue with local communities. A series of local public meetings in Azerbaijan, Georgia and Turkey was organised by the EBRD and IFC. The EBRD team surveyed local opinion before each meeting and encouraged as many local people as possible to attend, offering transport as needed. Land compensation, job creation

for local people, the environment and long-term monitoring were the priority issues raised.

Non-governmental organisations, private citizens, private businesses, national and local government representatives, academics, research and environmental institutions and donor agencies took part in stakeholder meetings. Reports of the meetings were distributed locally and copies were made available in the local EBRD and IFC offices, and on the EBRD’s web site. These reports were translated into Azeri, Georgian and Turkish.

Monitoring and moving forward Many challenges remain in spite of the efforts undertaken to date.

The EBRD is committed to monitoring compliance with the commitments that the project sponsor and/or client made on signing the project, particularly those relating to the environmental and social impact of the pipeline. The Bank’s monitoring of the construction activities continue, with site visits by the Bank’s environmental staff accompanying those by independent consultants. The monitoring reports are published on the Caspian Development and Export web site (www.caspiandevelopmentandexport.com).

In response to public demands, the EBRD and IFC have also worked with the project sponsors to introduce additional independent monitoring by non-governmental organisations.

Environmental and social monitoring

Staff training on the Environmental Policy

Evaluation of EBRD activities

Each EBRD project is monitored throughout its life to ensure that environmental standards and components in legal agreements are implemented by the project sponsor.

Monitoring also encompasses the effectiveness of measures taken to reduce negative environmental impact.

The Environment Department allocates an environmental risk rating for monitoring purposes to all EBRD-financed projects under implementation.

While the Bank’s Environment Department has the primary responsibility for environmental and social appraisal, the bankers in charge of a project carry ultimate responsibility for ensuring that all Bank policies, including the Environmental Policy, are met. It is therefore important that banking teams are familiar with the Policy requirements as well as the mechanics of working with the Environment Department on a day-to-day basis. In 2004, the Environment Department ran a series of training courses for bankers on the Environmental Policy. A total of 117 bankers from 11 teams attended the training.

Evaluations of EBRD activities are carried out by the EBRD’s Project Evaluation Department (PED). This is an internal department, which is independent of banking operations. The head of the department liaises with the Chair of the Audit Committee of the Board of Directors, which reviews the department’s annual work plan and selected evaluation reports. PED provides feedback on the performance of EBRD-financed projects, including their impact on the transition process and environmental performance.

High-risk projects are monitored more intensively and more often than those with a lower risk. In 2004, of the 694 projects under implementation, 41 were given high environmental risk ratings. Monitoring stops when the loan has been repaid or when the Bank divests its equity share in a company or if the project is cancelled. The environmental performance of all active projects in the Bank’s portfolio is monitored using the following mechanisms: • review of projects, up to four times a year, by the weekly Portfolio Review Committee • review of annual environmental reports submitted to the Bank by project sponsors • periodic third-party audits of projects in environmentally sensitive sectors • project visits by EBRD staff.

In 2004 EBRD staff conducted 83 environmental/social monitoring trips to 63 projects in 21 countries.

In order to strengthen the independence of PED from banking operations and to enhance the Board of Directors’ accountability, changes were made to its reporting structure in early 2005.

PED is now responsible to, and takes instructions from, the Board of Directors.

Some of the key indicators for transition impact include the degree to which an EBRD-financed project promotes privatisation, develops skills, encourages competition and supports market expansion. Other key aspects include how the project supports institutional reform, improves the functioning of markets, acts as a model for other projects and sets new standards in business conduct and governance.

During 2000-04 PED assessed 247 operations. Of these, 56 per cent achieved a transition impact rating of “good” or “excellent” and a further 21 per cent were assessed as “satisfactory”.

In 2004, 21 of the 41 environmentally high-risk projects were subject to environmental monitoring visits or audits

by Bank staff or independent experts.

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PART 01: INVESTING RESPONSIBLY

Assessments for environmental performance are made against the environmental objectives established for each EBRD project our Environmental Policy and the relevant country and sector strategies. The evaluation considers: • the environmental performance of the Bank and its project sponsors throughout the project. In 2004, 52 projects were evaluated.

The environmental performance of the sponsor and the Bank was rated “excellent” in 12 per cent of cases, “good” in 65 per cent, “satisfactory” in 13 per cent and “marginal” in 2 per cent. One project was rated “unsatisfactory”.

• the environmental change between the start and evaluation of the project.

In 2004 the differences in 19 per cent of projects were rated “substantial” or “outstanding”. “Some” differences were found in 48 per cent of projects, and no difference was found in 25 per cent. One project recorded a “negative” change.

Extractive industries review In 2004 PED published a review of the Bank’s performance in extractive industries. PED’s study rated the EBRD’s overall performance in this sector as “successful”. The Bank

scored well on the efficacy (achievement of objectives) and transition impact of its operations but not as well on efficiency and environmental impact.

Of the Bank’s evaluated projects in this sector, 48 per cent had a “good” or better transition impact rating, while another 39 per cent were rated “satisfactory”. In addition, 57 per cent of the Bank’s projects achieved a “good” rating and 14 per cent an “excellent” rating on environmental performance.

The PED study and management responses are posted on the EBRD web site (www.ebrd.com/projects/eval).

Oil extraction, Azerbaijan

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Maintaining sustainable investment The study recommended that the EBRD update its Natural Resources Policy, which is currently being incorporated into a new comprehensive Energy Policy.

Following the review, the EBRD is improving the promotion of greenhouse gas reductions in stand-alone projects and as part of routine due diligence and reporting.

The EBRD invested in nearly every sector in 2004. Approximately one-third of business volume was in financial institutions, which support local enterprises. Two- thirds of investment was devoted to infrastructure, energy, manufacturing and other sectors, such as agribusiness, property/tourism and telecommunications.

Our annual investment in the energy sector increased from €569 million in 2003 to €772 million in 2004. We also significantly increased our annual business volume in agribusiness to €401 million from €324 million the previous year.

Power and energy utilities study In 2004 PED undertook a review of the Bank’s performance in the power and energy utilities sector. PED’s study rated the EBRD’s overall performance in this sector as “partly successful”.

This rating was largely due to the less than satisfactory performance of power generation projects, which were dominated by state-owned projects in early transition countries. In contrast, transmission and distribution projects achieved significantly better results.

For the sector as a whole, the Bank scored “good-satisfactory” for transition impact and “good” for environmental impact, but “satisfactorymarginal” for both efficacy (achievement of policy objectives) and efficiency (sound banking). Of the Bank’s projects, 47 per cent had a “good” or better impact on the transition process while another 38 per cent were rated “satisfactory”. In addition, 63 per cent achieved a “good-satisfactory” rating and 10 per cent an “excellent” rating for environmental performance.

EBRD investments 2003-04 2004 € million

2003 € million

Bank equity

197.3

135.3

Bank lending1

858.9

651.3

Equity funds

185.5

68.5

Non-bank financial institutions

173.9

294.6

71.8

82.9

Energy efficiency

60.8

18.4

Natural resources

439.6

237.6

Power and energy

271.6

313.1

96.2

206.1

405.5

529.2

Agribusiness

400.6

324.2

Manufacturing

498.3

516.1

Property and tourism

210.3

141.3

Telecommunications

262.8

202.4

Financial institutions

Small business finance2 Energy

Infrastructure Municipal infrastructure Transport Other sectors

Total

4,133

3,721

1 A total of €247 million of bank lending was devoted to small and medium-sized businesses in 2004,

up from €143 million in 2003.

2 Small business finance comprises investments in micro-finance banks and micro-finance programmes,

such as the Russia Small Business Fund and the US/EBRD SME Finance Facility.

EBRD SUSTAINABILITY REPORT 2004

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PART 01: INVESTING RESPONSIBLY

Environmental expenditure 2003-04 EBRD investment in 2004

Environmental financing mobilised from project sponsors in 2004

EBRD investment in 2003

Environmental financing mobilised from project sponsors in 2003

Environmental projects involving municipal infrastructure, energy efficiency and clean-up operations

€377 million

€1.5 billion

€413 million

€1.9 billion

Environmental improvements in other sectors, such as manufacturing and agribusiness

€71 million

€174 million

€234 million

€48 million

Breakdown of total environmental expenditure in non-environmental sectors 2003-04 2004 €million

2003 € million

Air emissions/greenhouse gas reduction

13.1

136.9

Energy efficiency

74.6

74.3

Waste-water management

38.2

31.6

Solid waste management

25.0

3.0

Health and safety

46.7

6.3

Environmental management system

10.8

8.5

Clean-up of contaminated soil and groundwater

0.4

2.6

Training

2.6

0.0

33.4

19.1

244.8

282.3

Other Total

Environmental expenditure In total, the EBRD invested €377 million in municipal infrastructure, energy efficiency and clean-up operations in 2004, representing 9 per cent of the Bank’s total investment for the year.

This generated additional environmental investment of €1.5 billion from project sponsors. The Bank provided a further €71 million to cover environmental

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expenditure associated with projects in other sectors, such as manufacturing, heavy industry and agribusiness.

This mobilised a further €174 million of environmental investment. The Bank is looking to improve the collection of expenditure data in 2005 – in particular, by adding data on social expenditure, such as investments in community development programmes or resettlement action plans.

Water treatment, Romania

Improving waste-water treatment in Bacau, eastern Romania The EBRD’s €13 million loan to RAGC Bacau (the water utility company of the city of Bacau) is helping to provide clean drinking water for the city’s 190,000 residents.

The finance is being used to modernise equipment and facilities to EU standards, in particular to repair and develop the sewer network, upgrade the drinking water treatment plant and extend metering and monitoring in the water supply network. Improving the quality and reliability of the city’s drinking water and upgrading waste-water treatment reduces the threat to public health, while

reducing the leakages is helping to conserve water resources.

The EBRD’s loan is supported by a €39 million grant from the European Union’s ISPA programme (which specifically assists countries in preparation for EU accession).

The EBRD loan is being provided under the Municipal Environmental Loan Facility (MELF), set up in 2000 to provide co-financing with the ISPA programme for waste-water projects in Romania. The government of the Netherlands provided €2.2 million in technical cooperation funds to help prepare the overall facility and is providing a further €0.8 million to support implementation.

Municipal and environmental infrastructure

emission levels, better fuel efficiency, better air quality and less noise pollution.

In many of the EBRD’s countries of operations, municipal infrastructure has been neglected for many years and is now relatively dilapidated.

The environmental consequences are significant as ageing urban buses and trams pump out pollutants while heating and water supply systems are inefficient and costly to run and maintain. Improving the local infrastructure and quality of services is important to enhance the quality of life for residents.

The Bank’s financing objective for the sector is to promote efficient, high-quality services and cost-effective environmental improvements. We also focus on financial sustainability, helping countries to develop better cost-recovery systems and greater private sector participation.

Many of the environmental benefits of projects in this sector derive from raising standards to meet national and European Union (EU) standards.

Investment in urban transport, for example, is geared to achieving lower

EBRD SUSTAINABILITY REPORT 2004

At the end of 2004, the Bank’s municipal and environmental infrastructure (MEI) portfolio comprised 66 projects with commitments totalling €1.32 billion.

The EU has provided grants of €554 million to co-finance EBRD projects.

EU funding usually helps client companies to meet EU environmental directives while EBRD expertise and finance helps to improve the operational and financial performance of the company.

A new Bank policy for the sector The EBRD approved a new municipal and environmental infrastructure policy at the end of 2004, with three key themes.

Decentralisation: shifting service responsibilities from central to local or regional levels. Centrally controlled planning has left many responsibilities concentrated at the national level, with decentralisation only taking place in the last decade. Decentralisation is seen as key to improving the quality, cost and environmental efficiency of local infrastructure and services.

Commercialisation: increasing commercial behaviour and financial discipline in the operating companies that provide local services. Commercialisation can be achieved either under public or private ownership. However, greater private

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PART 01: INVESTING RESPONSIBLY

MEI projects signed in 2004 Country

Sub-sector

Project description

EBRD finance

Poland

Municipalities/ utility companies

Credit line for on-lending to small and medium-sized municipalities and their utility companies

€10 million

Slovak Republic

Municipalities/ utility companies

Credit line for on-lending to small and medium-sized municipalities and their utility companies

€8 million

Croatia

Urban transport

Purchase of 40 new buses for Dubrovnik

€7.5 million

Lithuania

Urban transport

Purchase of 50 new buses for Kaunas and advice on restructuring the sector

€10 million

Poland

Urban transport

Purchase of up to 35 new buses and extension of tram tracks in Gdansk

€6.6 million

sector participation is one way to introduce best practice, good management and use of resources, and greater responsiveness to local conditions.

Environmental improvement: financing projects that develop the infrastructure and technology. This is essential for reducing energy losses and pollutants and conserving energy use, while building sustainable institutional structures for meeting, maintaining and enforcing higher environmental standards.

MEI projects signed in 2004

PAGE

Affordability of utility services

Russia

Urban transport

Purchase of buses and upgrade of facilities in Togliatti, south-eastern Russia

€9.8 million

Romania

Waste water

Upgrade of waste-water treatment plants in Bacau, Oradea and Sibiu

€18 million

Russia

Waste water

Upgrade of water and waste-water infrastructure in Syktyvkar, northern Russia

€9.2 million

Serbia and Montenegro

Waste water

Modernisation of waste-water treatment plant in Subotica

€9 million

Tajikistan

Water supply

Improvement of water wells, upgrade of distribution network and installation of new equipment in Khujand

€0.9 million

Uzbekistan

Water supply

Replacement of equipment and construction of reservoir for Tashkent

€7.3 million

18

In 2004 the Bank invested €96 million in a total of 11 municipal infrastructure transactions in nine countries (see table left).

