The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) Concept Environmental and Social Review Summary Concept Stage (ESRS Concept Stage) Public Disclosure Date Prepared/Updated: 04/27/2021 | Report No: ESRSC02018 Apr 27, 2021 Page 1 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) BASIC INFORMATION A. Basic Project Data Country Region Project ID Parent Project ID (if any) China EAST ASIA AND PACIFIC P170839 Project Name China Strategic Green and Low Carbon Investment Fund Project Practice Area (Lead) Financing Instrument Estimated Appraisal Date Estimated Board Date Finance, Competitiveness Investment Project 5/10/2021 6/21/2021 and Innovation Financing Borrower(s) Implementing Agency(ies) People's Republic of China China Clean Development Mechanism Fund (CDMF) Proposed Development Objective To expand equity financing for green investments in China by mobilizing long-term capital and deploying best-practice Public Disclosure green investment standards and criteria Financing (in USD Million) Amount Total Project Cost 402.00 B. Is the project being prepared in a Situation of Urgent Need of Assistance or Capacity Constraints, as per Bank IPF Policy, para. 12? No C. Summary Description of Proposed Project [including overview of Country, Sectoral & Institutional Contexts and Relationship to CPF] The project will use an IBRD loan to capitalize a national-level Strategic Green and Low-Carbon Investment Fund for China, with the objective of mobilizing additional long-term capital to invest in eligible green enterprises and projects. The Fund will provide equity financing and will target ventures with the potential for significantly positive environmental and climate outcomes. The investments will focus on growth-stage green companies, with a minimum of 70% of its investments dedicated to privately-owned enterprises (POEs) and a minimum of 60% of investments will go into SMEs which face the most serious challenges in accessing long-term capital. In addition, the project will implement best practices in sub-project screening and selection, appraisal, implementation monitoring, as well as reporting/impact evaluation. Apr 27, 2021 Page 2 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) D. Environmental and Social Overview D.1. Detailed project location(s) and salient physical characteristics relevant to the E&S assessment [geographic, environmental, social] The project will establish a Strategic Green and Low Carbon Investment Fund under Component 1. The project will be implemented by the China Clean Development Mechanism Fund (CDMF) Management Center, which will establish a wholly-owned special purpose vehicle (SPV) to act specifically as the Project Implementing Unit (PIU). The SPV will receive the loan proceeds from the Ministry of Finance (under an on-lending agreement) and will use it as initial capitalization to establish the proposed Green Investment Fund. The Fund will mobilize additional capital from Chinese and foreign institutional investors. Support will be targeted, and funds used are tracked to clearly defined FI subprojects. Based on current design and the findings of market investigation, the Fund is anticipated to mainly invest in four areas, including energy saving and environmental protection, cleaner industrial production, energy efficiency improvement, and clean energy industry. The equity investments will mainly support growth-stage SMEs in the green supply chain, including manufacturing enterprises of equipment, parts and materials for clean energy, improved energy efficiency, resource recycling and pollution prevention and control; enterprises to expand or upgrade for non- toxic and non-hazardous raw material substitution and improved energy efficiency; enterprises involved in wastewater treatment, solid waste utilization, battery energy storage system (BESS), hydrogen energy utilization, and renewable energy facilities operation. The project design will exclude any high-risk subprojects/investments that would require large scale land acquisition or be located in vicinity of any environmental sensitive areas, and will not support subprojects involving the use or potential pollution of international waterways, or in a disputed area. During project preparation, the team will review the project pipeline of investments and CDMF’s current portfolio Public Disclosure investments to further screen the potential types of investments and their characteristics relevant to E&S assessment. The project investments are proposed to be mainly in six regions, including Beijing-Tianjin-Hebei Area, the Northeastern Region, Yangtze River Economic Belt, Beibu Gulf Cities Cluster, Guangdong-Fujian-Zhejiang Coastal Cities Cluster, and Yellow River Basin. The environmental and social (E&S) contexts will differ among subprojects with regards to landscape, climate, natural and socio-economic conditions. Regarding landscape, there are extensive alluvial plains in the east, broad grasslands in the northern Mongolian plateau, hills and low mountain ranges in the south and the deltas of China’s two major rivers (Yellow River and Yangtze River) in the central-east region. Given highly complex topography, the climate and natural conditions in China differ from region to region, monsoon climate in the east, temperate continental climate the northwest, and alpine climate for the Qinghai Tibet Plateau. In terms of socio-economic conditions, China’s central and eastern provinces are generally more advanced in terms of economic development and are more densely populated compared with the northern and western provinces. Most of the central and eastern provinces are Han Chinese dominated. A few provinces (i.e., Yunnan, Guizhou, Qinghai, Ningxia, and Inner Mongolia) with a higher composition of ethnic minorities will be potentially involved. Upon sub-project identification during implementation, further analysis of environmental and social baseline will be conducted as part of assessment process specific to individual investment. D. 2. Borrower’s Institutional Capacity The responsible Financial Intermediary (FI) for implementing the project will be a special purpose vehicle (SPV) to be established by China Clean Development Mechanism Fund (CDMF) Management Center. Establishment of CDMF was approved by the State Council in 2006 for financing actions tackling climate change. CDMF is governed by a Board comprised of representatives from seven line ministries responsible for climate actions in China, including NDRC, MoF, Ministry of Foreign Affairs, Ministry of Science and Technology, Ministry of Environmental Protection, Ministry Apr 27, 2021 Page 3 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) of Agriculture and the China Meteorological Administration. The Board is chaired by the NDRC with the Ministry of Finance as Vice-Chair. The daily management of CDMF is undertaken by CDMF Management Centre, which is affiliated to MoF. The SPV (as Limited Partner) and the fund manager (as General Partner) will establish a Strategic Green and Low Carbon Investment Fund. The Fund will be managed by a competitively selected professional Fund Management Company (FMC). The fund will have an Advisory Committee consisting of representatives of Limited Partners, which is responsible for the strategic direction, investment policies and procedures. The fund will also have an Investment Committee responsible for reviewing and approving all proposals for investments and exits. The Bank team conducted a preliminary