Environmental and social risks in credit operations

Identifying, assessing and mitigating the environmental and social risks of credit operations are key activities in global risk management of Latin America’s financial sector, and to a greater extent, multilateral banking. Inadequate management of such risks by borrowers or final beneficiaries jeopardizes the achievement of development goals pursued by projects and may pose financial, reputational and liability risks, among others, for financial institutions. 

Therefore, CAF—development bank of Latin America—develops a clear strategy with two fundamental objectives: to permanently create and improve frameworks, spaces and processes that ensure the Institution’s adequate management of environmental and social risks of its operations, as part of a comprehensive risk management system; and to foster a corporate culture in that regard. 

CAF’s credit process includes a management system that integrates methodological approaches, procedures, instruments and other available technical and human resources, for a comprehensive management of environmental and social risks arising from CAF-funded operations. 

Under this system and the risk management process, we classify credit and investment operations into four broad categories, according to the nature and type of environmental and social risks they entail. As a result, for each type of operation, a methodological approach, relevant procedures and specific support tools have been developed for the assessment of new operations and for monitoring those in the administration phase. 

The first phase consists of a preliminary screening, aimed at categorizing the operation according to the magnitude, nature and inherent risks and the general characteristics of the context in which it is developed, by assigning a level of environmental, social and climate risk. This level defines the scope of the detailed evaluation to be developed at a later stage. 

Credit operations financed by CAF must comply with each country’s applicable legal framework on environmental and social matters, including issues related to occupational health and industrial safety, in addition to the set of Environmental and Social Safeguards established by the Institution. These safeguards constitute the minimum technical benchmark to ensure sustainable and socially responsible environmental management, and embody the environmental and social principles of the organization.