Maintaining the affordability of utility services is a major challenge when reforming municipal infrastructure.

The Bank uses a standard affordability analysis to assess the probable impact of tariff changes following EBRD investment in municipal services across our countries of operations. Relevant measures, such as targeted assistance programmes, are subsequently incorporated into the project structure to alleviate the expected impact on low-income households.

Further information on affordability in the context of the poorest countries where the Bank operates is provided on page 42.

Energy efficiency

Calculating GHG emissions

For a detailed account of the Bank’s energy efficiency activities, see page 48.

Calculating GHG emissions from fuel consumption rates or product output rates is the final, and easiest, part of a GHG assessment. The more controversial aspects concern the scope of the assessment and deciding who is responsible for the emissions involved.

Greenhouse gases For all industrial projects that the EBRD finances, we make an assessment of current and future levels of greenhouse gas (GHG) emissions (before and after investment). We also include any significant process-related GHG emissions that occur in addition to those relating to energy use.

The emissions are calculated for the project as a whole rather than the EBRD-financed component only.

For projects involving the refurbishment of existing facilities, our investment is expected to lead to emission reductions through plant modernisation and energy efficiency improvements.

Wherever possible, projects involving the construction of new facilities are designed to ensure that greenhouse gas emissions are in line with current best practice.

Emission categories Emission levels are measured as the number of tonnes of carbon dioxide emitted per year and expressed as Mtpa (million tonnes per annum) or Ktpa (thousand tonnes per annum).

• High

more than 1 Mtpa

• Medium-High

100 Ktpa –1 Mtpa

• Medium-Low

20–100 Ktpa

• Low

less than 20 Ktpa

EBRD SUSTAINABILITY REPORT 2004

Defining the boundary of the project within which emission changes are counted is a crucial first step. In the Bank’s annual assessment, project boundaries are usually taken as the physical boundaries of the facilities concerned, but certain emissions outside the boundary, such as those associated with the generation of imported electricity, are always included. The general rule is to include those external emissions that arise as a direct result of the operation of the project facilities and which would cease to occur in the absence of the project.

The same conservative approach is taken regarding emission offsets.

Where a construction or refurbishment project includes the closure of older, less efficient production units, the cessation of emissions from closed units will offset the increased emissions from new or refurbished units, sometimes to the extent that the project gives rise to an overall decrease in emissions. While market forces will inevitably lead to such closures, either at the plant in question or elsewhere, the emission offsets are only counted if the closure of specific units is certain to occur as a result of the Bank’s financing.

As regards to who should take responsibility for emissions associated with fossil fuel combustion, a logical, and generally adopted, approach is to attribute emissions to the party burning the fuel. An accepted departure from this practice in project assessment is to attribute power station emissions to the electricity end-user, on the grounds that power is only generated to the extent that demand for it exists. But where the EBRD is investing in a power plant project, the Bank attributes the fuel combustion emissions to that power project. This element of “double counting” in the Bank’s methodology is considered acceptable as it highlights incentives to reduce emissions where they can best be made.

In the case of investments in the oil and gas sector, the Bank follows the United Nations Framework Convention on Climate Change (UNFCCC) approach of accounting for GHG emissions as a result of production and transport of oil and gas but not of its consumption. Only the end-user has the power and responsibility to determine how efficiently the fuel will be burnt and, ultimately, what the demand for fossil fuels will be. The responsibility of the other parties is to ensure that they deliver the product demanded by the end-user with the highest efficiency and lowest environmental impact possible.

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PART 01: INVESTING RESPONSIBLY

Project analysis in 2004 Of the 84 industrial projects signed by the EBRD in 2004, 27 were assessed as having significant levels of emissions.

These projects were mainly in power and energy, natural resources, steel, glass and other industrial sectors (see table right).

Maritza East II, Bulgaria

“What the GHG assessment doesn’t tell you” In viewing the Bank’s GHG assessment, it is easy to forget that increasing or reducing GHG emissions is only one of the ways in which the Bank may influence the environmental footprint of a project in which it invests.

The Integrated Pollution Prevention and Control Directive (IPPC) calls for the best overall protection of the environment, recognising that alleviation of one impact may exacerbate another. Striking the right balance to achieve the best overall solution depends a lot on where a project is and what dominates local environmental and economic concerns.

For example, the Maritza East II project, signed by the Bank in 2004, involves the installation of flue gas desulphurisation (FGD) at Maritza East II power plant in Bulgaria. It is a good example of the type of project that may lead to a slight increase in GHG emissions and in GHG emissions per unit output, but which in other respects yields major environmental improvement.

The Bulgarian economy relies heavily on its indigenous supplies of lignite as a power plant fuel, particularly in the context of the impending closure of some nuclear power plant units. Its high sulphur content poses significant local air pollution problems and the Bank has been investing in the Maritza complex over several years to modernise the plants and reduce their pollutant emissions.

FGD installation at Maritza East II will reduce sulphur dioxide (SO2) emissions by over 90 per cent and enable the plant to meet the levels of pollution control needed for Bulgaria’s prospective EU membership. Unfortunately, the SO2 removal process itself (reaction of SO2 with a limestone slurry) involves the release of CO2 from the limestone reagent. Moreover, the energy used to run the FGD plant will slightly reduce the output efficiency of the power plant. Other improvements may well lead to compensating efficiency increases, but the process emissions are an unavoidable side effect of what represents a major environmental improvement for Maritza.

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The total direct investments signed by the EBRD in 2004 will lead to a net increase in GHG emissions of approximately 4 Mt CO2 pa (just under one-fifth of the before-investment total).

Of the 4 Mt CO2 pa increase, 3.4 Mt CO2 pa arises from new facilities and a further 1.4 Mt CO2 pa from refurbished or expanded facilities. These emissions are offset by reductions of 0.7 Mt CO2 pa from energy efficiency investment projects. Emissions from the 25 low emission projects (below 20 kt CO2 pa and considered individually as non-significant) have not been fully assessed. They are estimated to involve additional total GHG emissions of less than 0.3 Mtpa.

Breakdown of the 27 projects assessed as having significant levels of emissions

Projects with high social benefits

Number of projects

Project impact

Reason for change

Six

0.7 Mtpa reduction

Energy efficiency improvements in steel, chemical and power generation plants and loss reductions in power transmission lines.

Nine

3.4 Mtpa increase

Acquisition or construction of new facilities, leading to new GHG emissions, mostly from projects in the oil and gas, power generation and wood pulp sectors.

Seven

1.4 Mtpa total increase but fall in per unit output

Expansion and/or modernisation of existing facilities, leading to higher emissions in each project but efficiency savings will lower per unit output in three of the projects.

Five

No significant changes

Investments do not involve significant changes to operations.

EBRD projects with significant GHG emissions 2003 -2004 2004

2003

Industrial projects signed

84

90

Projects with significant emissions

27

20

Before-investment emissions (Mt CO2 pa)

19.6

9.5

After-investment emissions (Mt CO2 pa)

23.6

11.1

4.0

1.6

Project net impact (Mt CO2 pa)

EBRD SUSTAINABILITY REPORT 2004

The EBRD has long supported small businesses because they contribute fundamentally to the Bank’s mandate of promoting market economies and democracies. It is in smaller businesses that entrepreneurship, competition and innovation will thrive, technology will advance and jobs will be created.

The EBRD has a variety of approaches for supporting small business throughout the Bank’s countries of operations.

One of our main methods is to channel financing through local banks which is on-lent to entrepreneurs. Through the donor-supported Micro and Small Business Programme, EBRD financing is provided through 55 local banks that disburse loans through over 900 branches in 19 countries. In 2004 some 329,000 loans totalling €1.4 billion were disbursed to small businesses.

Other tools used by the EBRD to help small businesses include the Direct Investment Facility, the Direct Lending Facility, the Trade Facilitation Programme and the TurnAround Management Programme. For more information on these forms of financing and associated social benefits, see page 36.

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PART 01: INVESTING RESPONSIBLY

Promoting sustainable financial markets One of the EBRD’s key objectives is to support the development and creation of a financial sector that is based on sound banking principles, provides high-quality services to the corporate and retail sectors of the economy and operates on principles of transparency and good corporate governance. In addition, financial institution (FI) projects are the most efficient way for the Bank to provide much-needed financing for micro and small businesses.

In 2004, FI projects accounted for 33 per cent of the EBRD’s portfolio and active projects numbered 241. FIs supported by the Bank include a range of financial service providers, such as local banks, insurance and leasing companies, private equity funds, mortgage institutions and pension funds using a variety of financial instruments, such as equity investments, loans, credit lines and trade finance.

All FI projects are subject to the Bank’s environmental procedures for FIs, which integrate environmental risk management into their lending and investment operations. Specific requirements include: • adopting environmental due diligence procedures satisfactory to the Bank, based on the model procedures the Bank has developed for different types of FIs • annual environmental reporting to the EBRD • adhering to the Bank’s FI Environmental Exclusion and Referral list

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• requiring clients to comply at a minimum with the host country’s health, safety, labour and environmental regulations and standards • appointing a member of management with overall responsibility for environmental matters.

Conducting effective environmental risk management is a challenge for many FIs, particularly in countries with weaker environmental law enforcement and lower levels of general environmental awareness. The EBRD recognises these challenges, and has responded by establishing a major environmental training programme for FIs across the Bank’s countries of operations. The programme works in two ways: by providing training to individual FIs and by organising workshops where groups of similar FIs can be trained together.

Individual FI training involves working with an FI’s management to embed environmental risk management procedures into their existing credit appraisal and decision-making procedures, training their credit staff to perform environmental due diligence, monitoring and reporting, and providing materials to support the implementation of the procedures. Through case studies, the training focuses on health, safety and environmental risks as well as new opportunities, such as cleaner production and energy efficiency improvements for the FI’s client companies. Since the programme started in 1995, it has provided environmental training to 193 FIs. Donor support has been essential for the programme. To date, the European Community has been the primary contributor with total funding of €5.6 million committed to date.

Complementing the training workshops, the EBRD has developed with EU support an electronic manual, Environmental Risk Management for Financial Institutions.

This manual contains all of the Bank’s FI environmental procedures, guidance materials and other practical tools to assist FIs with the implementation of an environmental management system in line with good practice and EBRD requirements. The manual is available on CD-ROM and is due to be published on the EBRD’s web site in 2005.

FI activities in 2004 • FI environmental monitoring The Bank’s Environment Department staff made monitoring visits to financial intermediaries and their clients in Romania, Bulgaria and Croatia. The FIs visited were found to comply with the Bank’s environmental requirements.

• Electronic manual The Bank updated its Environmental Risk Management for Financial Institutions manual, and added three new language versions (Bulgarian, Latvian and Lithuanian) to the five current languages (Czech, English, Polish, Romanian and Russian).

• Training workshops In addition to European Communityfunded environmental training for six FIs, the Bank’s Environment Department staff conducted a series of one-day country environmental training workshops for small groups of FIs attended by their key credit managers, and a one-day workshop on environmental risk management for strategic investors.

Environmental training workshops

Risk management workshop for strategic investors

Training workshops were undertaken with financial intermediaries in Bosnia and Herzegovina, Romania, Russia and Azerbaijan. The training was aimed at middle or senior managers who have overall responsibility for environmental risk management and implementation of the Bank’s environmental procedures. Similar workshops will be held in Ukraine and Kazakhstan in 2005.

When working with local financial institutions, the EBRD often co-invests with large Western financial service providers. We expect these strategic partners to play a key role in ensuring that their network banks in the region follow environmental procedures that meet the requirements of both the Bank and the partner.

To assist strategic partners in rolling out mutually acceptable procedures within local subsidiaries co-financed by the EBRD, the Bank held its first environmental risk management workshop for strategic partners in 2004.

Representatives from HVB Group, Bank Austria Creditanstalt, International Moscow Bank, KBC, Banka Intesa/Privredna Banka Zagreb, Société Générale and Raiffeisen International attended the workshop.

Microfinance bank, Russia

EBRD SUSTAINABILITY REPORT 2004

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PART 01: INVESTING RESPONSIBLY

Working from practical case studies, the objective of the workshop was to explain the Bank’s approach to environmental management in financial intermediaries, introduce the Bank’s electronic risk management manual, and discuss with investors how this approach tallies with their own environmental procedures.

Workshop attendees are subsequently expected to train employees in their respective subsidiaries. The workshop also provided a good basis for further dialogue between the partners’ environmental/sustainability managers and the EBRD’s environmental experts.

A second workshop will be held in 2005.

Collaborating with the UNEP FI The United Nations Environment Programme Finance Initiative (UNEP FI) was launched in 1991 to advance the consideration of environmental issues by financial markets. There are roughly 230 signatories to its ‘Statement on Environment and Sustainable Development’.

In May 2004 a Central and Eastern European Task Force (CEETF) within UNEP FI was established. The mission of the CEETF is to support and expand sustainable finance in central and eastern Europe by raising awareness of the link between the environment and finance. The Task Force consists of a core group of financial institutions (the EBRD, HVB Group, Komercni Banka, Bank Austria Creditanstalt, Emporiki Bank and Raiffeisen Zentralbank Austria AG) and associate members, such as non-governmental organisations, intergovernmental organisations and academics.

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The EBRD has had a long collaboration with the UNEP FI. The Bank officially signed the Statement in January 2005, making the EBRD the first multilateral financial institution to do so. As the current Chair of the CEETF, the EBRD is at the forefront of our region in terms of linking the environment and the financial sector. We encourage and assist the Bank’s partner FIs to become signatories to the UNEP FI Statement.

Working in partnership Many of the environmental challenges of the region – climate change, nuclear safety, pollution of international water resources and biodiversity conservation – are trans-boundary and global in nature.

The EBRD is committed to contributing to the various international initiatives that aim to address these issues, and to supporting through its investments the implementation of global and regional agreements related to the environment and sustainable development. Examples include the framework conventions on climate change and biodiversity, as well as the Arhus Convention on public participation and the Espoo Convention on Environmental Impact Assessment in a Transboundary Context.