due diligence on CDMF’s current E&S management capacity. Most of the investments were debt financing. In addition, the CDMF has made two equity investments, and also provided guarantees for green loans. CDMF has rich experience cooperating with international finance institutions (such as IFC, AIIB, Green Climate Fund) and equator banks, and CDMF has developed and implemented an ESMS composed of an E&S policy, procedures for E&S risk screening, assessment, management and monitoring, and institutional arrangements. The ESMS E&S risks are managed and supervised by the in-house Investment Department, Risk Management Department, and Administration (Human Resource) Department. The ESMS takes reference from IFC’s performance standards and E&S classifications. It was understood from interview with CDMF’s Investment Department that normally only projects with environmental assessment categories of B or C will be considered for investment. CDMF will conduct due diligence on the investee enterprises’ domestic regulatory compliance, conduct site investigation on the potential E&S impacts, seek environmental and industrial experts’ evaluation comments, and include E&S risk as part of post-investment monitoring. Public Disclosure During project preparation, a more thorough due diligence review will be conducted by the Bank Team on the CDMF’s existing ESMS and E&S performance and capacity through reviewing the relevant project due diligence reports for CDMF’s existing subprojects and carrying out site visits to potential invetment activities for the fund and selected similar projects/investee enterprises in the CDMF’s current investment portfolio. With comparison to Bank’s ESF requirements, the current CDMF’s ESMS will be further improved, especially with a more solid integration into the investment decision process, applying relevant ESF requirements during assessment, preparation and implementation of subprojects with substantial risk, and strengthening the capacity and knowledge of risk control staff to manage E&S risks and impacts. The SPV to be established by CDMF will be responsible for ESMS implementation, and ensure that the requirements of the ESMS are followed by the fund manager, and subproject enterprises receiving equity investments through contract obligations. CDMF is highly committed to enhancing the existing ESMS to bring it to align with ESF requirements. CDMF agreed that the enhanced ESMS will articulate the roles and responsibilities of CDMF, the SPV, the fund management company, and investees to enforce the ESMS consistent with ESF requirements. II. SCREENING OF POTENTIAL ENVIRONMENTAL AND SOCIAL (ES) RISKS AND IMPACTS A. Environmental and Social Risk Classification (ESRC) Substantial Environmental Risk Rating Substantial The project has overall environmental benefits by investing in green sectors and industries that would contribute to cleaner energy, improved energy efficiency, reduced release of pollutants to air and water, and waste reduction. As specific subproject information will remain unknown until implementation, the environmental risk assessment was Apr 27, 2021 Page 4 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) conducted by reviewing proposed type of investments and considering the environmental management practice for these investments in China. The project is anticipated to invest in four areas, including energy saving and environmental protection, cleaner industrial production, energy efficiency improvement, and clean energy industry. The equity investments will mainly support growth-stage SMEs in the green supply chain, including manufacturing enterprises of equipment, parts and materials for clean energy, improved energy efficiency, resource recycling and pollution prevention and control; enterprises to expand or upgrade for non-toxic and non-hazardous raw material substitution and improved energy efficiency; enterprises involved in wastewater treatment, solid waste utilization, BESS, hydrogen energy utilization, and renewable energy facilities operation. The project design will develop a clearly defined exclusion list to exclude high-risk investments. The adverse environmental impacts during new facilities construction or rehabilitation would mainly include general construction nuisance of dust, noise, soil disturbance, traffic safety, wastewater and waste disposal, and disturbance to modified habitats, which are generally temporary, short-term, localized, and could be effectively avoided, reduced or mitigated through adopting mature civil work techniques and good management practice. Operation of manufacturing plants and wastewater treatment facilities could bring environmental impacts such as odor, air emissions, noise, wastewater, waste (including sludge), and occupational health and safety (OHS) concerns. In domestic practice, the plant owner/operator is responsible for operational impacts monitoring through engaged third-parties, and subject to supervision by local environmental authorities. The environmental risks during operation are thus expected to be manageable by domestic regulatory system. Fire and explosion risks during BESS and hydrogen facilities construction and operation can be well controlled by following national design standards with safety considerations, including placement criteria, fire and explosion prevention measures and emergency response requirements. The environmental impacts assessment will compare domestic standards with the Bank’s Environmental, Health and Public Disclosure Safety (EHS) guidelines and Good International Industry Practice (GIIP), and determine more stringent performance criteria for the manufacturers, BESS and hydrogen facilities operation, and hazardous waste (including battery waste) disposal. Although CDMF has no prior Bank project experience, it has rich experience cooperating with international finance institutions and equator banks, and has developed and implemented an ESMS with reference to IFC’s performance standards. For this project, CDMF is committed to improve its current ESMS prior to project appraisal to be applicable to the whole fund portfolio and consistent with ESF requirements, and maintaining the ESMS operation with adequate financial and human resources for subprojects’ E&S management in alignment with relevant ESSs throughout the project lifecycle. Also, a time-bound capacity development plan will be prepared for ESF implementation. Given this, the overall environmental risk is rated substantial at this stage. Social Risk Rating Substantial The fund will scale up equity investment in a mix of public and private enterprises (prioritizing private SMEs). The fund will promote the investment in equipment manufacture, construction and operation of solid wastes (non- hazardous) utilization facilities, installation and operation of BESS and hydrogen energy utilization. The equity investments will have a clear purpose and are not expected to support large projects. All Environmental and Social Standards (ESSs) would be relevant to the fund. The exclusion list will set out explicit criteria for excluding high risks investment proposals. For typical activities, the most significant social risks are mainly related to (a) land acquisition and resettlement for establishing manufacturing and other facilities; and (b) labor and working conditions for operating the facilities. Land acquisition for constructing a new subproject may displace (economically and physically) tens of persons. For investment