E&S Advisory and Risk Management Services

Capability Statement


Problem Statement

Not long ago environmental, social and governance (ESG) issues were the niche concern of a select group of ethical or socially responsible investors. Few investment vehicles were available in the financial markets that enabled investors to target their investments according to ESG factors. Over the past 10 years, this reality has been undergoing a rapid change. On all fronts, be it by asset managers, regulators, or the investors themselves, serious efforts have been undertaken to incorporate ESG criteria into investment analysis and decision-making processes. Some general guidelines like the United Nations Principles for Responsible Investment (PRI) have encouraged a fundamental change in investment practices whereby investors explicitly employ ESG factor analysis to enhance returns and better manage risks.

This development has been catalysed by industry trends such as the EDFI Harmonisation Initiative, where investment flows are aligned with the Sustainable Development Goals and, more recently, with the Paris Climate Agreement. Further, the European Commission has developed a specific EU taxonomy for sustainable activities, which has the ability to not only trigger reporting and potentially accounting, but ultimately prompt funding considerations on the European financial markets as well as for any European investor for transactions abroad.

Our Approach

Still, there remain challenges for investors when integrating ESG considerations into their decision-making process. First, some still question if considering ESG issues actually adds value to their investment process or might even hurt yields. Even though several recent studies have shown that ESG integration can limit volatility and enhance returns, investment professionals often place a greater weight on their own experience than on third-party research - and their own experience is often still dominated by traditional investment paradigms that were established before ESG factors became an issue.

Another problem ESG investors face is the lack of high-quality data that can guide their investment decision process. Without access to data sets, modelling capabilities, and valuation techniques, it is not always straightforward to understand the effects of ESG risks and opportunities when planning an investment in a company. The good news is, that there has been a recent surge in specialized data providers for ESG investors. In comparison to market suppliers, these firms concentrate only on ESG research, evaluations, and analysis. Arabesque, Covalence, CSRHub, Ethos, Inrate, Sustainalytics, and Goby are just a few companies that offer comprehensive ESG data services. Each of these firms has its own technique of assessing ESG aspects, grading methodology, and risk analysis tools.

Finally, greenwashing is a growing challenge to the ESG investment industry. This term originally described misleading claims about environmental practices, performance, or product, but has been used more widely to incorporate ESG factors more broadly. In recent years, there have been serious questions why certain stocks are part of the top holdings of ESG funds even though these companies were involved in significant controversies or undertook controversial activities. This has been a major blow to the credibility of ESG investing. The good news is that certain regulators like the EU have recently launched various initiatives to standardize claims around the green and ESG credential of funds and indices, which will contribute to a clampdown on greenwashing.

Not withstanding these challenges, there is a widespread perception that ESG investing is likely to become the market standard within the next five years. At that point, a differentiation between “mainstream investing” and “ESG investing” will most likely no longer make sense as they will have merged into one concept. Most available research today indicates that this will be good news for investors as their long-term yields will increase while volatility will be tamed.

For our work in emerging markets, this implies several changes. First, more effort should be put in projects combating climate change, the mobilization of funds for that as well as the need for investors to ensure their money is well spent. Next, development of more regulation in emerging markets when it comes to ESG will in turn provide higher incentives to proactively engage in those markets. The incorporation of climate-related as well as technology-related questions into governance will become instrumental in addressing ESG issues along the investment process. Finally, advancement of technology that can be used to improve and support ESG reporting, grievance mechanisms, and risk management will take a front row in many assignments.

Over the past years of its operations, LFS has built up substantial track record in the field of E&S Advisory, Risk Management and the Development of E&S Management Systems for Social Enterprises, Financial Institutions and Investors. The knowledge gained and tools developed through our extensive project work enable us to provide a comprehensive array of services to clients for systematically improving their E&S performance in order to ensure compliance with their double-or triple-line business model. LFS is familiar with the most recent E&S requirements and approaches of leading international development finance institutions and development agencies.


 

Our Tools and Range of Services

The table below shows a selection of services which are provided by LFS in the business line of E&S Advisory, depending on the respective client and project requirements.