Many of the Bank’s environmental activities are undertaken in partnership with other international bodies, such as the Global Environment Facility (GEF), the Northern Dimension Environmental Partnership (NDEP) and the Environment for Europe Process and its Project Preparation Committee (PPC). In the area of climate change, the Bank has

a specific mandate to support with shareholder governments the implementation of the Kyoto Protocol (see page 50).

Supporting the Espoo Convention The Convention on Environmental Impact Assessment in a Transboundary Context (the “Espoo Convention”) provides a legal framework between countries for assessing the environmental impact of projects across borders. Under its Environmental Policy, the EBRD has recognised the importance of this convention.

The Espoo Convention came into force in 1997 and has been ratified by 33 countries plus the European Union.

It sets out obligations to assess the impact of certain activities at an early stage of project planning. It also sets out a general procedure for signatory countries to notify and consult each other on all major projects under consideration that are likely to have a significant adverse environmental impact across borders.

The EBRD is committed to supporting the objectives of the Espoo Convention.

If a project has a transboundary impact, the notification and consultation guidelines established by the parties to the convention must be taken into account and followed in principle.

We work with project sponsors to find practical solutions to incorporate Espoo principles in the consultation process, recognising that the convention obligations are between governments and that affected countries may not even be parties to the convention.

In November 2003, guidelines were agreed for communicating between countries on environmental impact assessments, particularly for off-shore oil projects that may have the potential for cross-boundary impacts. The agreement is particularly important because it applies regardless of whether or not the countries involved have signed or ratified the convention. The EBRD worked on this initiative with the United Nations Economic Commission for Europe (UNECE), the United Nations Environment Programme (UNEP), the Caspian Environment Programme (CEP) and the five countries around the Caspian.

In 2004, the implementation of the Caspian Agreement on Regional Guidelines for Implementing the Espoo Convention was initiated. This will be supplemented in 2005 with country workshops for local authorities in each of the bordering states, organised by UNEP and UNECE.

Global Environment Facility The Global Environment Facility (GEF) is an independent financial organisation that acts as a catalyst for improving the global environment. GEF provides project development funds and co-financing for

projects that address global issues, such as climate change, ozone depletion, international waters, land degradation, persistent organic pollutants and biodiversity.

EBRD and GEF co-financing in 2004 The Bank developed two projects with GEF in 2004: • an Environmental Credit Facility in Slovenia for improvements to the Slovenian part of the Danube River Basin (see page 26) • a municipal energy services company in Lodz (see page 26).

Caspian Sea, Azerbaijan

EBRD SUSTAINABILITY REPORT 2004

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PART 01: INVESTING RESPONSIBLY

Investing in energy efficiency in the city of Lodz The EBRD and GEF are co-funding the Lodz Municipal Energy Services Company (ESCO). It is a public-private financing project to implement energy efficiency investments in the municipal buildings in Lodz, Poland.

The new ESCO will implement projects and subsequently be repaid through the cost savings made. GEF funds will be used as a guarantee to protect the ESCO against risks linked to the performance of the municipality. The estimated investment programme totals €22 million and aims to reduce energy consumption by up to 30 per cent.

Desulphurisation unit, Lodz

Helping to clean up the Danube River Basin The EBRD and GEF are co-funding an Environmental Credit Facility in Slovenia to reduce pollution entering the Slovenian part of the Danube River Basin. The Bank is providing up to €45 million to four commercial banks for on-lending to environmental investment projects related to water pollution reduction. GEF is extending US$ 9.9 million of grant funding. (The local banks involved are Volksbank-Ljudska Banka, Bank Austria Creditanstalt, Nova Ljubljanska Banka and Probanka.)

GEF funds are being used to help overcome barriers to investment. They provide grant incentives for private sector companies and small municipalities to invest in environmental projects. The sub-borrowers receive a fee on completion of a project, while participating banks receive compensation for additional administrative costs associated with implementing the targeted credit line. An independent expert assesses each project before the grant funding is paid out. Fifteen sub-projects involving industry and municipalities were disbursed in 2004, with many additional projects in the pipeline.

As well as providing co-finance, GEF supports a technical assistance component operated through the donor-funded TurnAround Management and Business Advisory Services programmes (see page 38). Through these programmes, companies and municipalities may receive additional technical assistance – for example, to help structure investments and other aspects of an environmental project to improve cost effectiveness.

Danube River, Slovenia

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Promoting biodiversity Preserving and protecting biodiversity is essential to managing the environmental impact of projects.

All EBRD-financed projects are expected to include measures to safeguard and, where possible, enhance natural habitats and the biodiversity they support. In addition, the Bank is committed to supporting investments that specifically promote biodiversity.

Activities in 2004 The EBRD has worked with the European Centre for Nature Conservation (ECNC) for a number of years to consider biodiversity concerns in the Bank’s countries of operations.

The Bank and other organisations, including the ECNC, the European Investment Bank and Rabobank, are participating in the framework of the Pan-European Biological and Landscape Diversity Strategy. This considers possible biodiversity financing mechanisms and the establishment of a European Biodiversity Finance Facility.

A European Task Force on Banking, Business and Biodiversity was established and met a number of times in 2004 at the Bank’s headquarters in London. It includes the European Investment Bank, the International Finance Corporation, Rabobank, Deutsche Bank and ECNC.

EBRD SUSTAINABILITY REPORT 2004

The EBRD is a partner with Flora and Fauna International (FFI) in a biodiversity project being funded by the Dutch DOEN Foundation. FFI is working in Hungary and Poland to develop a pipeline of projects requiring loan financing, and which will have a positive impact on biodiversity.

The Bank is acting as prime adviser to the project, including providing access to finance through our Small Business Programme and to advisory services of the donor-funded TurnAround Management Programme (see page 38).

The Bank’s Resident Offices in Hungary and Poland are also providing support to the project. The project is expected to provide case studies that can be used to support the development of a larger biodiversity financing mechanism.

Northern Dimension Environmental Partnership The Northern Dimension Environmental Partnership (NDEP) mobilises investment for priority environmental projects in north-west Russia, such as water supply, solid and waste-water treatment, energy efficiency and nuclear safety.

NDEP is a partnership between the Russian government, the donor community, and international financial institutions. These include the EBRD, the European Investment Bank, the Nordic Investment Bank and the World Bank.

The NDEP steering group identifies priority projects and puts together financing packages, consisting of NDEP grants, IFI loans, bilateral funding and contributions from local banks.

NDEP Support Fund The NDEP Support Fund is managed by the EBRD and supervised by an Assembly of Contributors, which oversees management of the fund, selects projects for financing, and approves work programmes.

At the end of 2004, contributions to the NDEP Support Fund were close to €200 million with roughly three-quarters of the fund earmarked for nuclear safety projects (see page 28).

A challenge for 2005 is to mobilise additional investment as NDEP’s funds to support new projects are scarce.

Additional donor support is needed for NDEP to realise the potential of over €1.8 billion in investments in north-west Russia.

Contributors to the NDEP Support Fund The Assembly of Contributors consists of the European Community, Belgium, Canada, Denmark, Finland, France, Germany, the Netherlands, Norway, Russia, Sweden and the United Kingdom.

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PART 01: INVESTING RESPONSIBLY

EBRD and NDEP activities in 2004 Twelve priority environmental investment projects in north-west Russia were initially identified for NDEP involvement in 2002.

By the end of 2004 eight of these projects had moved forward, at a total project value of over €900 million.

The NDEP Support Fund has committed €44 million in co-financing. The approved projects are: • Archangelsk municipal water services project • Kaliningrad district heating renovation • Komi municipal services improvement programme

• Municipal Environment Investment Programme in Leningrad oblast • Murmansk district heating project • St Petersburg flood protection barrier • St Petersburg northern waste-water treatment plant incinerator (see case study below) • St Petersburg south-west waste-water treatment plant.

As well as the projects already approved, the NDEP Steering Group (working in cooperation with the Russian government and other agencies) has identified a further five priority projects and is preparing proposals for several other environmental projects.

Financing nuclear safety improvements Nuclear safety continues to be a major area of concern for many of the countries where the EBRD operates. A major milestone in 2004 was the closure of the Ignalina 1 nuclear power plant in Lithuania (in accordance with the EU accession agreement and the Framework Agreement with the EBRD).

The EBRD’s decommissioning support programmes progressed well in 2004.

For example, contracts were signed for the construction of interim spent fuel storage facilities in Kozloduy (Bulgaria) and Ignalina (in early 2005).

Energy sector projects such as the upgrade of the Sofia district heating system demonstrated a significant potential for further savings.

Cleaning up sludge disposal in St Petersburg Waste-water sludge contains heavy metals and other potentially toxic substances. St Petersburg’s northern waste-water treatment plant produces about 230,000 cubic metres of sludge every year, which is expected to double by 2010. The sludge is disposed of in a nearby landfill site, which is close to maximum capacity. A new sludge incinerator is a top priority to reduce the environmental risks of transporting large quantities of sludge to landfill sites.

Through the NDEP Support Fund, the EBRD, Nordic Investment Bank and local banks are providing loan financing of €81.7 million to build a new sludge incinerator.

(The first incinerator was built at the central waste-water treatment plant in 1999 and is performing well.) As a result of the funding, the operations of the northern waste-water treatment plant will become more efficient, reducing discharges of untreated or inadequately treated waste water to the Gulf of Finland.

NDEP grant funds of €6.35 million are also being used to finance specialist equipment needed for construction and to develop a maintenance and operation strategy for the incinerator.

Waste incinerator, Russia

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Firm closure commitments are in place for Ignalina 2 (2009), Kozloduy 3 and 4 (2006) and Bohunice 1 and 2 in the Slovak Republic (2006 and 2008).

Nuclear safety projects are funded from contributions to six funds that the Bank manages on behalf of donor governments. At the end of 2004 contributions to the funds were close to €2 billion, boosted by further contributions during the year from the European Community.

The six nuclear safety funds managed by the EBRD are: • the Nuclear Safety Account (NSA)

• three International Decommissioning Support Funds for Bulgaria (Kozloduy), Lithuania (Ignalina) and the Slovak Republic (Bohunice) • the NDEP Nuclear Window.

Each fund is managed by the EBRD and supervised by an Assembly of Contributors, which oversees management of the funds, selects projects to be financed and approves work programmes.

Financing priorities

• improving the safety of first-generation reactors of Soviet design • supporting the closure and decommissioning of high-risk reactors • mitigating the consequences of the Chernobyl accident • ensuring safe and secure storage of spent nuclear fuel and waste • achieving environmental rehabilitation • financing energy and energy efficiency measures to compensate for lost generating capacity.

The projects financed by the funds reflect the priorities of the international community. They include:

• the Chernobyl Shelter Fund (CSF)

Decommissioning nuclear submarines in north-west Russia The former Soviet Union built 250 submarines, warships and icebreakers, containing over 450 naval nuclear reactors. Russia subsequently reduced the size of the nuclear fleet, withdrawing approximately 140 submarines, surface ships, support and maintenance vessels from service in the north-west region of Russia.

This has resulted in significant amounts of spent nuclear fuel and radioactive waste, which has accumulated in poor storage conditions in the region, causing considerable risk to workers, local populations and the environment, including neighbouring countries and the international community.

Russia has requested assistance to plan a strategy and to set priorities for decommissioning the fleet. The international donor community, through the Northern Dimension Environmental Partnership, is assisting the Russian government by developing a Strategic Master Plan and incorporating a Strategic Environmental Assessment as part of the programme.

In accordance with the EBRD’s Environmental Policy, a programme of public consultation was built into the framework of the Strategic Environmental Assessment, including the principles of the UN’s Convention on Transboundary Environmental Impact Assessment and the Convention on Public Participation. The programme will help provide a forum for information flow, feedback from local and international stakeholders, and to develop an ongoing information programme.

Nuclear submarine, Russia

EBRD SUSTAINABILITY REPORT 2004

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PART 01: INVESTING RESPONSIBLY

Project Preparation Committee The Project Preparation Committee (PPC) is a networking mechanism set up to strengthen the link between donors and IFIs in the preparation and financing of environmental and related investment projects. It focuses mainly on eastern Europe, the Caucasus, Central Asia and the non-EU accession countries of southeastern Europe. Its activities include: • project identification, preparation and financing Chernobyl shelter

Nuclear safety activities Stabilising the Chernobyl shelter The shelter around Chernobyl was built around the reactor destroyed in the 1986 accident. It is now being transformed into a stable and environmentally safe system. The complex infrastructure is mostly completed, including radiation containment, health and industrial safety measures and facilities. In December 2004 the final phase of construction work began.

When completed in 2008, an arch-shaped structure (measuring 260 metres wide and more than 100 metres high) will enclose the existing shelter, protect the environment and provide conditions for future nuclear waste management operations over many decades.

Endorsing a safety analysis methodology and findings The first-ever independent review of the safety of a Russian first-generation reactor (Kursk 1) was completed through cooperation between Russian and Western experts. Its methodology and findings have been accepted and applied by both the operators and regulators, and further significant safety gains from applying the methodology are expected. This project concludes the NSA programme for Russia.

Investing in energy efficiency to compensate for lost generating capacity In 2004 donors to the Kozloduy International Decommissioning Support Fund approved €25 million for energy efficiency programmes in Bulgaria.

These include district heating projects, the refurbishment of public and residential buildings, a credit line for private investments in energy efficiency, renewable energy and electricity metering. These and the energy efficiency projects in the current pipeline will represent savings equivalent to 200 MW in installed capacity.

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• coordination, matchmaking and networking • good practice and capacity building.

Activities in 2004 In 2004 the PPC undertook the following activities: • Five PPC officers (located in London, Zagreb and St Petersburg) helped prepare and develop a number of investment projects at the Bank.