in upgrading existing facilities, the challenges are to approach to government to find adequate documented evidence to demonstrate its compliance status and agree on the remedial actions for gaps with ESS5. The investment subprojects will introduce direct workers, contracted workers, and primary supply workers. The numbers of direct workers and contracted workers would be small. However, Apr 27, 2021 Page 5 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) primary suppliers (for supplying construction and manufacturing activities) are subject to further analysis on a case by case. China’s labor law strictly prohibits child labor and forced labor, which is well enforced in advanced manufacturing sectors where demand is primarily for highly skilled workers. CDMF’s existing ESMS has not documented the incidents of child labor, forced labor, or gender-based violence. As part of the ESMS enhancement, due diligence will be undertaken on participating enterprises to ensure no track record of significant labor infringements. Other risk issues, including working conditions and a culture of long-hour and “overwork”, job security, and age discrimination, will be assessed and mitigated while adopting ESS2. Community health and safety is mainly associated with proximity to operational BESS or hydrogen utilization facilities, and interactions with construction activities. Ethnic minorities may potentially be involved where new or legacy land acquisition may be required on land utilized by ethnic groups in more remote areas close to renewable energy generation facilities (for BESS related investment). CDMF will screen potential E&S social risks for typical activities in each targeted sector and document it in the ESMS. CDMF will enhance the social elements through screening, due diligence, monitoring, and supervision in existing ESMS to ensure it is consistent with ESF requirements. The investee enterprises will adopt a system commensurate to the E&S risks and impact of relevant subprojects and activities. The project promotes good E&S management practices and sound human resources management within the FI and investee enterprises. As a result, the project supports responsible investment consistent with GIIP. CDMF recognizes the added value of establishing a functioning ESMS. CDMF is committed to setting out explicit procedures and control points in the enhanced ESMS to ensure it will be implemented consistently through the fund, investee enterprises, to the subprojects and activities on the ground. Investment activities and subprojects may involve some substantial risks and impacts but these are likely to be medium in magnitude, and the probability of serious adverse effects is mostly temporary and reversible with investment and time. The overall social risk of the project is currently deemed Public Disclosure to be Substantial at the concept stage. B. Environment and Social Standards (ESSs) that Apply to the Activities Being Considered B.1. General Assessment ESS1 Assessment and Management of Environmental and Social Risks and Impacts Overview of the relevance of the Standard for the Project: Initial E&S due diligence was conducted based on a desk review of the draft project concept note and desktop study of CDMF’s existing ESMS, risk governance policies, documents for selective CMDF’s existing subprojects, documents of subprojects funded by other funds, and E&S implications of relevant and similar projects and studies. Based on the screening, all ESSs are relevant to this project. The project has overall environmental benefits including cleaner energy, improved energy efficiency, reduced release of pollutants to air and water, and waste reduction. The project will invest in four areas, including energy saving and environmental protection, cleaner industrial production, energy efficiency improvement, and clean energy industry. The equity investments will mainly support growth-stage SMEs in the green supply chain, including manufacturing enterprises of equipment, parts and materials for clean energy, improved energy efficiency, resource recycling and pollution prevention and control; enterprises to expand or upgrade for non-toxic and non-hazardous raw material substitution and improved energy efficiency; enterprises involved in wastewater treatment, solid waste utilization, BESS, hydrogen energy utilization, and renewable energy facilities operation. The project design will exclude any high-risk subprojects that would require large scale land acquisition or be located in vicinity of any environmental Apr 27, 2021 Page 6 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) sensitive areas. Adverse environmental impacts during new facilities construction or rehabilitation would include construction nuisance of dust, noise, soil disturbance, traffic safety, wastewater and waste disposal, and disturbance to modified habitats, which are generally temporary, short-term, and localized. These impacts could be effectively avoided, reduced or mitigated through a well-established domestic legal and regulatory supervision framework for environmental management, and by adopting mature civil work techniques and good management practice. Operation of manufacturing plants and wastewater treatment facilities could bring environmental impacts such as odor, air emissions, noise, wastewater, waste (including sludge), and OHS concerns. In domestic practice, the plant owner/operator is responsible for conducting operational impacts monitoring through third parties, and subject to supervision by local environmental authorities. The environmental risks during operation are thus expected to be manageable under domestic regulatory system. Fire and explosion risks during BESS and hydrogen facilities construction and operation can be well controlled by following national design standards with safety considerations, including placement criteria, fire and explosion prevention measures and emergency response requirements. The environmental impacts assessment will compare domestic standards with the Bank’s EHS guidelines and GIIP, and determine more stringent performance criteria for the manufacturers, BESS and hydrogen facilities operation, and hazardous waste (including battery waste) disposal. In addition, the project will estimate the reduction of pollutants release to air (including volatile organic chemicals (VOCs) and Greenhouse Gas (GHG)) and water for subprojects involving VOCs treatment, carbon footprint reduction or wastewater treatment. The fund aims to scale up equity investment and promote good E&S and human resources management in investee enterprises. Discussions are ongoing with CDMF on appropriate caps on the size of individual investments. The equity investments will have a clear purpose and are not expected to support large projects. The most significant adverse Public Disclosure social risks and impacts would be mainly concerning land and resettlement and labor and working conditions. Land acquisition to accommodate the siting of a manufacturing workshop would affect tens of people. In many cases, the invested workshops or activities will be located on existing industrial land in ecological industrial parks, which would not cause additional land acquisition or resettlement. The project will involve direct workers, contracted workers, and primary supply workers. Community workers are unlikely to be engaged given the technical nature of potential subprojects. Potential labor-related risks concerning manufacturing