E&S Risk Management

Review, Development & Implementation of ESMS

Development of E&S Risk Management Tools

Assessment of Compliance with IFC PS

Management of E&S compliant Supply Chains

E&S Commitment Plans and Reference Frameworks

Implementation of E&S credit Risk Assessment for FIs

ESG Investment Services

Proprietary Materiality Maps of various Sectors

Tools for integrating ESG into investment decisions and models (Equity and Debt)

ESG Screening Tools

ESG Due Diligence Questionnaire

E&S Gap Analysis at FI, Fund or Enterprise Level

E&S Portfolio Audits

E&S Impact Measurements

E&S Engagement and Stewardship Services

Advisory on E&S compliant Impact Investing

Development of Sustainable Finance Credit Lines

ESMS Samples for FIs, Fintechs and companies

Standards’ Library

E&S Trainings & Capacity Building

E&S Training needs assessment

Design of curricula, learning materials and case studies for classroom and virtual/e-delivery

On-the-ground and remote trainings

E&S Reporting & Monitoring

Development of E&S Reports

Concepts for reporting against Sustainable Finance Disclosure Regulations (SFDR)

Remote and on-site monitoring of E&S risks

 

 
Partners

To leverage our in-house expertise in the field of E&S advisory, LFS can benefit from a strong worldwide partner network that includes both s reputable regional consultancy firms in Latin America, Africa and Asia and a large network of individual experts of that field around the globe.

Typical ESMS Development Assignment

An increasing number of donors and investors expects investees to have a fully fledged Environmental and Social Management Systems (ESMS) in order to ensure an efficient mitigation of all E&S risks a company or financial institution faces. In the past, LFS has designed such ESMS for both Fintech and Agrotech Firms as well as for Financial Institutions in Developing countries. A typical ESMS development assignment commonly incurs five phases:

  • Phase 1: Kick-Off and initial site-visit and stocktaking
  • Phase 2: Development of ESMS Procedures & Tools
  • Phase 3: ESMS Training
  • Phase 4: ESMS implementation
  • Phase 5: ESMS Evaluation

The activities in each of the phases include the following:

Phase 1: Kick-Off and initial site-visit and stocktaking

The objectives of Phase 1 include general awareness raising for E&S risk management and Green Finance opportunities within the clients` institution, build the capacity of an E&S officer, identify the clients` E&S needs as well as to prepare a Work Plan for the ESMS development.

Total of around ten working days

Phase 2: Development of ESMS Procedures & Tools

In Phase 2, the ESMS itself including all accompanying procedures and tools is developed in accordance with the client´s needs as well as potential specific requirements or regulation and. This will occur in close cooperation with the client as well as a potential donor.

Total of around five working days over several months

Phase 3: ESMS Training

Through the ESMS Training in Phase 3, relevant client staff will be trained in E&S topics and on the ESMS implementation. The training is held jointly by the consultant and the E&S officer and shall be interactive including case studies. It ideally takes place on-site.

Total of six working days

Phase 4: ESMS implementation

In Phase 4, the developed ESMS is implemented by testing its applicability on a variety of medium to high-risk activities as well as on operational level. This process shall both strengthen the client´s staff capacity as well as identify potential weaknesses of the developed ESMS.

Total of around ten working days over several months

Phase 5: ESMS Evaluation

The ESMS implementation is evaluated in Phase 5 with the objective to reinforce the client´s staff capacity to use the ESMS and by assisting in refining the ESMS based on the findings from Phase 4. The final output will be a solely standing ESMS that covers all the client´s E&S risks.

Total of six working days

 

Project References

The table below contains a summary overview of relevant projects carried out by LFS over the last years with regards to E&S risk mitigation as well as the development and/or implementation of ESMS. More detailed information on selected projects can be provided on request.

 
Country
Client
Year
Project & Description
 
Benin

Agricultural Development Fund in Benin (funded by KfW Development Bank)

2022

Development support and implementation of an Environmental and Social Management System for the Agricultural Development Fund in Benin (FNDA).


Uruguay

Banque Heritage (partially funded by DEG)

2022

Review and improvement of the existing Environmental & Social Management System of Banque Heritage including guidance to achieve a level based on international best practices as well as accompanying staff training as well as development of a sustainability report.


China

Zhujiang Financial Leasing (partially funded by DEG)

2022

Review and upgrade of the existing Environmental & Social Management System of Zhujiang Financial Leasing as well as accompanying staff training as well as development of a sustainability report.