These mostly related to water supply and sanitation, waste management, energy efficiency and renewable energy.

• PPC staff helped set up four donor-funded facilities that provide support for project identification and preparation: Clean Development Mechanism (CDM) Project Support (Netherlands); District Heating Support Facility (United Kingdom); Bulgarian Energy Efficiency and Renewable Energy Credit Line (Kozloduy Decommissioning Fund); and Municipal and Environmental Infrastructure Technical Cooperation Framework Contract (Austria).

• A further facility for CDM Project Support for the Early Transition Countries Initiative was established.

• The PPC Project Financing Workshop was developed and piloted in Moscow in July 2004 (as part of its capacity building activities). It aims to assist municipal clients develop project concepts ready for discussion with potential financiers. It will be rolled out on a twice-yearly basis in other locations across the region.

• In October 2004 the second joint meeting of the Environmental Action Plan (EAP) Task Force and the PPC met in Tbilisi, Georgia. During its session on mobilising finance, the PPC presented information on the current flow of finance into the environment sector. It also explored the opportunities and constraints in mobilising finance in the water supply and sanitation, climate change and biodiversity sectors, and highlighted financing gaps in specific projects in Russia and the early transition countries. A workshop on the CDM, held at the same time in Tbilisi, identified the main needs for its implementation in the Caucasus and Central Asia.

Harnessing donor funding

Nearly half of EBRD investment is supported in some way by technical cooperation. The need for it is greater in some countries and sectors than in others depending on the transition stage of the country and the specific needs of the sector.

As well as supporting EBRD-financed projects, TC funding has promoted institutional development and a wide range of support programmes. The donorfunded Legal Transition Programme (LTP), for example, assists governments with the laws and regulations needed to foster business growth and development.

TC funding also promotes the development of skills through training and specialist advice programmes. For more information about all aspects of TC funding, see the Donor Report on our web site (www.ebrd.com/pubs).

Use of TC funds for environment-related activities In 2004 the TC Funds Programme provided a total of €20.4 million to support environment-related activities connected with EBRD-financed projects and donor-supported programmes.

TC funds boosted sustainable development as shown in the table below.

Use of TC funds for environment-related activities in 2004 Sector

TC funds (€)

Source of funding

Municipal and environmental infrastructure

16,051,428

Austria, Central European Initiative (Italy), European Community, Finland, Italy, Netherlands, Northern Dimension Environmental Partnership (multi-donor fund), Sweden, Switzerland, United Kingdom, United States

Energy

2,677,786

Canada, Central European Initiative (Italy), European Community, Greece, Netherlands, United Kingdom, United States

TurnAround Management Programme (environmental activities)

774,500

Japan

Manufacturing

393,000

Italy

Project Preparation Committee (administrative and staffing costs)

368,074

Switzerland, United Kingdom

Technical cooperation The Bank’s Technical Cooperation (TC) Funds Programme is funded by governments and intergovernmental institutions, and managed by the EBRD. The Bank uses these donor funds to prepare the way for EBRD financing and to achieve a greater impact for our investment.

Transport

87,925

Property

6,000

Total

EBRD SUSTAINABILITY REPORT 2004

United States Switzerland

20,358,713

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31

PART 01: INVESTING RESPONSIBLY

Financial reporting During 2004 the EBRD implemented a framework to certify internal controls over external financial reporting. As part of this process, the Bank carried out a wide-ranging operational risk selfassessment that led to the further development of the Bank’s operational risk management function.

Snow leopard cubs

Protecting the natural environment in the Kyrgyz Republic The Kumtor gold mine (a Kyrgyz-Canadian joint venture in which the EBRD and IFC are shareholders) is the largest business operation in the Kyrgyz Republic. An accidental spill of cyanide into a local river in May 1998 – subsequently cleaned up safely – focused national and international attention on the need for increased dialogue between businesses and local communities.

As a result, the Community and Business Forum was set up in 1999 to facilitate dialogue and support the development of local non-governmental organisations (NGOs) using TC and NGO funding.

A new TC initiative in 2004 is helping to improve the management of the Sary-Chat Ertash nature reserve, which is adjacent to the Kumtor mining site.

It will enhance the reserve’s renowned biodiversity, which include the ibex, the rare Marco Polo sheep and the endangered snow leopard. To raise the level of support of the local community for the protected area, more community-based activities are being promoted, which focus on the development of small projects linking improvements in local livelihoods to biodiversity and/or its conservation (for example, crafts, sustainable forestry and agriculture).

The new TC initiative is jointly funded through EBRD and IFC trust funds and implemented by Flora and Fauna International. The mining company KOC (Centerra) is also directly contributing to the TC.

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The EBRD reviewed and compared the key features of a number of internal control frameworks before deciding to adopt the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO).

This framework has been, or is being, adopted by other international financial institutions. It also represents the broadest international best practice.

The certification of internal controls entailed identifying, documenting, recording and testing key internal controls over financial reporting.

This involved the whole Bank and was coordinated by a project team comprising both internal EBRD staff and consultants from Deloitte.

Investing in capital markets A Steering Committee jointly chaired by the Vice President Finance and the Vice President Risk Management oversaw the whole process. Key departments involved in financial controls and reporting were identified following a review of the financial statements and consideration of the Bank’s main business processes.

Each department documented its key controls over financial reporting and then tested them to make sure they were operating effectively.

This information was then used by management to make an assertion regarding the effectiveness of the controls which was signed by the President and Vice President Finance.

This assertion was reviewed and affirmed by the EBRD’s external auditors. Both management’s assertion and the external auditor’s attestation are included in the Bank’s 2004 Financial Statements.

Capital market investments by the EBRD’s Treasury Department are undertaken to protect the Bank’s capital and to optimise returns on the EBRD’s liquidity within defined parameters.

In making investments and taking exposures, the Bank is guided by the principle of conservatism in the form of the risks taken. Although environmental or social criteria are not explicit investment parameters, they form part of the investment decision. With the average rating of the portfolio at AA/Aa or better, over 75 per cent of the investment exposures are to regulated financial industries, with the remainder largely invested in AAA/Aaa assets.

Treasury’s credit parameters allow investment in sovereign and sovereignguaranteed paper with a minimum rating of A-/A3. In accordance with these parameters, limits have been established for 22 countries, all of which are members of the Financial Action Task Force (FATF), an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing.

The Treasury Department interacts with a wide range of regulated market counterparties. In 2004 it executed capital market investments through over 30 counterparties.

EBRD SUSTAINABILITY REPORT 2004

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PART 02: SPECIAL FOCUS FOR 2004

Special focus for 2004 Helping the poorest countries

02

he EBRD is committed to helping all of our countries of operations, from the most advanced to those at the earliest stages of establishing market economies.

In 2004 we financed projects in each of these 27 countries but we undertook special efforts to assist the poorest countries. As part of our gradual shift further east, we focused particularly on a grouping of seven countries in Central Asia, the Caucasus and the western extremity of the former Soviet Union where help is most needed.

T

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In April 2004 the EBRD launched an initiative to increase activities and coordinate donor support in the early transition countries. Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan face difficult challenges and have made slow progress towards developing their financial institutions, reforming infrastructure and restructuring enterprises. Their domestic markets are small, access to world export markets is limited, and local infrastructure is underdeveloped.

Over half the population in these countries lives in poverty.

This grouping of countries has the greatest need of the Bank’s local experience and relationships with potential co-investors. With the help of the EBRD, they can start to improve their investment climate and to halt the descent into further poverty.

Early Transition Countries Initiative The main aim of the Early Transition Countries (ETC) Initiative is to extend the reach and impact of the EBRD in these countries. Through support for the private sector, the Initiative aims to provide sustainable solutions to poverty alleviation and to create jobs, complementing other international efforts to address poverty in these countries.

EBRD SUSTAINABILITY REPORT 2004

ETC Initiative at a glance Launched: April 2004, covering Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan.

Aims:

To develop micro, small and medium-sized businesses in the private sector and other private sector activities, and identify suitable projects to finance in the public sector.

Activities: Lending to micro, small and medium-sized businesses; investment in municipal and environmental infrastructure; legal transition work to improve the investment climate; advisory services for local businesses.

The ETC Initiative intends to stimulate market activity by using a streamlined approach to financing more and smaller projects, mobilising more investment, and encouraging on-going economic reform.

The ETC Initiative is a Bank-wide effort. A new dedicated team has been created in the Banking Department to assist with selected products and to coordinate the Initiative across activities, with support from the donor community.

The focus is on: • nurturing business growth: boosting businesses by providing loans and equity to growing enterprises (preferably in partnership with local financial institutions)

Direct Lending Facilities, the Medium-Sized Co-financing Facility with local banks, the Trade Facilitation Programme, and the TurnAround Management and Business Advisory Services programmes (see page 38) • ensuring affordability of essential services: reforming the system of tariffs in public services • improving infrastructure and the legal environment: playing a stronger role in discussions with governments and institutional reform to improve the investment climate, governance and anticorruption initiatives.

• developing support programmes: expanding the Bank’s Micro and Small Business Programme, SME credit lines, the Direct Investment and

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PART 02: SPECIAL FOCUS FOR 2004

Attracting donor support Donor funding prepares the way for EBRD investment and funds the use of consultants to support sound project preparation and implementation.

For example, it allows the Bank to ensure that EBRD funding is distributed efficiently, and that local staff in banks are trained in fast-stream lending procedures for SME business clients.

Donor funding in the form of “technical cooperation” grants to the seven ETC countries increased by more than half in 2004 (over 2003 levels), and 66 new assignments were approved.

Multi-donor ETC Fund In November 2004 the Bank launched a new multi-donor fund to support the Bank’s activities in the early transition countries. Since its launch, 11 countries have pledged almost €24 million to the ETC Fund. Some €4 million of this total has been earmarked for ETC projects approved before the end of 2004.

The fund is untied, meaning that consultants of any nationality may be employed.

Contributors include Canada, Finland, Ireland, Japan, the Netherlands, Norway, Spain, Sweden, Switzerland, Taipei China and the United Kingdom.

The fund operates in parallel with other donor-funded initiatives in the region (including by the European Community and the United States). The fund accounted for 29 per cent of all TC commitments for 2004.

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Investment in the early transition countries 2003-04

EBRD investment (excluding oil and gas projects) Donor funding Projects financed

The fund’s first assembly approved a range of projects aimed at institutional strengthening and developing the private sector in the seven countries. The projects included preparation of a training programme for commercial court judges in the Kyrgyz Republic and regulatory reform to improve municipal utilities in Uzbekistan. Business advisory services programmes for small and medium-sized businesses are also being expanded (see page 38).

Support programmes and mechanisms The EBRD is using well-established programmes and financing mechanisms, which are known to be effective, to support the seven early transition countries.

Micro and Small Business Programme Growth in small private businesses is key to alleviating poverty and raising living standards. It is particularly crucial in the poorest countries, where it can

2004

2003

€93 million

€84 million

€12.7 million

€8.1 million

18

10

act as a driving force for economic reform. Loans to micro and small businesses help them to become stable and grow. They also help successful entrepreneurs to become role models in the local community, creating new jobs and encouraging more people to start their own businesses.

Micro and small business lending is central to the Bank’s ETC Initiative.

The Bank’s donor-supported Micro and Small Business Programme helps local banks to provide entrepreneurs with much-needed finance to expand their businesses. It provides funding that is simply not available from other sources and helps banks to develop procedures for a new clientele.

EBRD financing is provided mostly through credit lines to local banks and to dedicated micro lending institutions that on-lend to micro and small enterprises.

The EBRD also sets up specialist finance departments within banks where staff lack lending experience.

Management information systems are also installed to provide banks with integrated systems for monitoring their loan portfolios.

Backing for micro lending projects has come from the European Community, Japan, Switzerland, the United Kingdom and the United States. The largest supporter of the Micro and Small Business Programme in the early transition countries is the United States through the US/EBRD SME Finance Facility. By the end of 2004, the facility had provided over 63,000 loans totalling â‚Ź239.5 million in the ETC countries.

A number of other donors have also supported the Bank’s Micro and Small Business Programme.

Lending approach and results The EBRD has shaped its micro lending programme according to the needs of individual countries. In Azerbaijan and Moldova, the Bank has established new microfinance institutions (in conjunction with other international donors), whereas in Armenia, the Kyrgyz Republic, Tajikistan and Uzbekistan the Bank is working with existing banks to develop small business lending. In Georgia the Bank has applied both approaches with equal success.

small businesses can benefit from the scheme. In December 2004 alone, over 7,900 loans totalling US$ 22.5 million were disbursed, more than double the number and volume for December 2003.

Arrears over 30 days stand at 1.23 per cent.

In 2004 the programme disbursed loans totalling over US$ 185.6 million in the seven early transition countries.

The average loan size was under US$ 2,800, ensuring that even very

Financing micro and small enterprises in Tajikistan Kibriyo Naimova has received a number of loans through the Tajik Micro and Small Enterprise Finance Facility. Her first job was as a salesperson in the bazaar, selling products such as wallpaper. Her first loan enabled her to set up her own business, which she has gradually expanded into two sales pitches in the market. Her second loan will help her buy new products to extend her business.

The Tajik Micro and Small Enterprise Finance Facility was launched in 2003 with the support of the EBRD and the international donor community. It has financed more than 3,000 local entrepreneurs, who have mostly benefited from credit for the first time.

In Tajikistan more than 65 per cent of people earn less than US$ 2.15 a day.

Loans of up to US$ 10,000, typically on a 12-month basis, have enabled the smallest entrepreneurs to expand their businesses. The average loan amount is below US$ 2,700. Approximately half of the clients are women using the loans to buy goods from other Central Asian countries or from China. These products are subsequently resold in the local bazaars. Donor financing has helped the local Tajik banks to improve their lending skills. The Facility is currently expanding into more remote areas where finance is in even greater demand.