would be culture of overtime working, age discrimination, job security, and outsourcing “risky” work. The risks of child labor or forced labor, and SEA-SH issues are deemed either negligible or low risk in the advanced manufacturing sectors. CDMF will set out explicit criteria to exclude high-risk investment proposals. The ESMS will include provisons to assess the willingness and capacity for an candidate investee to adopt and enforce relevant ESSs. The ESMS will also enhance the due diligence review, monitoring, and supervision procedures to ensure child labor or forced labor will not happen in the project. The project promotes responsible investment, and the FI and relevant enterprises should adopt ESS2 to manage substantial social risks. This will promote responsible investment and enhances the investee enterprises’ practice to align with ESF and GIIP. Other social risks such as community health and safety, ethnic minorities, exclusion of vulnerable groups are deemed relevant at this stage but are subject to case-by-case screening during implementation. As part of the ESMS, CDMF will screen potential E&S risks for typical activities in each targeted sector. CDMF will enhance the existing ESMS to ensure it is proportionate to the higher levels of E&S risks and impacts. During preparation, CDMF will further assess the current ESMS, identify any gaps against the ESF, and improve its ESMS for the design, construction and operation of proposed project activities, following both domestic regulations and the ESF. The due diligence review should pay more attention to the results of corporate reporting on the current Apr 27, 2021 Page 7 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) ESMS, any periodic reviews, and any other evidence of effective functioning of the ESMS. The Bank team will carry out due diligence of the enhanced ESMS before Appraisal. The ESMS should have procedures to screen the E&S risks for subproject activities and associated facilities, set up clear roles and responsibilities for CDMF, the SPV, and the fund manager, and set out commitments (in the ESCP) to provide adequate resources to effectively and consistently implement the ESMS through the fund, investee enterprises, investment subprojects and activities on the ground. The ESMS will develop a set of tools consistent with relevant ESSs to facilitate the implementation. There will be no fund disbursement to final recipients before an enhanced ESMS is considered as satisfactory to the Bank team. During implementation, the E&S audit will review the investee company’s ESMS as part of eligibility criteria to access FI funds and assess the E&S risks and impact of relevant subprojects and activities. The ESMS will define the way in which an investee enterprise will enhance its existing ESMS. Each subproject or activity should prepare appropriate E&S documents in line with regulatory requirements. For all subprojects, assessment and mitigation of specific E&S risks should be designed in accordance with relevant ESSs and the ESMS in a proportionate way. The project risk rating and relevance of ESSs will be further reviewed during preparation. To address E&S capacity gaps, CDMF is required to establish a timebound capacity development plan and include it in the ESCP. In addition, for any TA activities under the project, CDMF and the SPV (after set-up) should incorporate reference to the E&S Standards in the ToRs to ensure that activities and outputs are consistent with the ESF. The ESMS will be designed with appropriate mechanism of disclosure and public consultation following the ESS10 requirements and subprojects are to apply stakeholder engagement pursuant to the ESMS and ESS10, as elaborated in the ESS10 section below. Public Disclosure Areas where “Use of Borrower Framework” is being considered: China has a comprehensive E&S Framework, low or moderate risk subprojects and activities will be prepared and implemented in accordance with relevant environmental and social national and local laws and regulations. The FI subprojects with substantial risks and impacts will apply relevant requirements of ESSs. High-risk subprojects or activities will not be eligible for financing. CDMF has adopted an ESMS for selective existing funds. As shown in the section of ESS9, CDMF’s existing ESMS needs to be enhanced to align with ESS9 and other relevant ESSs. The enhanced ESMS will apply to the proposed fund in its entirety, including the additional private and social capital mobilized. A value addition of this project will be the enhancement of an ESMS and strengthening CDMF’s (and the SPV) capacity consistent with the ESF requirements and proportionate to the risks. The fund will exclude high E&S risk investment proposals based on the exclusion criteria. Implementing an ESMS, consistent with ESF, will contribute to upgrading environmental and social risks management for green investments and projects in China. ESS10 Stakeholder Engagement and Information Disclosure This project aims to expand China’s equity financing for green investments. The fund will adopt the international best practices to promote meaningful engagement, transparency, and social inclusion. There are various categories of stakeholders for the fund itself and the investee enterprises to succeed. According to ESS10, stakeholders are classified as affected parties, other interested parties, as well as vulnerable and disadvantaged groups. The overall SEP for the fund will identify and analyze relevant stakeholders at different levels and establish procedures and Apr 27, 2021 Page 8 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) framework to the fund (SPV) and investee enterprises (as well as subprojects or activities) to enforce during implementation. At the fund level, there would be no stakeholders that are adversely affected by the fund. The fund would have a few other interested parties such as MoF, NDRC, CDMF, the SPV (to be established by CDMF), the third-party fund manager, domestic and foreign institutional investors, other multilateral development financial institutions joining as Limited Partners, direct workers, contracted workers, investee enterprises, government authorities (for approving the fund), NGOs, media, green advocacy groups, research institutes, relevant industry and sectoral associations (for the fund’s focused sectors), among others. For an investee firm, the project affected parties would include residents affected land acquisition and resettlement, communities, communities located close to the subprojects, direct workers, contracted workers, primary supply workers, ethnic minorities. Other interested parties would include fund managers, the firm’s owners, the firm’s management team, other investors, internal E&S staff, suppliers of equipment, contractors for construction and equipment installation, vendors for waste recycling and disposal, project beneficiaries, sector specialists, research institutions and relevant government authorities. The responsible government bureaus would include, but not limited to Power Bureau, Transport Bureau, Housing and Urban-Rural Integration Bureau, Ecological and Environmental Protection Bureau, Emergency Management Bureau, Fire-fighting Brigade, Natural Resources Bureau, and Ethnic Minority and Religious Bureau (for confirming status of ethnic minorities in subproject areas). Potential vulnerable and disadvantaged groups would include contracted workers, primary supply workers, ethnic