Procedures

Factoring

 

 

 

The EBRD’s Sustainability Mandate requires it to “promote in the full range of its activities, environmentally sound and sustainable development”. This mandate is interpreted to apply not only to direct investment and lending by the EBRD but also to the investment and lending activities of Financial Intermediaries (FIs) such as banks, investments funds, leasing, insurance and factoring companies. EBRD’s Performance Requirement 9 (PR 9) outlines the specific environmental and social requirements for FIs, in line with the Bank’s Sustainability Mandate and Environmental and Social Policy. The procedures for International Factoring outlined below are fully consistent with PR 2 whilst taking into account the special nature of Factoring.

For the purposes of these procedures, Factoring is defined as a specialised service provided through a financial institution (FI) involving a continuing arrangement between the FI (“the Factor”) and the client (the Supplier or “Seller”). The Seller assigns to the Factor receivables arising from contracts of sales of goods between the Seller and its customers (“Buyers”). Pursuant to the assignment the Factor purchases the Seller’s debts as they arise (with or without recourse) and assumes some or all of the following functions: finance for the Seller, maintenance of accounts, collection of receivables, and protection against default by Buyers. Notice of the assignment of the Seller’s receivables is to be given to the Buyers. In the case of international factoring, the Factor (Export Factor) typically selects a correspondent to act as Import Factor in the country to which the exports are going.

1.  The Export Factor should conduct the following environmental and social due diligence on Sellers prior to concluding a Factoring Agreement:

  1. Screen the Seller’s business and the goods being manufactured against EBRD’s Environmental and Social Exclusion and Referral List. Sellers engaged in activities listed on sections 1 and 2 of the exclusion list may not be financed. Those engaged in activities listed on section 3 of the list (the Referral List) may not be financed unless prior written approval has been obtained from EBRD.
  2. Check regulatory compliance of the Seller: The Sellers’ business and the goods being manufactured are required to comply with the health, safety, labour and environmental (HSE) regulations and standards (including product standards) of the country where the business is located. The level of assurance needed from the Seller to confirm regulatory compliance varies according the environmental and social risk associated with the Seller’s operations:
    1. (i) In the case of Sellers whose business are not considered environmentally and socially sensitive (see box below), it is usually sufficient to obtain appropriate compliance warranties/representations from the Seller. These should be included in the Factoring Agreement, e.g. as ongoing representations.

      (ii) In the case of Sellers whose business is classified as environmentally and socially sensitive by EBRD, the Factor should require the Seller to provide evidence of compliance such as copies of environmental permits and/or approvals, recent inspection reports etc. The Factor may use the environmental and social questionnaire to obtain such information. If the information obtained from the Seller raises any issues of concern the Factor should also check the company’s environmental and social performance with the competent environmental authorities. If the Seller’s business is materially non-compliant, the Factor should satisfy itself that the Seller is committed to taking appropriate measures to achieve compliance within a reasonable time frame. Appropriate requirements should be included in the Factoring Agreement where necessary. If the mitigation measures proposed by the Seller are considered inadequate, the transaction should be rejected.

       

      EBRD Environmentally Sensitive Sectors List

      The following sectors are considered environmentally sensitive. If a company (normally in trade finance or factoring) is working in one of these sectors or locations a questionnaire should be completed to ensure that environmental issues have been adequately considered. Other environmental due diligence requirements may also apply.

      Environmentally sensitive operations

      Activities

      • Mining, on-site extraction and processing of metal ores or coal
      • Oil and gas development
      • Crude oil refineries and petrochemical facilities
      • Thermal, gas turbine and diesel driven power stations
      • Production of non-ferrous metals
      • Iron and steel production
      • Chemical industry
      • Pharmaceuticals production
      • Large-scale cement and lime processing
      • Large-scale commercial logging
      • Pulp and paper manufacturing
      • Large-scale intensive agriculture
      • Municipal water or waste water infrastructure
      • Construction of motorways, express roads and lines for long-distance railway traffic and of airports
      • Shipment of hazardous materials (e.g. rail, road)
      • Storage of hazardous materials (e.g. port terminals)
      • Tanneries

      Environmentally sensitive locations

      Operations located in, or potentially having an adverse impact on:

      • Environmentally sensitive locations (e.g. national parks, conservation areas, wetlands, tidal flats, primary forests)
      • World Heritage Sites or other sites of archaeological or cultural significance
      • Indigenous peoples
  1. Screen the Sellers’ approved clients (buyers): The Factor should check that buyers which are to be included in the Factoring Agreement and which are located in the Bank’s countries of operation are not engaged in activities listed on the Environmental and Social Exclusion and Referral List and comply with the environmental, health, safety and labour regulations and standards of the country of import. The Factor should ask the Seller to obtain appropriate warranties from such buyers.

2.  Inclusion of new buyers in the Factoring Agreement:

Prior to approving the inclusion of new buyers in the Factoring Agreement, the Factor should check the environmental and social compliance status of the new buyers as stated in section (1c) above.

3.  Annual Environmental and Social Report

The Factor is required to submit annual environmental reports to EBRD. These can be brief and should focus on the points listed below.

Annual Report coverage

 

  1. Breakdown of portfolio by industry sector and size of clients (Sellers). List clients in environmentally sensitive sectors and related tenor/exposure limits.
  2. Give details of any Factoring Agreement rejected on environmental or social grounds, in particular for actual or perceived non-compliance of clients with the Environmental and Social Exclusion List and host country environmental, health, safety and labour regulations.
  3. Give details of any material HSE issues associated with clients during the reporting period which have become known to the Factor, in particular:
    • any significant accidents / litigation / complaints by the public or the authorities;
    • incidents of material non-compliance of clients with applicable environmental, labour and health and safety regulations, in particular business loss/suspension/ shutdown due to HSE problems;
    • any incidents of non-compliance by clients with environmental covenants or the conditionality imposed by the Factor.
  1. Give details of any material HSE issues associated with Buyers, such as
    • Rejection, on environmental, health, safety and labour grounds, of any Buyers submitted for inclusion in the Factoring Agreement
    • Any debt purchases rejected or gone bad for reasons related to environmental, health, safety and labour which have become known to the Factor, in particular non-conformity with the Environmental and Social Exclusion List or the environmental and social product standards of the country of import.

 

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