Kibriyo Naimova, Tajik business woman

EBRD SUSTAINABILITY REPORT 2004

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PART 02: SPECIAL FOCUS FOR 2004

Farming community, Tajikistan

TAM and BAS Programmes supporting entrepreneurs in local communities In 2004 the TAM and BAS Programmes launched community projects aimed at boosting income to some of the poorest people in the early transition countries.

In the Kyrgyz Republic joint TAM and BAS initiatives have helped farmers and small businesses to raise the quality of their produce, to improve local skills, and to create new jobs.

In Tajikistan a TAM project assisted the integration of collective farms into the market economy. By helping these businesses develop high-value products, such as processed fruit and dairy products, the poorest farmers have been able to increase their income. Their increased purchasing power benefits the whole community and even spreads the benefit to the economies of neighbouring communities.

In Azerbaijan the Azerbaijan Enterprise Centre in Baku launched a training programme in September 2004 for women entrepreneurs and held an exhibition of their work. The project is providing business training to 31 women from Baku and the surrounding districts, who are involved in a variety of crafts, publishing, printing, and bee-keeping businesses. The project is giving women the skills needed to compete in the market place.

It is co-funded by BAS and the Open Society Institute.

Expanding catering services in Armenia An Armenian company in the catering business since 1994 faced internal organisation problems when it sought to expand. With the help of an audit provided through the BAS Programme, the company’s operations were systematically analysed.

Procedures were developed to conform with ISO standards, staff were trained, quality management standards were implemented, and a six-monthly surveillance audit performed by a registered ISO assessor was introduced.

The company is now able to handle very large orders. Its operational effectiveness and efficiency have improved by 20 per cent and its profitability by 64 per cent in less than a year. Nine new employees were hired in 2004.

Catering company, Armenia

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TurnAround Management (TAM) and Business Advisory Services (BAS) Programmes The TAM and BAS Programmes provide expert technical and management advice to local businesses. They are complementary programmes, funded by the international donor community and managed by the Bank.

The main source of support for the TAM and BAS Programmes in the early transition countries in 2004 was the ETC Fund and contributions from Denmark, Italy, Luxembourg, the Netherlands and Switzerland.

TAM projects provide businesses with management advice, including business planning, restructuring, improving products, reducing operating costs, and developing local and export markets. TAM also helps companies attract potential business partners and investors.

Senior Industrial Advisers (experienced business people from around the world) work with senior managers, mentoring and advising them on how to adapt their businesses to compete in a market economy.

EBRD SUSTAINABILITY REPORT 2004

TAM and BAS Programmes in the early transition countries in 2004 TAM Programme 13 projects undertaken with 13 businesses in six countries.

Operates in all seven early transition countries.

BAS Programme 393 projects undertaken with 350 businesses in four countries.

Operates in Armenia, Azerbaijan, Georgia and Uzbekistan.

Offices will shortly be opened in Moldova and the Kyrgyz Republic.

BAS projects are usually short term and are aimed at identifying and removing barriers to business growth.

They provide expert business advice to improve the performance of smaller businesses.

The Programme uses local accredited consultants to teach new business skills to micro and small businesses (ranging from 10 to 250 employees).

BAS maintains staff and offices in the countries of operations, which helps to develop the expertise of local consultancy services.

The impact of TAM and BAS projects is measured by changes in the enterprise status, employee numbers, productivity and sales improvement. • By developing local know-how, TAM projects typically increase turnover and employment levels.

In companies with fewer than 250 employees, employment levels have increased on average by 15 per cent in the first year following completion of the project. • By boosting local consultancy skills, BAS projects typically result in business expansion based on sound principles.

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PART 02: SPECIAL FOCUS FOR 2004

Direct Investment and Direct Lending Facilities The EBRD makes direct equity investments to help develop fast-growing mediumsized businesses through the Direct Investment Facility (DIF), which is the EBRD’s own private development capital fund.

DIF supports start-ups with a strong business plan and existing companies proposing to expand their business or product lines. The programme invests in local entrepreneurs, providing investments of up to US$ 2.5 million, and advising on professional management practices and good governance.

Given the demand for loans in early transition countries, the EBRD also set up a Direct Lending Facility (DLF) in 2004 to complement the DIF. The DLF is an umbrella programme that allows the EBRD to provide loans directly to medium-sized businesses in early transition countries when using the services of a financial intermediary is not possible. The Bank provides loans under the DLF ranging from €0.5 million to €4 million.

In the early transition countries two DIF projects (in Armenia and Georgia) and two DLF projects (in Armenia) were signed in 2004. A substantial increase is planned under the ETC Initiative in 2005.

to meet the financing needs of newly emerging medium-sized private companies in the early transition countries.

EBRD co-financing takes the form of risk participation in the local banks’ sub-loans to their best clients. The main objective of the facility is to assist these local banks in overcoming lending constraints caused by single borrower exposure limits and the absence of local co-financing markets.

Two medium-sized co-financing facilities were signed in 2004, with Victoriabank (Moldova) and KICB (Kyrgyz Republic).

Four new facilities are expected to be signed in the first half of 2005, and a further four to six banks are being targeted in the early transition countries in the second half of the year.

Trade Facilitation Programme The donor-supported Trade Facilitation Programme (TFP) supports businesses seeking to develop import and export

operations. It provides guarantees through local banks for trade transactions between countries, and helps small businesses to grow through export and import trade. The programme also makes short-term loans to banks for on-lending to local companies involved in importing and exporting.

The number of TFP transactions in the early transition countries more than doubled in 2004, reflecting strong growth in Armenia, the Kyrgyz Republic and Tajikistan. Over half of all transactions were for less than €100,000, indicating the widespread participation of small enterprises in export and import business.

Support to the TFP in the seven countries comes from Canada, Germany, Ireland, the Netherlands, Switzerland and the United Kingdom. The funds provided by these donors cover a range of activities, including training and consultancy services for local banks and the provision of lending support through risk-sharing funds.

Trade Facilitation Programme in the early transition countries

Participating banks in the seven early transition countries Trade guarantees

2004

2003

32

26

305

219

€72.9 million

€80.6 million

Co-financing facilities The EBRD recently established a new co-financing facility to be provided to leading private local commercial banks

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Total value of business transactions guaranteed

Window factory, Bishkek

Financing business expansion in the Kyrgyz Republic Erkin Jumabaev is the owner of Windoors, a window and door manufacturing business in Bishkek. He credits TFP with helping him to buy machinery and material from Germany and Turkey, without which he could not have increased his production, sales, staff and employees’ salaries.

“Before TFP, all our foreign suppliers wanted us to pre-pay our equipment orders 100 per cent – I couldn’t do that!

This import guarantee facility has been very useful to us.”

Oleg Sibirtsev’s corrugated roofing manufacturing company Komet in Bishkek is experiencing phenomenal growth, making him a repeat customer for trade finance. He used his own capital to buy new equipment and needed TFP support to import from Finland the metal sheets that his workforce transforms into roofing. The new equipment has driven up demand and Oleg plans to start exporting to neighbouring Kazakhstan.

“The biggest loan from TFP was €210,000, which I used to buy the metal sheets. In just two years, we’ve increased our production sixfold. Our staff has grown from 16 to 40.

I used to be a geologist – now I have found my gold here!”

Ineximbank is one of the many local banks in the seven early transition countries involved in the TFP. “Trade credit wasn’t available in this country until the EBRD started offering it,” says Ruslan Boronbaev, Ineximbank’s deputy chairman. “Now we’re getting clients from other banks that need this service. In fact we have Chinese, German and Russian business people operating in the Kyrgyz Republic who need these letters of credit.”

Modernising a printing company in Uzbekistan Four young entrepreneurs have taken JSC Seal-Mag from start-up in 1996 to a small private company specialising in printing services for the domestic textile, advertising and souvenir industries.

A TAM team of two Japanese print industry experts and a Belgian team coordinator provided strategic, marketing and production advice to help the company grow. The BAS programme helped implement a comprehensive Management Information System to integrate accounting, financial management and warehousing functions, which increased transparency for shareholders and potential investors. The EBRD invested in the company via its Direct Investment Facility, providing US$ 580,000 to buy modern printing equipment.

Printing company, Uzbekistan

EBRD SUSTAINABILITY REPORT 2004

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PART 02: SPECIAL FOCUS FOR 2004

Taking account of ability to pay In centrally planned economies, utility services have traditionally been heavily subsidised by the state. As part of the reform of public utilities, the Bank is encouraging companies to adopt tariff structures that reflect true costs. At the same time, the Bank is aware of the need to take account of people’s ability to pay in poor countries.

Affordability of utility services is one of the main challenges in reforming municipal infrastructure. People on below-average incomes have limited access to modern sources of energy and clean water and spend a disproportionate amount of their income on them, even at the current low levels of tariffs.

The poorest 10 per cent of the population in the early transition countries spends roughly 5 per cent of income on electricity at current prices and around 1 per cent on water.

These low figures partly reflect widespread non-payment of bills, limited access to services and use of substitute fuels.

The percentage of income devoted to essential services is higher in Armenia, Georgia and Moldova, where tariffs have been raised to reflect true costs. Figures above 10 per cent (for power) and 5 per cent (for water) are considered to be the point beyond which affordability becomes a problem.

Addressing the social impact of higher tariffs Various measures are available and are being increasingly used in the early transition countries to reduce the effects of tariff reform.

Block or lifeline tariffs are the most common schemes, under which a minimum amount of water or energy is provided at a low price or free.

Consumption beyond this threshold is charged at full cost. Block tariffs operate in Moldova in the energy and water sector, where consumers can subscribe to either a block system or a uniform pricing system. A drawback to block or lifeline tariffs is that household consumption has to be metered, which may be difficult in the water and district heating sectors.

Affordability of utility services in the early transition countries (for the poorest 10 per cent of the population) Percentage of household expenditure devoted to electricity

Percentage of household expenditure devoted to water services

2003

2007 (projected)

2003

2007 (projected)

Armenia

6.1

8.5

0.1

4.0

Azerbaijan

2.4

2.7

1.1

8.5

14.1

15.5

0.6

8.7

Kyrgyz Republic

2.8

5.9

1.2

8.9

Moldova

4.9

5.1

0.3

1.6

Tajikistan

2.5

8.9

3.5

14.6

Uzbekistan

4.6

9.0

0.6

18.6

Georgia

Notes: Affordability estimates are unweighted averages. Data for Armenia and the Kyrgyz Republic refer to 2002.

Data for Georgia and Uzbekistan relate to household income as opposed to expenditure.

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Targeted assistance programmes involve means-tested cash payments or income transfers to vulnerable consumer groups, typically to cover a minimum level of consumption.

Programmes are operating in Armenia, Georgia and Tajikistan where they mainly cover electricity and, to a smaller extent, water consumption.

Programmes are not necessarily permanent. There have been seasonal programmes in Georgia to assist vulnerable consumers during the winter when fuel bills are highest. These dedicated assistance programmes are difficult to maintain because they require effective management, administration, monitoring and funding.

The effectiveness and sustainability of such programmes depends on a country’s level of poverty and the effectiveness of its institutions.

Countries with high poverty levels and poor targeting systems might be better off with lifeline tariffs, while countries with a lower level of poverty may benefit from direct income transfers.

Power plant

EBRD SUSTAINABILITY REPORT 2004

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PART 02: SPECIAL FOCUS FOR 2004

EBRD support for public utilities The EBRD takes full account of customers’ ability to pay when it provides finance to public utility companies intending to restructure their tariff systems. During the project appraisal process, the Bank makes an assessment of the probable impact of the tariff changes through its standard affordability analysis and incorporates relevant measures into the project structure based on the options outlined above.

Addressing electrical safety concerns in Moldova

Electrician, Moldova

Foreign investment, with EBRD support, has contributed to the development of Moldova’s electricity sector. However, the improvements have also highlighted safety issues. The authorities and electrical service providers in Moldova are concerned about the high death rate from electrocution. Some incidents have involved employees or sub-contractors but the majority involve customers of the utility and members of the public who may be attempting to obtain supplies of electricity through non-official means.

The Bank is committed to help the country address safety concerns and achieve an international standard of safety for its workforce and its citizens. We have worked with relevant ministries in Moldova to develop an electrical safety initiative, involving the utility companies. The Canadian government has provided funding for a programme of technical assistance to improve operational safety in the electricity supply and distribution sector.

It will finance public awareness raising and safety education measures.

A national electrical safety week is planned for autumn 2005, to include a public awareness campaign, safety education in schools, and safety training for electrical inspectors.

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Over the last year, the EBRD has enhanced substantially its ability to assess the affordability consequences of projects with a tariff component. In a project supported by the United Kingdom, the Bank has developed an affordability model and database that permits project teams to study affordability in a more detailed and standardised way, focusing on low-income households.

The results of these analyses are now disclosed in Board documents, and tariff conditionality is increasingly structured with affordability constraints in mind (see Khujand case study). In selected cases, the Bank has also been involved in the reform of dedicated support programmes, usually in collaboration with agencies such as the World Bank which have specialised expertise in this area.

Assessing progress and the way forward The EBRD’s specific focus on some of the poorest countries has increased support to local businesses and investment in infrastructure, which is contributing to the improvement of living conditions. The ETC Initiative has also generated additional donor support for EBRD operations in these countries.

By acting as a “pioneer grass root investor” in a region that lacks many other sources of investment, the Bank is helping to develop a growing market economy in these countries. Strategic collaboration with donors is ensuring effective coordination as part of an international effort.

The EBRD hopes to use projects such as the Khujand water supply investment as role models for projects in other communities where poverty and underinvestment require a coordinated approach to the provision of basic business services and funding.

Over a three-year period the EBRD plans to triple the number of its investment projects in the early transition countries, making full use of donor support.