minorities, the poor households, etc. Public Disclosure Prior to the Appraisal, CDMF (on behalf of the SPV) will develop an overall Stakeholder Engagement Plan (SEP) consistent with the requirements of ESS10, to ensure effective and meaningful engagement and consultation with various stakeholders throughout the fund lifecycle. CDMF will put in place, as part of the ESMS, procedures for stakeholder engagement and external communications on E&S matters proportionate to the risks and impacts of project activities consistent with the requirements of ESS9 and ESS10. The ESMS will also include establishing and maintaining functioning grievance redress systems (GRMs) to respond to public inquiries and ensure concerns are recorded, addressed, and responded to on a timely basis. The SPV, once it is established, will be responsible for implementing and maintaining the procedures and mechanisms for stakeholder engagement, public communication, grievance redress, etc. The overall SEP needs to mainstream the investee enterprises’ responsibilities for conducting meaningful stakeholder engagement in a manner proportionate to the risks and impacts of the FI subprojects or activities. The Overall SEP should also articulate the circumstances in which the FI (CDMF and the SPV) will engage in stakeholder engagement. The overall SEP should include a stakeholder engagement framework, outlining general principles and a collaborative strategy to identify stakeholders and plan for an engagement process per ESS10 that the investee enterprises will implement once the location for a subproject or an activity is known. The investee enterprises will transform the stakeholder engagement framework into a SEP during the preparation of a specific subproject or activity. During the preparation, CDMF, with the support of the E&S consultants, will hold consultations with relevant stakeholders to seek their views to improve the fund design and enhance the ESMS. Before Appraisal, the ESMS, ESCP, and SEP should be disclosed locally and on the World Bank website. Apr 27, 2021 Page 9 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) B.2. Specific Risks and Impacts A brief description of the potential environmental and social risks and impacts relevant to the Project. ESS2 Labor and Working Conditions This project is classified as a FI project and ESS2 applies to the responsible FI itself, and the third-party fund manager. CDMF has designated HR department to handle labor related issues. It has set up and maintained in place a comprehensive labor management system, providing clear documented guidelines and procedures for employee hiring, labor contract management, employee training, wage payment and welfare, social security and pension benefits, health examination, worker’s organization, and grievance redress. Initial Due diligence found that the labor management system is following China’s Labor Law (amended in 2009) and Labor Contract Law (amended in 2012) and generally in conformance with relevant requirements on direct workers under ESS2. CDMF’s HR system is deemed adequate and appropriate. Therefore, this project will rely on CDMF’s labor management system for managing labor related issues for direct workers. As part of the ESMS, CDMF will document the compliance status of the HR system against ESS2. The subprojects will involve contracted workers to perform construction works, and direct workers (and sometimes contracted workers) for operating the manufacturing facilities. Manufacturing installation would likely involve primary suppliers to supply materials and goods essential for construction activities and operation activities on an ongoing basis. Community workers are unlikely to be engaged in consideration of the technical nature of the potential subprojects. The ESMS will have procedures to screen and identify the types of workers involved in an Public Disclosure investment. The types of workers for a specific investment subproject or activity will be further screened on a case by case during implementation. Overall, China has enforced comprehensive regulations requiring sound and fair treatment of all types of workers, increasing enhancement of occupational health and safety (OHS) risk abatement, prevention of child labor, and forced labor. China’s labor law is well enforced in advanced manufacturing sectors where demand is primarily for highly skilled workers. Labor authority mainly supervises the matters concerning terms and conditions of employment, workforce protection, and grievance redress, whilst local health and emergency administration on OHS issues. In nowadays, workers continue to increase awareness of rights-safeguarding. In the meanwhile, the local authorities at levels increasingly strengthen labor inspection to enhance labor protection. The governments at all levels have put in-place various ways for workers to raise concerns and complaints. Potential labor-related risks concerning manufacturing would be about a culture of long-hour working, age discrimination, job security, and outsourcing “risky” and “dirty” work. The risk of forced labor and child labor would be low in advanced manufacturing sectors where demand is primarily for highly skilled workers. CDMF’s existing ESMS has not documented the incidents of child labor or forced labor for other existing funds. The labor and working conditions for direct workers, contracted workers, and primary supplier workers of a specific investment subproject or activity are subject to further assessment during implementation. The fund promotes responsible investment and provides an opportunity to promote sound human resources management within the FI and the investee enterprises. The investee enterprises shall adopt relevant ESS2 requirements to manage the substantial risks on labor and working conditions. This, as a result, will promote worker- Apr 27, 2021 Page 10 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) management relationships and enhance social outcomes by treating workers fairly and providing safe and healthy working conditions. The ESMS will set out exclusion criteria in terms of labor and working conditions. Particularly, the fund will exclude any candidate enterprises that involve child labor or forced labor. The ESMS will also enhance the due diligence review, monitoring and supervision procedures to ensure child labor and forced labor will not happen in the project. The ESMS will include screening and due diligence review of subprojects or activities for risks and impacts on labor and working conditions, and will prepare the subprojects applying the relevant requirements of ESS2 where subprojects are found to have significant risks or impacts on working conditions. The ESMS will also have provisions to identify goods and materials that may constitute primary suppliers and assess as per ESS2 and ESS6. The screening form should be enhanced to cover potential E&S issues as required in ESS2. The ESMS will also need to include a labor management procedure (LMP) template for the investee enterprises to adopt. The results of a due diligence review of investee enterprises will inform tailoring an appropriate LMP for the subprojects or activities. The enhanced ESMS also needs to articulate the arrangement for monitoring, evaluation, and remedy to ensure the labor elements in the ESMS will be consistently implemented by the investee enterprises for relevant subprojects or activities. During implementation, the labor and working conditions of