Worldwide

DEG

Since 2020

Framework Agreement for ESMS and other E&S Advisory Projects with Financial Institutions and Investment Funds in conformity with new/harmonized EDFI approach, leading a consortium with three partner firms.


Mexico

Banco Intercam (partially funded by DEG)

2021

Development and implementation of an Environmental & Social Management System for Intercam as well as accompanying staff training.


Paraguay

Banco Regional (partially funded by DEG)

2021

Review of the existing Environmental & Social Management System of Banco Regional and accompanying staff training as well as development of a sustainability report.


Egypt

Sandah for Microfinance

2020 - 2021

Development of an Environmental and Social Risk Categorization/Screening Methodology and Upgrade of E&S Risk Management Policy.


Germany, Mexico, Brazil

ICLEI (funded by KfW Development Bank)

2020 - 2021

E&S DD of a prospective project executing agency for a new urban infrastructure insurance facility in Latin America (in response to climate change risks). E&S risk identification and development of an E&S commitment plan for the project.


Germany + remote work with various countries

Investing for Employment (IFE) (KfW subsidiary)

2019 - 2021

Review of project applications from public and private sector partners in Ethiopia, Tunisia and Côte d’Ivoire, including screening of E&S risks and review of E&S action plans. Implementation of E&S requirements & screening tools for MSMEs supported under a Covid-19 Response Programme through financial intermediaries.


Malawi

Malawian Agriculture and Industrial Investment Corporation

2021

Development of an Environmental and Social Risk Categorization/Screening Methodology and Upgrade of E&S Risk Management Policy.


Jordan

GIZ Central Bank of Jordan

2018 - 2019

Training on financial consumer protection, social performance management and risk management (including E&S risks).


Rwanda

One Acre Fund (project funded by KfW Development Bank)

2019 - 2020

Reviewing and Expanding an Social and Environmental Management System of an Agricultural Organization providing Financial and Non-Financial Services.


Senegal

MyAgro (project funded by KfW Development Bank)

2019 - 2020

Developing and Implementing an Social and Environmental Management System of an Agricultural Organization providing Financial and Non-Financial Services.


Nigeria

Babban Gona (project funded by KfW Development Bank)

2020 - 2021

Developing and Implementing an Social and Environmental Management System of a Social Enterprise providing Financial and Non-Financial Services.


 

The E&S Advisory Team

Dan Balke
Managing Director & Partner

Dan Balke is a Managing Director and Partner of LFS, with a multifaceted record of senior management positions in development finance projects and banks. As manager and expert he covers an array of areas, in the fields of inclusive, MSME and digital finance as well as IT projects and core banking systems implementation and, since recently ESG/ ESM investments and advisory mandates. Dan managed a variety of projects through different stages of their cycle for all major international and a variety of national development finance institutions.

Dan also served as Chairman of the Supervisory Boards of three commercial banks. In the course of the last three years, he managed a number of projects in different geographies, such as in Egypt (Sandah for Microfinance and Al Ahly Capital) and Pakistan (Karandaaz), where LFS helped setting up or provided capacity building to MVSE finance institutions.

He assisted to developed strategies in digital finance for Palestine Investment Bank and Caja Piura in Peru and in climate finance for PEG Ghana and Yemen Kuwait Bank. For GIZ Jordan, he provided support to the local Central Bank as well as to the Development & Employment Fund.

Dan is a member of the supervisory board of Access Holding AG, Germany and has served as chairman to the supervisory boards of several commercial banks in emerging markets. He is fluent in English, Spanish, Serbo-Croat and Russian and holds a Finance MBA from Manchester Business School and a Msc. Economics from Freie Universität Berlin and obtained a Certificate in ESG Investing from the CFA Society.

 
Konstantin Schroeter
Advisor | MSME Finance & ESG

Konstantin has contributed to the implementation of various financial sector projects in developing countries. He supported the review and development of ESMS for several enterprises and Financial Institutions across various geographies and administrates the Framework contract for the development of ESMS for financial institutions with DEG from the side of the consortium lead by LFS. He has developed a tool for assessing the current status of E&S risk mitigation according to the IFC PS of enterprises and Financial Institutions. Moreover, he has worked in a variety of other development finance projects, including in the field of green finance.

Konstantin graduated with a Master´s degree in Economics from Freie Universität Berlin. Besides his native German, he is fluent in English and Spanish, possesses intermediate proficiency in Russian and basic proficiency in French.