Improving water supply to the people of Khujand, Tajikistan

Upgrading water pipes, Khujand

The EBRD provided financing of €0.9 million to improve the water distribution network in Khujand, Tajikistan’s second-largest city.

It is the Bank’s first municipal loan in Tajikistan and also our first-ever loan made under our Early Transition Countries Initiative.

The loan is being used to improve water wells, upgrade the distribution network and install new pumps and other equipment. This investment will reduce water leakages, make the water supply more reliable and improve the quality of Khujand’s drinking water.

Donor support has been critical. The Belgian government provided technical cooperation assistance for project preparation, the government of Norway funded a programme to improve the company’s governance and managerial practices, and the Swiss government provided grants for capital investments and a stakeholder participation programme.

To meet the challenges of the difficult operating environment, the EBRD worked with the International Secretariat for Water (ISW), a non-governmental organisation whose mission is to help improve drinking water infrastructure in developing countries.

ISW increased public awareness of the project by helping to develop a stakeholder participation programme that addressed customers’ ability and willingness to pay.

EBRD SUSTAINABILITY REPORT 2004

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PART 02: SPECIAL FOCUS FOR 2004

Addressing climate change ussia’s ratification of the Kyoto Protocol in November 2004 marked an important step in the global efforts to address the dangers of climate change. Following this ratification, the Protocol finally came into force in February 2005.

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A total of 38 industrialised nations, including 12 of the EBRD’s countries of operations, are now legally bound to cut their greenhouse gas (GHG) emissions by at least 5 per cent below 1990 levels by 2012. A further eight EBRD countries signed the Protocol but do not have an emissions cap. Most of the remaining EBRD countries of operations are working towards ratification of the Protocol.

The Protocol has created a market in which companies and governments that invest in GHG emission reduction projects can sell the ensuing carbon credits.

These are purchased by businesses and governments in developed countries – such as the Netherlands – that are close to exceeding their GHG emission quotas.

Carbon credits can be sold by the 12 EBRD countries with an emissions reduction target as well as the eight EBRD countries without an emissions cap.

The EBRD’s countries of operations are in a strong position to contribute to the worldwide reduction of greenhouse gases.

Many are rich in energy resources, but use energy inefficiently. Opportunities to cut high GHG emissions associated with such inefficient use of energy are abundant. Investment in energy efficiency is therefore a priority for the Bank. The EBRD is taking an active role to support the implementation of the Kyoto Protocol by funding emission reduction projects and by promoting the trading of carbon credits.

EBRD SUSTAINABILITY REPORT 2004

New energy policy The energy sector is going through rapid change as modern economies develop their energy markets and promote transparency, competition and private sector participation.

The EBRD recognises that the Bank’s energy policy needs to take account of the changing nature of the sector.

In particular, it needs to tackle the challenge of how to modernise power systems, support privatisation, reduce transmission losses, increase energy efficiency and ensure nuclear safety.

Public consultation In 2005 the EBRD will adopt a new Energy Policy to replace its current Energy and Natural Resources Policies.

The aim of the new policy is to provide a single framework for the Bank’s energyrelated activities in all sectors. The process of preparing the new policy involves a wide-ranging review, which began with a series of consultation workshops in London, Sofia and Moscow in January 2005.

The main aim of these workshops was to provide a forum for exchanging views and critical analysis, which will assist in the formulation of the Bank’s new policy.

A Discussion Paper was prepared, with the assistance of the Bank’s

Environmental Advisory Council (see page 57), to stimulate and focus the discussions, and to assist in drawing out responses, comments and ideas from the participants.

Participants were asked to consider the overriding question of “how the EBRD can effectively support activities in the energy sector, given the current context and challenges faced, in order to facilitate transition to market economies and promote environmentally sound and sustainable development in its countries of operations”. They were also asked to address the issues affecting specific sub-sectors, such as energy efficiency, renewable energy, oil and gas, electricity, coal mining and nuclear energy. All participants had the opportunity to provide their views during the workshops and to take part in a constructive dialogue with EBRD representatives.

In formulating the new energy policy, the EBRD will take into consideration all of the recommendations from the consultation process, including feedback from industry and government representatives. A draft of the new policy will be released for additional public consultation, and the final policy is scheduled for publication later in 2005.

For more information about the policy review and consultation activities, see www.ebrd.com/country/sector/power.

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PART 02: SPECIAL FOCUS FOR 2004

Energy efficiency The EBRD’s countries of operations typically use five times as much energy as the EU average. Companies and institutions in these countries face rising energy costs as prices increase towards international levels (see page 42).

Improving energy efficiency is therefore a key objective for the Bank’s entire investment portfolio.

The EBRD screens all of its projects for energy efficiency potential and mobilises technical assistance funding from donors for energy audits which help clients identify energy-saving opportunities within their operations. In addition, the Bank finances projects that focus specifically on reducing energy consumption and greenhouse gas emissions.

The Bank has a dedicated energy efficiency team, which consists of ten professionals. Funding to support the team is provided by the governments of Italy and the Netherlands.

The client repays the ESCO through the savings made. The Bank supports ESCOs, such as Dalkia, Danfoss and Energy Alliance (see page 49).

Energy efficiency credit lines provide EBRD funding for smaller projects, with loans disbursed through local participating banks. An example is the Bulgarian Energy Efficiency and Renewable Energy Credit Line, which is providing €50 million of EBRD finance to six Bulgarian banks for on-lending to local businesses. The loans will be used for industrial energy efficiency and small renewable energy projects. The credit line is supported by a €10 million grant from the Kozloduy International Decommissioning Support fund (KIDSF), a Bank-managed fund which promotes energy efficiency and renewable energy in addition to decommissioning the Kozloduy nuclear plant (see page 28).

Consultants are hired by the EBRD to assist Bulgarian companies in developing these projects. An upto-date overview of projects implemented can be found at www.beerecl.com.

Equity funds provide targeted finance in the form of equity investment for energy efficiency and renewable energy projects.

The Dexia-FondElec Energy Efficiency and Emission Reduction Fund invests in projects across a range of sectors (including district heating, public lighting and industry) to reduce energy consumption and greenhouse gas emissions in the Bank’s countries of operations.

Specific energy efficiency projects The EBRD signed four specific energy efficiency projects in 2004, totalling €61 million (see table below).

Energy efficiency projects signed in 2004 Country

Client

Project description

EBRD finance

Hungary

Prometheus

Investment in energy service company

€3 million

Poland

Dalkia

Acquisition of ZEC Lodz, a district heating and co-generation utility, to make energy efficiency improvements

€39.1 million

Poland

Dalkia

Acquisition of ZEC, a combined heat and power plant in Poznan (see page 49)

€15 million

Ukraine

Energy Alliance

Establishment of new private sector energy service company (see page 49)

€3.7 million

Financing mechanisms The EBRD supports dedicated energy efficiency financing schemes, such as energy service companies (ESCOs), energy efficiency credit lines and equity funds that invest in energy efficiency projects.

Energy service companies (ESCOs) are specialist organisations that make energy efficiency investments in companies in the public and private sectors. They operate in many of the Bank’s countries of operations, providing energy services that enable their clients to realise savings.

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ZEC Poznan, Poland Zespol Elektrocieplowni (ZEC) Poznan is a combined heat and power plant in Poznan. Dalkia and the EBRD have bought an 85 per cent stake in the company (the remaining 15 per cent of ZEC shares were reserved for company employees). The acquisition is helping Dalkia to integrate the production and distribution of heat in one business unit to improve energy efficiency.

An investment programme is taking place to modernise operations, expand the network, extend metering and improve the environmental performance of the company’s heat and energy production.

Energy Alliance, Ukraine Energy Alliance is the first privately owned energy service company in Ukraine. It finances and develops co-generation and electricity generation projects for industrial clients.

The company purchases generation equipment, which is leased to clients. Over a ten-year period, the companies may save up to 25 per cent on the cost of energy by utilising a co-generation engine.

The first project to be undertaken is with KOEP, a large Ukrainian edible oil extraction plant. It involves the construction of a 4 MW co-generation station to be fuelled by sunflower seed husks (a natural by-product of the client’s edible oil production).

Projects with energy efficiency components All potential EBRD-financed projects are screened to identify possible energy efficiency opportunities. These are presented to the client and incorporated into the project wherever possible.

EBRD SUSTAINABILITY REPORT 2004

Improving energy efficiency and environmental management

Ammonia production, Russia

Togliatti Azot (ToAz) is the largest ammonia producer of the former Soviet Union, operating seven ammonia production units at its plant site in Togliatti, western Russia. It accounts for approximately 7.6 per cent of the world market. ToAz consumes approximately 1 per cent of Russia’s domestic gas, making it the country’s largest single-site user.

A full energy efficiency audit (using EBRD technical cooperation funds provided by the Dutch government) identified major energy efficiency opportunities.

The opportunities are now being realised with the help of a €73 million long-term EBRD loan signed in 2004.

The project consists of a complete revamp and modernisation of the four oldest ammonia production units. The overall goal is to expand production capacity by optimising the efficiency of the revamped units.

The technology supplier (Casale) will guarantee an energy efficiency improvement of approximately 20 per cent (defined as gas consumed per unit of ammonia produced) and a capacity increase in each of the four units of approximately 18 per cent. This will enable ToAz to meet EU environmental standards. The cost saving is estimated at up to US$ 20 million per year at current gas prices.

This project is the largest energy efficiency investment financed by the Bank to date. The gas saving (based on existing production output) every year is approximately equivalent to the average monthly consumption of a country the size of Switzerland, Greece or Portugal. During due diligence, the Bank required an environmental analysis of the proposed revamp and modernisation as well as an environmental audit of all the client’s facilities.

Based on the audit, an Environmental Action Plan was agreed with the client that will bring all of ToAz’s facilities into compliance with Russian law. ToAz is also committed to complying with good international environmental management standards and the principles of transparency and consultation in corporate decision making.

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PART 02: SPECIAL FOCUS FOR 2004

The Bank uses donor-supported technical cooperation (TC) funds to contract consultants to conduct energy audits and to provide specialist advice and training to clients. In 2004 the team carried out 14 on-site surveys, including seven projects that involved detailed energy audits by consultants.

In 2004, eight manufacturing projects with significant energy efficiency components were signed by the EBRD, totalling €102 million. One of these projects was the Bank’s largest-ever energy efficiency signing – Togliatti Azot ammonia plant in Russia (see page 49).

Carbon trading In 2004 the EBRD undertook its first carbon credit agreement, helping a Bulgarian company to reduce its emissions and sell the reduction (see page 51).

This was undertaken under the terms of the Kyoto Protocol, which allows countries exceeding their Kyoto quota to buy carbon credits from other countries at lower costs than taking domestic measures.

Through this fund, the Bank buys as many carbon credits as possible for the Netherlands. The fund supports emission reduction projects, including energy efficiency, renewable energy, fuel switching and waste processing.

The purchase and sale of carbon credits create a new revenue stream for climate-friendly projects. The trading is particularly relevant in the Bank’s countries of operations, which are characterised by high usage of carbon fuels and low energy efficiency, leaving good scope for emission reductions.

In 2004 the EBRD also set up a Sustainable Energy Programme that will assist companies in the early transition countries to develop greenhouse gas emission reduction projects under the Kyoto Protocol.

Carbon credits give private companies an incentive to invest in projects such as renewable energy sources.

The EBRD acts as an intermediary in carbon finance, buying carbon credits on behalf of buyers. The Bank established its first carbon fund with the Netherlands government in October 2003.

Renewables The EBRD’s countries of operations remain heavily dependent on fossil and nuclear fuel for electricity generation, and still produce a considerable volume of greenhouse gases. Renewable energy sources currently contribute a comparatively small amount to power generation except for hydro, which is a significant source of power in countries such as Albania, Romania and Russia.

How carbon trading works • Carbon credits are created when a project reduces or avoids the emission of greenhouse gases under the rules of the Kyoto Protocol.

• Carbon credits can be sold to buyers, which could be countries or private firms.

This may mean that some countries emit more greenhouse gases than allocated under the Kyoto Protocol, on the understanding that the trading country uses less.

• The project company and the buyer enter into an Emissions Reduction Purchase Agreement (ERPA).

• The seller uses its ERPA to further attract financing for the needed investments in emission reduction technologies and measures.

• The reduction of emissions is verified against an agreed baseline or the initial emissions allowances allocated and the balance is transferred as carbon credits to the buyers. In the case of the Netherlands fund, the credits will be transferred directly to the Netherlands.

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However, renewables, such as hydro power, wind energy and biomass, offer significant benefits in terms of reducing pollution and dependence on other sources of energy.

In the Bank’s countries of operations, Russia has the largest estimated potential for renewable energy but there is also scope for developments in this area in Poland, Bulgaria and Romania.

The EBRD is seeking to overcome the barriers to financing renewable energy projects. These include the following factors: •

commercial and legal frameworks for supporting renewable energy are weak (or only recently established)

•

few international strategic investors from the renewable energy sector are active in the region

•

most projects are small to mediumsized and face high transaction costs while developers face difficulties in raising the levels of equity required to attract loans

•

the cost to the end user tends to be higher than traditional forms of power generation (except for hydro), which makes renewables projects difficult in the Bank’s countries where the ability to pay for electricity is an issue.

To date, the Bank has financed eight renewable energy projects excluding the projects financed indirectly via the Bulgarian credit line (see page 48).

The EBRD is committed to finding further suitable renewable energy projects for investment and has made a particular effort to identify projects that could qualify for investment. The Bank also provides information on renewable energy in its countries of operations via a dedicated web site, funded by the United States: www.ebrdrenewables.com.

The EBRD participated in the International Conference for Renewable Energies in Bonn in June 2004, a highlevel meeting that addressed technical capacity and barriers to financing.