subprojects will be subject to spot checks by the responsible FI and the Bank as part of monitoring and supervision requirements. Incidents (e.g. health and safety incidents in the workplace) involving any type of labor hired under the project should be reported to the Bank through the reporting mechanisms established for the project. Public Disclosure ESS3 Resource Efficiency and Pollution Prevention and Management This standard is relevant. The project investments will be in green sectors and industries that would contribute to cleaner energy, improved energy efficiency, reduced release of pollutants to air and water, waste reduction and recycling in China. The ESMS will specify that during subproject preparation, a scoping will be carried out to screen and assess the key ESS3 related issues. Regarding efficient use of energy, water or raw materials, reference/comparison will be made with available national and international benchmarking data and standards, including Good International Industry Practice (GIIP) and the applicable Bank’s Environmental, Health and Safety (EHS) guidelines. An estimation of reduced pollutants release to air (including volatile organic chemicals (VOCs) and Greenhouse Gas (GHG)) and water will be carried out for subprojects involving VOCs treatment, carbon footprint reduction or wastewater treatment. Some of the proposed subprojects may involve hazardous waste (such as used batteries, hazardous chemicals or packages) that require proper disposal to avoid harm to humans and environment. Existing requirements for hazardous waste management (including storage, transportation and disposal) will be followed, including domestic legislation and applicable international conventions. During preparation, relevant domestic regulations and their enforcement will be reviewed against the requirements of ESS3 and the Bank’s applicable EHS guidelines to confirm the adequacy of existing system for hazardous waste management in China. Necessary actions may be proposed in the ESCP at the appraisal stage if any major gap is identified. Apr 27, 2021 Page 11 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) ESS4 Community Health and Safety This standard is relevant. The project would be unlikely to involve dams. Some subprojects may involve civil works, and bring general construction nuisance (e.g. dust, noise, traffic disturbance, waste, construction camps) to communities located close to the construction site. These construction impacts are temporary, short-term, localized, and can be readily mitigated by incorporating good civil work practices. Given the expected nature and scale, these civil works are unlikely to cause large labor influx. Most of the investment activities would be technology-intensive and involve a small number of highly skilled workers for operation. Therefore, the risks of communicable disease spread or sexual exploitation and abuse and sexual harassment (SEA-SH) associated with labor influx are considered low. For certain investment activities, there would be communities present the area of influence of workshops. Operating manufacturing facilities may pose road safety impact and community health concerns. As described under ESS3, existing national requirements for hazardous waste management (including storage, transportation and disposal) will be followed to avoid community exposure to hazardous materials, and if any inadequacy is found, necessary actions/mitigations measures will be adopted by the investee enterprises to ensure consistence with ESS4. Operation of manufacturing plants, wastewater treatment plants, BESS and hydrogen energy facilities could bring community health and safety concerns such as odor, air pollution, noise, wastewater, waste (including sludge), fire and explosion risks. In addition to follow existing national regulatory and supervision system for these operational phase impacts, necessary actions/mitigations measures will be proposed in the ESMS and ESCP to further control these impacts and risks. During subproject preparation, a risk hazard assessment will be conducted by the environmental assessment team entrusted by potential investee enterprises as part the EIA process when applicable depending on the actual situation of the risks and impacts of the subprojects. Emergency response plans against fire, Public Disclosure explosion and chemical leaks/spills will be prepared depending on the assessment results. The enhanced ESMS should take into account the potential E&S issues pertinent to ESS4, such as road safety, labor influx, SEA-SH, community exposure to health issues and hazardous material, among others. Relevant requirements of ESS4 will apply where an investment activity is identified to have significant risks and impacts on community health and safety. The investees enterprises should adopt a sound risk governance system to manage the community health and safety in a proportionate way. The ESCP will set out necessary measures and actions for CDMF, the SPV, the Fund Management Company, and investee enterprises to enforce during implementation. Community health and safety guidelines in the ESMS will also draw on existing national, World Bank and WHO guidance on COVID-19 to prevent or minimize the spread of COVID-19 in the workplace or communities. The responsible FI will monitor the situation and prepare emergency response plan for COVID-19 spread when it is necessary. ESS5 Land Acquisition, Restrictions on Land Use and Involuntary Resettlement ESS5 is relevant to the proposed fund. According ESS9, ESS5 will apply to any subproject or activity with resettlement (unless the resettlement risk is minor). The project’s types of land use would include: (a) new land acquisition resulting in physical and/or economic displacement; and (b) land acquisition occurring prior to the fund’s engagement. The future investment would concentrate on green manufacturing-related activities, initiatives to utilize solid wastes, high-efficiency battery storage factifies, hydrogen energy utilization, among others. The loan proceeds may be invested in the construction, expansion, and operation of green enterprises and green projects that conform Apr 27, 2021 Page 12 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) to the pre-agreed sectors and investment selection criteria. Proposed manufacturing workshops would be sitting on existing land of the investee enterprises or the newly acquired land. The project companies are not expected to embark on large projects, a workshop or facility’s footprint would not be large and normally occupies an area of several hectares. Potential investee enterprises would be likely in ecological industry parks. The World Bank’s current energy storage project experience demonstrates that land taking for an energy storage project or a hydrogen utilization facility would range from small to moderate in scale. CDMF’s existing ESMS merely includes basic provisions to screen land acquisition and resettlement impact associated with a subproject. However, it does not articulate how to ensure consistency with IFI’s requirements (e.g., IFC PS5 or ESS5) when there are gaps. The enhanced ESMS will set out criteria for screening and categorizing resettlement risks, establish provisions on due diligence review of existing land and past resettlement occurring before the sub-FI’s involvement, and formulate the TOR for a Resettlement Plan (RP) to be applied to anticipated new land acquisition and resettlement. The screening form