ANNUAL REPORT 2016

MANAGEMENT DISCUSSION AND ANALYSIS

10.0 ENVIRONMENTAL AND SOCIAL MANAGEMENT SYSTEM

For information on our commitments and procedures associated with Environmental and Social Risk Management and ESMS organisational capacity at Bank Audi, please refer to Bank Audi Lebanon’s 2014 and 2015 CSR Reports, and Bank Audi’s 2015 Annual Report.

During 2016, the Bank took additional steps to enhance Environmental and Social (E&S) Risk Management in its Corporate and Commercial Banking activities. As part of our ongoing commitment to managing these risks, an in depth E&S risk management training was held in collaboration with E&S experts from the International Finance Corporation (IFC) across the Group. This was done in an effort to further strengthen our internal organisational capacity to identify and manage these risks. The training provided a comprehensive overview of key E&S risk management concepts, including the IFC Performance Standards and how they should be applied in supporting the Bank’s credit decision-making. These sessions were attended by 96 Corporate and Commercial Banking employees from across all the Bank’s entities. Furthermore, the IFC training included an enhanced and in-depth two day E&S risk training addressing the Bank’s dedicated ESMS officers from each of the Bank’s entities.

Throughout 2016, the Bank placed an emphasis on further strengthening our internal capacity to identify and manage E&S risks at Odea Bank.

A three-hour compulsory online training module, developed by the Banks Association of Turkey (BAT) on Sustainability Guidelines for the Banking Sector was assigned to all Odea Bank Corporate and Commercial Banking teams, including Relationship Managers (352 employees in total had completed the training by February 2016). Two further E&S risk assessment sessions were held in collaboration with international E&S consultants, attended by 18 and 20 participants, respectively. These sessions provided a more in-depth coverage of E&S risk assessment and monitoring of the banking sector, including the importance of project finance transactions.

As part of our commitment to continuously improve our ESMS, updated E&S risk review documentation was rolled out during 2016 across all entities. Improvements were made to this documentation based on observations made since our initial implementation of the Bank’s ESMS in 2014. We updated the Bank’s internal guidelines for categorising E&S risk, as well as the review summary documentation associated with transaction E&S risk reviews. These changes were made in an effort to streamline the process, while at the same time ensuring that all transactions within scope of E&S risk review were reviewed according to the required standards.

TRANSACTION E&S RISK REVIEWS

During 2016, 802 transactions across the Group were subject to E&S risk review, as per requirements set out by our ESMS (see Figure 1 for E&S risk breakdowns of these transactions). By comparison, 679 transactions were reviewed in 2015. As part of the Bank’s E&S risk review process, independent consultants were commissioned to conduct E&S due diligence on project finance/project-related corporate loan transactions at Odea Bank and Bank Audi Egypt, in order to confirm the compliance of the proposed projects with the relevant IFC Performance Standards.

TRANSACTION E&S RISK REVIEWS

(1) An environmental and social risk categorisation is assigned to a transaction based on the understood magnitude of E&S impacts/risks associated to the client’s sector and the specific transaction. Transactions are assigned a category of A, B or C, in descending order of environmental and social sensitivity. Bank Audi follows the IFC definitions for E&S risk categorisations, namely:
CATEGORY A: projects expected to have significant adverse social and/or environmental impacts that are diverse, irreversible or unprecedented.
CATEGORY B: projects expected to have limited adverse social and/or environmental impacts that can be readily addressed through mitigation measures.
CATEGORY C: projects expected to have minimal or no adverse impacts.