Arising from this conference, the EBRD plans to invest in a dedicated renewable energy fund in 2005. It will make equity or quasi-equity investments in projects involving wind power, hydro power and biomass. The focus is expected to be on projects that are relatively developed in terms of technical viability.

EBRD SUSTAINABILITY REPORT 2004

Bulgarian paper mill is the EBRD’s first emissions reduction project

Paper mill, Bulgaria

In December 2004 the Bank signed its first Emissions Reduction Purchase Agreement (ERPA) under the Netherlands-EBRD Carbon Fund. With EBRD financing, a Bulgarian paper company, Stambolijsky, is switching from energy production based on oil and gas to biomass (plant-based) energy, which will reduce its greenhouse gas emissions by 360,000 tonnes. This is the equivalent of that released by 60,000 households in a year.

The company will sell the ensuing carbon credits to the EBRD-managed fund.

These credits will be bought on behalf of the Dutch government, helping the Netherlands to meet its commitments under the Kyoto Protocol. As well as generating additional revenue for the mill, the energy savings are expected to improve efficiency and quickly boost profits.

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PART 03: PROMOTING TRANSPARENCY AND ACCOUNTABILITY

03

Promoting transparency and accountability he EBRD has policies and mechanisms to ensure that we operate responsibly in all of our activities. In addition to the Bank’s Environmental Policy (see page 7), we have specific procedures that cover how we promote transparency and access to information, and how we respond to complaints.

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The Bank’s commitment to the transparency of all our operations is underpinned by the EBRD’s Public Information Policy (PIP). Procedures for expressing concerns about EBRD projects are detailed in the Bank’s Independent Recourse Mechanism (IRM), which was adopted in 2004 (see page 57). Dialogue between the EBRD, non-governmental organisations and local communities is facilitated by the Bank’s Outreach Unit.

To make our policies as accessible as possible, we are in the process of translating the PIP, the Environmental Policy and the IRM into local languages.

By the end of 2004, the PIP was available in Czech, Polish, Romanian, Russian and Slovak. Versions in Bosnian, Croatian and Serbian will be made available in 2005. The Environmental Policy has been translated into Bosnian, Croatian, Moldovan, Polish, Romanian, Russian and Serbian. The IRM is available in Russian. Since June 2003, new EBRD country strategies have been translated into local languages.

When formulating a new country strategy, the EBRD invites the public to submit comments, which are taken into account during the review process.

A summary of the comments, along with the Bank’s responses, is posted on our web site following Board approval of the revised strategy.

EBRD SUSTAINABILITY REPORT 2004

Disclosing information on EBRD-financed projects For each project that might receive EBRD financing, we publish a project summary document (PSD) disclosing the main aim of the project, its financial details and a summary of the environmental aspects.

For private sector projects, PSDs are posted on the Bank’s web site 30 days before consideration by the Bank’s Board of Directors. For public sector projects, this is extended to 60 days.

In certain circumstances, PSDs may not be subject to normal release rules. For example, publication may be delayed if: • capital markets transactions are involved

• there is concern about the likelihood of substantial changes or rejection at the Board’s final review stage of a project proposal, which might embarrass the sponsor and prejudice alternative sources of funding.

In 2004, seven PSDs were not subject to normal release rules.

For more information, see www.ebrd.com/projects/psd.

Engaging in dialogue with our stakeholders The EBRD’s staff meets and consults regularly with the people and organisations that are affected by the projects the Bank finances. We include the following groups in our general consultation with stakeholders:

• there are legitimate sponsor or client concerns about confidentiality

Public Information Policy The Bank’s Public Information Policy sets out our framework for operating responsibly: Transparency We make information available to the public unless there is a compelling reason for confidentiality.

Accountability We are careful to ensure compliance with our mandate and accountability to shareholders.

Listening We consider the views of all who wish to comment on the Bank’s activities, and in the shaping of our policies and actions.

Sensitivity to project sponsors We are sensitive to the needs of project sponsors and to concerns about project sponsor confidentiality.

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PART 03: PROMOTING TRANSPARENCY AND ACCOUNTABILITY

• Local communities We seek the views of local communities and, where appropriate, consult with local groups as part of our project assessment activities.

• Non-governmental organisations (NGOs) We engage in regular dialogue with NGOs to get their input on Bank projects and policies.

• International financial institutions We often co-finance projects with other international financial institutions (IFIs).

We help develop a consistent approach to environmental issues among IFIs through our participation in the Multilateral Financial Institutions Environmental Working Group and the Development Financing Institutions Social Issues Working Group. Part of this relationship is the harmonising of standards and approach.

• Environmental bodies We work in partnership with bilateral and multilateral environmental organisations, such as the Project Preparation Committee, the Northern Dimension Environmental Partnership and the Global Environmental Facility (see pages 25 -31). We are in regular dialogue with the UN Environment Programme Finance Initiative that promotes sustainability in the financial community (see page 24).

• Other stakeholders We consult widely and invite comments on all new Bank policies and country strategies from stakeholders, including central and local governments and businesses.

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NGO relations The EBRD further developed its channels of communication with NGOs in 2004 through the Bank’s Outreach Unit.

We also increased the involvement of Resident Offices in our countries of operations. The Unit informed NGOs, for example, about the consultation process for developing the Bank’s new Energy Policy.

Meetings were held with local NGOs and think tank organisations during the Board consultation visits to Albania, Belarus, Moldova, Romania and Serbia and Montenegro. Further meetings to discuss specific projects were held at the request of NGOs at the Bank’s London headquarters and in the region.

The BTC pipeline project involved extensive consultation – the Outreach Unit established a direct dialogue with NGOs before and after the project was signed (see page 12).

Consultation activities in 2004 Outlined below are some of the ways that we involved stakeholders in our activities over the past year. For more information, see www.ebrd.com/oppor/ngo.

• Preparation of a new Energy Policy The Bank conducted public consultation workshops on its new Energy Policy in January 2005 (see page 47). We also invited comments on the Bank’s existing policy documents (Natural Resources and Energy Operations policies).

A summary of the discussions from the consultation workshops has been posted on the Bank’s web site.

• Extractive Industries Review The Project Evaluation Department produced a study in 2004 on the Bank’s performance in the extractive industries. The report has been published on the Bank’s web site.

• Independent Recourse Mechanism The EBRD invited comments from interested parties before setting up the IRM Rules of Procedure in July 2004 (see page 57).

• Country strategies EBRD country strategies set out a framework for the Bank’s investments in a country. We invite the public to comment to help us update our strategy for each country. In 2004 we published new country strategies for Albania, Estonia, Georgia, Kazakhstan, the Kyrgyz Republic, Lithuania, FYR Macedonia, Poland, Russia, Serbia and Montenegro, the Slovak Republic and Turkmenistan. Our new country strategies are translated into local languages.

• Sustainability reporting The EBRD issued its first Environmental Report in 2004, highlighting the Bank’s environmental investments and its own environmental record. Discussions on sustainability reporting continued with other institutions, NGOs and the Bank’s Environmental Advisory Council (ENVAC). ENVAC members agreed to assist the Bank in developing a report that will be in line with international standards and take into account the Bank’s mandate to promote sustainable development in its investment activities and internal operations.

Consultation relating to Environmental Impact Assessments Environmental Impact Assessments (EIA) are prepared for the Bank’s most environmentally sensitive projects.

They are released for public comment in the Bank’s headquarters and Resident Offices in our countries of operations.

Nine “Category A” projects required EIAs in 2004 (see page 56). Full EIA documentation for all nine was made

available by the project sponsor in local languages. Six of the nine projects had full documentation available electronically on a project sponsor web site in the local language. All nine had executive summaries available on the EBRD’s web site in English and a local language.

Four of these projects progressed to the Board during 2004. Three of the four projects that progressed to the Board met the public disclosure requirements regarding the release date.

The M5 Phase II Motorway Project in Hungary did not meet the 60-day disclosure period prior to Board review.

The original EIA was prepared in 1991 and updated in 1998, including public consultation at both times. In May 2004 a second update was completed to meet the EBRD’s requirements and a scoping meeting was held. Due to the government of Hungary’s deadline for signing documentation, and the lack of an EBRD

NGO meeting at the EBRD Annual Meeting 2005

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PART 03: PROMOTING TRANSPARENCY AND ACCOUNTABILITY

Environmental Impact Assessments released in 2004 Country

Project name

Sector

Date EIA released

Date of Board discussion

Days available (before Board)

Albania

Fier-Tepelene road rehabilitation

State

2 Jul 2004

--

--

Albanian

Sponsor web site in Albanian and English

Albania

Vlore Thermal Power Generation Plant

State

6 Feb 2004

8 Jun 2004

122 days

Albanian

Hard copy in Albanian.

Sponsor web site in English

Bosnia and Regional Road Herzegovina Development Programme

State

1 Jun 2004

16 Nov 2004

169 days

Bosnian and Serbian

Sponsor web site in Bosnian and Serbian

Croatia

Rijeka bypass

State

1 Jul 2004

--

--

Croatian

Sponsor web site in Croatian and English

Hungary

M5 Phase II

Private

25 Jun 2004

20 Jul 2004

25 days

Hungarian

Hard copy only

Kazakhstan

Tasbulat

Private

20 Apr 2004

--

--

Russian

Sponsor web site in Russian

Lithuania

AB Lietuvos Elektrine

State

17 Sep 2004

--

--

Lithuanian

Sponsor web site in Lithuanian

Romania

Transelectricaregional transmission link

State

1 Jul 2004

2 Nov 2004

125 days

Romanian

Sponsor web site in Romanian

State

20 Feb 2004

--

--

Serbian

Hard copy only

Serbia and Belgrade-Novi Montenegro Sad motorway

Language of EIA in region

Electronic availability/ language

Note: ‘–’ denotes projects which were not discussed by the Board in 2004.

Board meeting in August, the EBRD Board of Directors approved the project in July on an exceptional basis, conditional on the completion of public consultation prior to signing the legal documentation.

Public consultation was completed in

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August and the results of the consultation were reviewed by the Bank and released to the public. The Board of Directors was also updated on the results of the consultation.

Setting up a complaints mechanism In July 2004 the Bank launched its Independent Recourse Mechanism (IRM).

Its purpose is to assess whether banking operations comply with Bank policies, specifically the Bank’s Environmental Policy and Public Information Policy.

The IRM establishes a procedure for assessing and reviewing complaints about projects that the Bank has agreed to finance. It strengthens the Bank’s accountability and increases the transparency of its decision-making.

The Chief Compliance Officer (CCO) administers the IRM independently from banking operations. Any local group (of two or more people) with a common interest may raise a complaint or grievance if the group is likely to suffer direct harm as a result of a Bank-financed project.

Together with independent experts, the CCO makes an initial assessment and decides if a complaint is eligible for a compliance review. Depending on the complaint, a problem-solving initiative might be considered also to restore dialogue between the parties without apportioning fault or blame. This might include independent fact-finding, mediation, conciliation, dialogue facilitation, investigation or reporting.

The IRM is up and running, although no eligible complaints were received in 2004. A booklet explaining the IRM was published and translated into Russian, Czech and Slovak (further languages to follow in 2005). Three external independent experts have been appointed to assess the eligibility of complaints and

EBRD SUSTAINABILITY REPORT 2004

conduct compliance reviews. Two ENVAC members and a former President of the European Investment Bank were involved in the selection of experts.

human resource concerns, technical developments, emerging trends and future opportunities. ENVAC met at the Bank’s headquarters in London, in March and October 2004.

Listening to expert advice The Environmental Advisory Council (ENVAC) is an independent body of environmental specialists. It advises the Bank on managing environmental protection and natural resources, on policy development and project activities.

ENVAC consists of a group of experts from non-governmental organisations (NGOs), the private sector, academia and policy-based institutions.

In March 2004 the meeting focused on discussing the extractive industries review and projects that had received media and NGO attention. In October 2004 the meeting focused on sectoral issues, in particular on the critical importance of energy and transport, and the Bank’s challenge in assessing sector needs within our countries of operations.

ENVAC provides a forum to discuss priority policy issues, institutional and

ENVAC agenda topics March 2004

October 2004

Extractive industries, general discussion

Extractive Industries Review (by the Bank’s Project Evaluation Department)

Update on specific projects (K2R4, Sakhalin, Animex, Togliatti Azot)

Energy Policy revision process

Case study: BTC pipeline

Transport Policy

Progress on implementing the 2003 Environmental Policy commitments: • social issues and core labour standards • annual environmental report • Independent Recourse Mechanism (IRM)

Municipal and Environmental Infrastructure (MEI) Policy

EBRD Annual Environmental Report 2003

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PART 04: WORKING RESPONSIBLY

04

Working responsibly he EBRD’s headquarters are in London and we have local offices in the 27 countries where we operate. In 2004 the Bank’s London-recruited staff totalled 965 people, the same as the previous year, while locally hired staff in the Bank’s Resident Offices totalled 237, compared with 228 in 2003.

T

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The EBRD has a responsibility to treat its people fairly, provide them with a safe place to work, and manage the environmental impact of the Bank’s buildings and operations.

There are two main areas of activity: the first is how we manage the environmental impact of physical resources and materials, such as our approach to energy efficiency, waste management and recycling at our London headquarters. The second is how we manage our human resources, such as ensuring that our staff work safely and have opportunities for continuous learning and development.

In July 2004 the Bank restructured the Human Resources Department under a new Director of Human Resources. The department recruited new staff and refocused its priorities to fully align its activities with the Bank’s business needs.

Paper usage

Recycling

The EBRD sources paper from sustainably managed forests. This is produced without using chlorine bleach by mills that conform to the ISO 14001 environmental management systems standard.

We recycle used paper, light bulbs, printer and toner cartridges, and other office materials. We use certified companies that follow the required environmental standards to dispose of obsolete IT equipment, such as computers and copy machines.