should include explicit provisions to exclude investment proposals with high- risk resettlement and identify the application of resettlement due diligence review or resettlement planning. Relevance of ESS5 to a specific investment proposal will be further reviewed on a case by case during implementation. Any investment proposal with high resettlement risk will be excluded. The fund and responsible enterprises shall carry out a due diligence review to assess compliance status of existing land and past resettlement, identify any complaints, grievances and outstanding issues (if any) and determine the measures, cost and timelines to close identified issues. The conclusions of due diligence review will inform the fund’s investment decision-making. All subprojects involving minor new resettlement should be prepared and implemented according to national Public Disclosure regulations. For subprojects with resettlement risk higher than minor, the investee enterprises should meet relevant requirements of ESS5 in terms of resettlement planning, enforcement, and monitoring and evaluation. The ESMS will define minor resettlement in consideration of China’s regulatory context and ESS5. ESS6 Biodiversity Conservation and Sustainable Management of Living Natural Resources This standard is relevant. Exclusion criteria will be included in the ESMS to avoid negative impacts on critical habitats or natural habitats. Under the proposed ESMS, all subprojects will be screened whether the construction or operation may cause adverse impacts to any modified habitat and its biodiversity, and mitigation measures will be proposed to avoid or minimize the impacts. The ESMS will also include screening of risks associated with primary suppliers. Relevance of ESS6 will be further reviewed during FI subprojects preparation. ESS7 Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Local Communities ESS7 is relevant considering the geographical coverage of the fund of funds. CDMF’s market analysis identifies that potential investment opportunities would be primarily in six regions, including Beijing-Tianjin-Hebei Area, Yangtze River Economic Belt, Great Bay Area, Chengdu-Chongqing Economic Circle, Guangdong-Fujian-Zhejiang Coastal Cities Cluster, and Yellow River Basin. The fund’s investment would likely be away from the remote and lagging areas. Most of the provinces and municipalities to be involved are traditional Han Chinese-dominated areas. A few provinces (i.e., Yunnan, Guizhou, Qinghai, Ningxia, and Inner Mongolia) with a higher composition of ethnic minorities will be potentially involved. In some circumstances, ethnic minorities would be present in or have an attachment to a proposed subproject site. Potential adverse impacts to ethnic minorities would be associated with land acquisition Apr 27, 2021 Page 13 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) and resettlement, community health and safety, labor working conditions, and exclusion risk. Considering the geographical concentration of the proposed manufacturing sectors in urban areas, the likelihood of such adverse impacts on ethnic minorities is not high. Any investment activities that are judged to be likely to have significant adverse impacts that are sensitive, diverse, or unprecedented on the ethnic minorities are not eligible for financing. The fund’s ESMS procedure will include exclusion criteria to ensure that financing is not provided to support the activities that would (a) have adverse impacts on land and natural resources subject to traditional ownership or under customary use or occupation; (b) cause relocation of ethnic minorities from land and natural resources that are subject to traditional ownership or under customary use of occupation; or (c) have significant impacts on ethnic minorities’ cultural heritage that is material to the identify and/or cultural, ceremonial, or spiritual aspects of the affected communities. CDMF has considered ethnic minorities to be present for some existing investments. The in-place ESMS has consolidated basic elements concerning ethnic minorities in the E&S risks screening table. However, the existing ESMS does not specify gaps against ESS9 and ESS7 or describe relevant legal exclusions. No ethnic minority development framework and plans (EMDF, EMDP) have been prepared, and the FI lacks in-house capacity and expertise in this area. During preparation, CDMF shall enhance the provisions on exclusion criteria, screening and identifying adverse impacts on ethnic minorities, and meaningful engagement with ethnic minorities, consistent with ESF requirements. The ESMS shall include elements consistent with an ethnic minority development framework before the appraisal. Public Disclosure The enhanced ESMS also needs to establish an organizational structure and set out commitments to providing adequate resources to effectively implement the ESMS through the fund, investee enterprises, and investment activities on the ground. The risk governance system of the investee enterprises should consolidate relevant dimensions on ethnic minorities. Where potential adverse risks and impacts on ethnic minorities are identified as relevant to a specific investment proposal, the World Bank will confirm the screening results. If investment activities are likely to adversely impact on ethnic minorities, an Ethnic Minority Development Plan (EMDP) will be prepared by the investee firm in accordance with the provisions set out in the EMDF. The enhanced ESMS will set out the procedure for clearing the EMDP. ESS8 Cultural Heritage This standard is relevant. The project will neither have a material impact on intangible cultural heritage nor use such cultural heritage for commercial purposes, but location of the civil works under subprojects remains unknown until project implementation. The E&S screening process of ESMS will include screening for risks and impacts on cultural heritage, and relevant requirements of ESS8 will be applied where subprojects are found to have significant risks and impacts on cultural heritage. As part of the EIA process conducted by the EA team entrusted by potential investee enterprises, the subprojects’ impacts on cultural heritage will be assessed and mitigation measures will be proposed to avoid or minimize the impacts. The fund manager and the investee enterprises will ensure that chance finds procedure is included in all contracts relating to construction. Relevance of ESS8 will be further reviewed during FI subprojects preparation. Apr 27, 2021 Page 14 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) ESS9 Financial Intermediaries This project is classified as a FI project. The SPV to be established by CDMF is the responsible FI. The SPV will establish the green fund and will invest in four thematic sectors. The fund will be managed by a competitively selected professional Fund Management Company (FMC). The fund will then invest in eligible enterprises or enterprises in alignment with the project objectives and the selection criteria. CDMF has adopted an ESMS for some existing funds, e.g., Green Climate Fund. The current ESMS has established a basic structure for E&S risk governance, but the substances need to be substantially enhanced to align with ESS9 and relevant ESSs. For example, the ESMS does not include an exclusion list. The categorization system used by CDMF consists three categories (A/B/C), which do not correspond to the four categories required by ESF. The seven-step procedure for