We have made efforts to reduce the amount of paper we use by distributing information electronically on our internal computer network (intranet) and our external web site (www.ebrd.com).

Refrigerants Our refrigerants comply with EU regulations. We employ a refrigerant recovery unit to retrieve and re-use refrigerant gas. We dispose of redundant refrigerators using licensed contractors.

Paper usage in the last five years 2004

2003

2002

2001

2000

89

88

90

96

94

18.2

17.6

18.9

20.2

19.8

2004

2003

Glass

25,500 kg

26,000 kg

Paper

23,000 kg

22,000 kg

420

395

Tonnage Million sheets

Materials recycled

Managing the environmental impact of our internal operations

Printer/toner cartridges The EBRD is committed to pursuing “the best practices in its internal management”, as set out in the Bank’s Environmental Policy.

EBRD SUSTAINABILITY REPORT 2004

Note: Part of the EBRD’s London headquarters building is sub-let. The glass figures include tenants’ recycling.

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PART 04: WORKING RESPONSIBLY

Energy and travel Our London office is designed to be energy efficient. The Bank’s energy supply is currently sourced through a contract that will terminate in October 2005. For future supplies, we have employed energy management consultants to investigate the availability and cost implications of purchasing a percentage of the Bank’s energy requirements from renewable sources. The results of this study will be presented to senior management.

Apart from the gas and electricity we use to heat and cool our buildings, our main use of energy is from travel, which is associated with carbon dioxide emissions. Business travel by air and rail is essential for our staff to carry out our business effectively, but we also use video-conferencing to reduce the need for travel where possible.

We encourage staff to reduce car use by providing interest-free loans to buy season tickets for public transport.

We also provide secure storage space for people cycling to work.

Environmentally conscious purchasing Although environmental considerations have been explicitly included in a large number of purchasing decisions (such as the supply of paper), further efforts have to be made. The Bank includes in all its purchasing contracts the obligation for the suppliers to be compliant with the relevant UK environmental regulations. Greater efforts will be required to include in the qualification parameters the environmental aspects as part of the tendering process. These could be applied to the purchasing of vehicles, stationery, cleaning services and supplies.

Energy and water consumption 2004

2003

Electricity consumption

20.43 GWh

20.02 GWh

Gas consumption

2.97 GWh

2.71 GWh

69,492 cubic metres

65,604 cubic metres

42,500 square metres

42,500 square metres

Water consumption London headquarters office gross floor area

Note: Part of the EBRD’s London headquarters building is sub-let.

The electricity and gas figures include tenants’ consumption.

Business travel 2004

2003

Air travel

28.1 million kilometres

25.1 million kilometres

Rail travel

308,896 kilometres

349,277 kilometres

approx. 4.4 kilo tonnes

approx. 4.0 kilo tonnes

CO2 from business travel

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Both the cleaning and catering contractors have environmental policies, which include waste minimisation, energy efficiency, safe handling of chemicals, and responsible sourcing of supplies.

The catering contractor uses organic produce where price is not prohibitive and will not knowingly use ingredients containing genetically modified organisms (GMOs). Both the catering and cleaning contractors are equal opportunities employers.

Developing our human resources Diversity The EBRD recruits staff from its member countries without discrimination on the basis of gender, race or religious beliefs. At the end of 2004, a total of 55 nationalities were represented in our workforce. Women represented 55 per cent of the total workforce and 36 per cent of professional staff at the Bank’s headquarters.

We encourage staff to pursue new career opportunities within different departments at Headquarters and in our local offices so that individuals can experience new working environments and expand their skills.

Staff welfare Work-life balance The EBRD’s work-life balance programme offers employees opportunities to take advantage of home working, flexible working hours, part-time working and job sharing, and special leave including parental, study and unpaid leave.

Learning and development A flexible and responsive workforce is key to our business. The Bank offers staff many opportunities to develop and expand their skills. In 2004 the Bank placed specific emphasis on management development, providing training tailored to the needs of the Bank’s different management levels. We piloted a new management development programme, which will be launched in 2005. We also focused on the development and delivery

of a number of business-related courses building on core banking competencies.

A total of 3,148 staff training days were undertaken in 2004.

Health and safety The EBRD’s health and safety policy covers staff working in our network of 33 offices, and provides particular advice on staff travel in pursuing the business of the Bank.

Health and safety risks to staff arise from road, rail and air travel, and from working in countries where there is potential for civil unrest and natural disasters. The Bank therefore places considerable emphasis on procedures related to travel safety, and training for being prepared in an emergency situation.

2004 Training days (excluding Integrity Training) Banking skills Introductory programme Managerial skills Business and personal skills Health and safety Information technology Technical skills

39% 13% 5% 17% 11% 11% 4%

The Health and Safety Unit implements an international standard health and safety management system, which undergoes an independent review every five years. The Unit reports annually on health and safety issues to the Board of Directors, the Executive Committee and the Staff Council of the Bank.

The Bank also maintains a Health and Safety Advisory Committee, comprising senior management from all vicepresidencies and representatives from the Staff Council and Resident Offices, to provide overall policy guidance to the Health and Safety Unit.

Within office buildings, health and safety risks arise mostly from working with computers, and accidents involving slips and falls. Better procedures and more targeted training and assessment has led to a lowering of the accident rate in recent years. The accident rate in 2004 was 6 accidents per 1,000 employees, comprising mostly slips and falls in office buildings.

The Health and Safety Unit provides health and safety information to Bank staff, including information on diseases endemic in the Bank’s countries of operations, travel and security advice, good practice guidance for safe travel, and fact sheets on safety issues associated with over 30 industrial sectors. Travelling staff can access health and safety advice and information through remote internet connection.

Staff numbers 2004

2003

London headquarters

965

965

Regional offices (27 countries of operations)

237

228

1.62 to 1

1.82 to 1

Ratio of male to female professional staff

EBRD SUSTAINABILITY REPORT 2004

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PART 04: WORKING RESPONSIBLY

Retirement plans

Online training course

Health and safety programmes In 2004 the Health and Safety Unit focused on three key programmes.

The EBRD’s Pension Committee has overall responsibility for overseeing the staff retirement plans. The Committee consists of the President, two representatives of the Board of Directors and staff members. Specialist advisers are retained by the Committee as plan administrators and investment advisers.

Advisers are carefully selected from industry leaders to ensure prudent and responsible management of the plans’ funds. As with the Bank’s treasury operations, there are no specific social or environmental investment criteria.

Telecommunications for emergency preparedness The EBRD has focused on improving telecommunications for staff working in our resident offices in our countries of operations. Our key concern is to ensure that a variety of telecommunications systems are in place so that if one or more systems fail, there is secure back-up to allow staff to continue to communicate, particularly at times of crisis. We provided new radio sets and satellite telephones to a number of offices to ensure necessary land-line, mobile, VHF radio and satellite communications.

Defensive driver training Road accidents are the most serious risk facing staff while travelling on business for the Bank. We arrange regular medical examinations for Bank drivers, including eye-sight testing, but driver training is seen as key to reducing the risk of accidents. In 2004 the Bank rolled out a new defensive driver training course to improve the safety driving skills of Bank drivers. Much emphasis is placed on adhering to local traffic rules and to the wearing of seatbelts.

Online training courses As the Bank has offices in the UK and 27 countries of operations, training can be costly and difficult to arrange. Certain technical courses lend themselves very well to online (internet-based) delivery, including via the Bank’s internal computer network (intranet). In 2004 the Bank rolled out two new online training courses, one covering basic travel security awareness and the second covering the use of workstations. These courses allow Bank staff throughout our office network to work through training sessions at a time and at a pace suitable to the individual’s business schedule.

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Integrity and whistle-blowing The Bank’s Chief Compliance Officer is responsible for preserving the internal integrity of the Bank by administering our “Procedures for Reporting and Investigating Suspected Misconduct” (PRISM). If a staff member is suspected of wrongdoing, the allegation is investigated fairly and swiftly based on these procedures. PRISM includes a whistle-blowing provision confirming that the Bank will protect a staff member who cooperates on a misconduct inquiry from being subjected to retaliation or reprisal.

To preserve, protect and maintain the Bank’s strong culture of integrity, a comprehensive learning programme, “Integrity Matters”, was rolled out to nearly all employees in 2004. The emphasis on integrity will continue with follow-up measures throughout 2005.

The Chief Compliance Officer began an in-depth review of the Bank’s Code of Conduct in 2004 and will present the findings in 2005.

Staff representation

Dispute resolution

The EBRD’s Staff Council is made up of volunteers, who are elected by staff and represent the different levels and categories within the Bank (for example, professional staff, support staff and staff in the Resident Offices). It provides a link between management and staff, promotes the rights, interests and welfare of staff members, and is involved in collaborative problem solving and consultation. The Council is consulted by management on all issues relating to the welfare of the Bank’s employees, such as retirement plan arrangements and benefits.

Ombudsman

The following key issues were prominent in the work of the Staff Council in 2004: • renovation works in the Bank’s headquarters building • compensation and benefits issues • smoking policy • pensions.

The EBRD has appointed an independent Ombudsman whose main role is to provide an advisory service for all staff on personnelrelated issues. The service is completely confidential and can include advice for staff members on how to resolve issues as well as intervention to help all parties reach a satisfactory agreement.

Grievance and appeals As an international organisation, the EBRD is afforded a number of privileges and immunities. In employment disputes, this includes immunity from the jurisdiction of the employment tribunals and courts of the member states of the Bank. To give employees a substitute judicial process in which to air their employment-related concerns, the Bank has implemented a three-stage grievance resolution system through its Grievance and Appeals Procedures.

The final stage of appeal is to the EBRD Administrative Tribunal, which constitutes a “quasi-judicial” forum for review of the administrative decision that forms the basis of an employee’s grievance. The President of the Administrative Tribunal must be a highly qualified lawyer from outside the Bank.

EBRD SUSTAINABILITY REPORT 2004

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ADDITIONAL INFORMATION

Abbreviations and acronyms

How to contact us

EBRD, the Bank

European Bank for Reconstruction and Development

BAS

Business Advisory Services

BTC

Baku-Tbilisi-Ceyhan

If you have any questions or comments about this report, please email environment@ebrd.com.

CCO

Chief Compliance Officer

CDM

Clean Development Mechanism

CEETF

Central and Eastern European Task Force

CEP

Caspian Environment Programme

CIS

Commonwealth of Independent States

CSF

Chernobyl Shelter Fund

DIF

Direct Investment Facility

DLF

Direct Lending Facility

EIA

environmental impact assessment

ENVAC

Environmental Advisory Council

ERPA

Emissions Reduction Purchase Agreement

ESCO

energy services company

ETC

early transition country

EU

European Union

FI

financial institution

GEF

Global Environment Facility

GHG

greenhouse gases

GRI

Global Reporting Initiative

IFIs

international financial institutions

ILO

International Labour Organization

IPPC

Integrated Pollution Prevention and Control Directive

IRM

Independent Recourse Mechanism

LTP

Legal Transition Programme

MEI

municipal and environmental infrastructure

NDEP

Northern Dimension Environmental Partnership

NGOs

non-governmental organisations

NSA

Nuclear Safety Account

PED

Project Evaluation Department

PIP

Public Information Policy

PPC

Project Preparation Committee

PSD

Project Summary Document

SMEs

small and medium-sized enterprises

TAM

TurnAround Management

TC

technical cooperation

TFP

Trade Facilitation Programme

UNECE

United Nations Economic Commission for Europe

UNEP

United Nations Environment Programme

UNEP FI

United Nations Environment Programme Finance Initiative

UNFCCC

United Nations Framework Convention on Climate Change

General enquiries should be directed to: Tel: +44 20 7338 6372 Fax: +44 20 7338 6102 Email: generalenquiries@ebrd.com

Other EBRD publications that might interest you Annual Report 2004 Environmental Policy Independent Recourse Mechanism Public Information Policy You can download these publications from our web site at www.ebrd.com or contact our publications department for printed copies: Tel: +44 20 7338 7553 Fax: +44 20 7338 6102 Email: pubsdesk@ebrd.com

Photography

Page

Aleksandar Andjic 55 Richard Bate 17 left, 38 bottom BP 12 Caspian Environment Programme 25 Sue Cunningham 44 Digital Vision 46, 49, 51 EBRD 6, 26 top, 30, 32, 37, 38 top, 41 bottom Mike Ellis 23, 62 Andy Lane 2, 58 Maritza East II 20 Northern Dimension Environmental Partnership 29 Photo Disc 17 right, 28 Vladimir Pirogov cover, 34, 41 top, 45 Powerstock 26 bottom Jon Spaull 14, 43 Colin Spurway 52

Š European Bank for Reconstruction and Development One Exchange Square London EC2A 2JN United Kingdom Printed in England by Colchester Print Group, using environmental waste and paper recycling programmes.

Colchester Print Group is ISO14001 registered.

Printed on 9lives 55 produced with 55 per cent recycled fibre from both pre and post consumer sources, together with 45 per cent virgin ECF fibre comprising a carefully selected combination of FSC, PEFC and SFI fibre from sustainable forests.

6410 Sustainability Report – June 2005 Report designed by nim design

EBRD SUSTAINABILITY REPORT 2004

European Bank for Reconstruction and Development One Exchange Square London EC2A 2JN United Kingdom Switchboard /central contact Tel: +44 20 7338 6000 Fax: +44 20 7338 6100 SWIFT: EBRDGB2L Web site www.ebrd.com Requests for publications Tel: +44 20 7338 7553 Fax: +44 20 7338 6102 Email: pubsdesk@ebrd.com General enquiries about the EBRD Tel: +44 20 7338 6372 Fax: +44 20 7338 6102 Email: generalenquiries@ebrd.com Project enquiries Tel: +44 20 7338 7168 Fax: +44 20 7338 7380 Email: projectenquiries@ebrd.com