E&S risk management is not well embedded in the fund decision-making process. The ESMS also lacks a few essential tools such as TOR for environmental and social audit, TOR for social impact assessment, labor management procedure, RF, EMDF, chance find procedure, etc. Both the enhanced ESMS and ESCP should set out clear procedures, concrete actions, and strong commitment to ensuring the ESMS will be implemented appropriately and consistently by the fund and investee enterprises. Prior to project appraisal, CDMF (on behalf of the SPV) will improve its ESMS consistent with the requirements of ESS9 and relevant ESSs and proportionate to the project E&S risks. The ESMS as defined in ESS9 will include: (a) E&S policy, (b) E&S procedures (exclusions, screening, categorization, assessments and plans to prepare), (c) capacity for assessing, managing, and monitoring risks and impacts of subprojects and designation of a responsible senior management position for reporting; (d) monitoring and review of E&S risks of subprojects and the portfolio, and (e) Public Disclosure external communication mechanisms. The enhanced ESMS will define how the SPV’s ESMS will apply downstream to an investee enterprise consistent with the types of investment. All subprojects and associated facilities will be screened against the exclusion list (to be established during preparation and including E&S eligibility) and assessed for their E&S risks and impacts prior to financing under this project. The fund’s organizational set-up and the ESCP shall set out clear roles and responsibilities, control points, and remedy measures to ensure an ESMS will be implemented consistently through the fund, investee enterprises, and investment activities on the ground. Since the fund will provide equity financing, the ESMS should set out clear procedures for a required environmental and social audit of the relevant existing business of investee enterprises and assess the adequacy of their existing ESMS. The audit will inform the necessary actions to bring the investee enterprises’ E&S risk governance to align with the ESMS of the fund and be proportionate to the E&S risks. The screening and categorization procedure, as part of ESMS, will review and categorize the subprojects based on their E&S risks. Any subprojects involving potential land acquisition and resettlement; or adverse risks or impacts on ethnic minorities; or significant risks or impacts on the environment, community health and safety, labor and working conditions, biodiversity or cultural heritage are to be classified as high or substantial. High risk subprojects will be excluded at the screening stage and ineligible for project financing. The environmental and social audit will review the investee company’s ESMS as part of eligibility criteria to access FI funds and assess the E&S risks with its relevant subprojects or activities. The audit will formulate actions for an investee enterprise to align with the ESMS and relevant ESSs. All the fund-supported subprojects or activities will be prepared and implemented according to national regulations. For all the subprojects with substantial risks, the ESMS should include processes to notify World Bank prior to making investment decisions and contain procedures to ensure requirements of relevant ESSs are met. To address E&S capacity gaps, CDMF is required to establish a timebound capacity development plan on ESMS Apr 27, 2021 Page 15 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) implementation and include it in the appraisal stage ESCP. The responsible FI (SPV) will submit to the Bank semi- annual Environmental and Social Reports on the implementation of its ESMS. B.3 Other Relevant Project Risks Not currently anticipated. C. Legal Operational Policies that Apply OP 7.50 Projects on International Waterways No OP 7.60 Projects in Disputed Areas No III. WORLD BANK ENVIRONMENTAL AND SOCIAL DUE DILIGENCE A. Is a common approach being considered? No Financing Partners The fund will mobilize additional capital from Chinese and international institutional investors. The ESF and enhanced ESMS will apply to the fund in its entirety. Public Disclosure B. Proposed Measures, Actions and Timing (Borrower’s commitments) Actions to be completed prior to Bank Board Approval: CDMF (on behalf of the SPV) to establish subproject exclusion list (including E&S eligibility) and include in the ESMS. CDMF to enhance existing ESMS to bring it proportionate to the E&S risks and consistent with ESS9 and other relevant ESSs. CDMF to develop a LMP as part of the enhanced ESMS. CDMF to develop a SEP consistent with ESS10. CDMF to develop the Appraisal stage ESCP. CDMF to develop a timebound institutional capacity enhancement plan (as part of the enhanced ESMS) for SPV, the fund manager, and investee enterprises, etc. CDMF to include appropriate E&S provisions in the TOR for Fund Manager. CDMF to disclose the ESMS, SEP, and ESCP as early as possible and before Appraisal. Possible issues to be addressed in the Borrower Environmental and Social Commitment Plan (ESCP): The ESCP will include the material actions for CDMF, the SPV, the fund manager, and investee enterprises separately. CDMF and SPV will designate a senior management representative to have overall accountability for E&S performance of FI subprojects. CDMF, the SPV, the fund manager, and the investees enterprises to implement the E&S capacity enhancement plan. The SPV to carry out E&S risk screening for potential investment proposals. The SPV and the fund manager will implement the ESMS, ESCP, SEP consistent with ESF. Apr 27, 2021 Page 16 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) The investee enterprises to adopt an ESMS in a way proportionate to the E&S risks and impacts of relevant subprojects and activities. The investee enterprises to apply relevant requirements of ESSs to the specific subprojects and activities. CDMF, the SPV, the fund manager, and investee enterprises to implement and maintain the LMP consistent with ESS2 and China’s labor law. The SPV to submit semi-annual Environmental and Social Monitoring Report to the Bank. The SPV to report to the Bank and agree on measures and actions if a subproject risk profile increases significantly at any stage during the life of the project. C. Timing Tentative target date for preparing the Appraisal Stage ESRS 30-Apr-2021 IV. CONTACT POINTS World Bank Contact: Abayomi A. Alawode Title: Lead Financial Sector Specialist Telephone No: 5788+7657 / 86-10-5861-7657 Email: aalawode@worldbank.org Contact: Christophe de Gouvello Title: Senior Energy Specialist Public Disclosure Telephone No: 5788+7753 / 86-10-5861 7753 Email: cdegouvello@worldbank.org Contact: Xiaolan Wang Title: Senior Operations Officer Telephone No: 5725+8213 / 976-70-078213 Email: xwang@worldbank.org Borrower/Client/Recipient Borrower: People's Republic of China Implementing Agency(ies) Implementing Agency: China Clean Development Mechanism Fund (CDMF) V. FOR MORE INFORMATION CONTACT Apr 27, 2021 Page 17 of 18 The World Bank China Strategic Green and Low Carbon Investment Fund Project (P170839) The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects VI. APPROVAL Task Team Leader(s): Abayomi A. Alawode, Christophe de Gouvello, Xiaolan Wang Practice Manager (ENR/Social) Susan S. Shen Recommended on 26-Apr-2021 at 13:35:49 GMT-04:00 Safeguards Advisor ESSA Nina Chee (SAESSA) Cleared on 27-Apr-2021 at 13:21:0 GMT-04:00 Public Disclosure Apr 27, 2021 Page 18 of 18