Financial Sustainability Guide 2021

0 - 37 1442 Central Bank of Iraq

1 - 37 Introduction In accordance with Article 22 of the Corporate Governance Guide for Banks issued by the Central Bank of Iraq, and in order for banks to prepare an annual report containing financial information related to sustainability activities that consider environmental, social, and governance (ESG) standards, this report is announced to the public, containing information on the bank's economic, financial, social, and environmental performance in implementing sustainable operations. The governance guide confirmed in Article 23 the necessity of disclosure and transparency regarding the bank's sustainability policy and related actions. Sustainability reports also serve as a regulatory tool to set objectives, monitor performance, and evaluate the bank's operations to make them more sustainable and efficient, especially given the rapid dynamics of economic, social, and environmental changes. The sustainability report measures a self-assessment aspect regarding regulatory performance related to economic, social, and environmental aspects. This guide is divided into five main sections: the first section provides definitions, terms, and abbreviations; the second covers the scope of application; the third focuses on sustainable finance activities; the fourth contains the environmental, social, and governance standards report; and the fifth and final section is dedicated to the strategic plan for environmental, social, and governance principles.

Section 1 / Definitions, Terms & Abbreviations This section provides important definitions relevant to this guide:

1. Business Activities: Include the bank/microfinance institution's business activities, including but not limited to providing financial products and services to customers, such as corporate banking, project financing, project finance consulting, structured commodity financing, stock investment, commercial financing, leasing, SME lending, microfinance, and retail banking.
2. Business Operations: Include the bank/microfinance institution's operational processes and resources used to deliver its products and services. These include human resources, assets, infrastructure (e.g., offices, branches, equipment), suppliers, contractors, and third parties involved in facilitating the bank's commercial activities.
3. Cultural Heritage: The legacy of tangible and intangible cultural forms passed down from past generations, preserved currently for the benefit of future generations. Cultural heritage aspects may include: (1) tangible forms such as properties, sites, and structures with archaeological, historical, cultural, artistic, or religious value; (2) unique natural features embodying cultural values; (3) intangible forms such as cultural knowledge, innovations, or community practices reflecting traditional lifestyles (including language, music, and traditions).
4. S&E (Social & Environmental) Footprint: The overall or total impact of the bank/microfinance institution's business operations on the environment and society in which it operates, such as natural resource consumption, waste generation, environmental and social issues in its supply chain, and impacts on the bank's human capital or customers/communities.
5. Environmental & Social Impact: A change (a) in the physical, natural, or cultural environment, or (b) affecting the local community or workers, resulting from a business activity or financed project. Impacts may be temporary or permanent, including atmospheric/water/land changes (e.g., greenhouse gas emissions, pollution), impacts on customer/workforce health and safety, human rights violations, or corruption.
6. Comprehensive Environmental & Social Policy Framework: A set of internal policies (general sustainability / sustainable finance / S&E policy, plus specific S&E policies), strategies, and related procedures defining the rules for managing environmental and social risks and opportunities in the bank's business activities.
7. Environmental & Social Risks: Actual or potential threats of negative environmental and/or social impacts associated with the bank's/microfinance institution's business decisions or transactions, which must be considered.
8. E&S Opportunities: Business prospects driven by environmental and social risks, such as financial products/services supporting clean/renewable energy development, customer climate adaptation measures, eco-tourism, improved health and safety conditions, job creation, or community development.
9. ESMS (Environmental & Social Management System)
10. FinTech: Financial services provided through modern software and technology, enabling financial service providers to reach remote areas at lower cost and with greater safety.
11. Green Economy: An economy that improves human well-being and social equity while significantly reducing environmental risks and scarcity. It is characterized by low carbon, resource efficiency, and broad social inclusion.
12. High Conservation Values: Biological, environmental, social, or cultural values of significant or critical importance at the national, regional, or global levels.
13. Human Rights: Rights and freedoms inherent to all human beings, regardless of race, sex, nationality, language, religion, or other status. Includes the right to life and liberty, freedom from slavery and torture, freedom of opinion and expression, right to work and education, among others. Every individual has the right to enjoy human rights without discrimination.
14. IFC (International Finance Corporation)
15. Sustainable Finance: Providing financial products and services that integrate environmental, social, and governance standards into business or investment decisions, aiming to achieve long-term economic development that is not only economically viable but also environmentally responsible and socially relevant.

Section 2 / Scope of Application (1) This guide applies to all licensed banks on an advisory/guideline basis. (2) Purpose: Given the unique strategic and economic importance of financial institutions, which impact the national economy as a whole, contributing to sustainable development, adopting innovation standards, and embracing sustainability initiatives in line with the Bank's vision for a green future and green economy for Iraq, this advisory guide is issued. Furthermore, banks' application of sustainability principles from the Corporate Governance Guide issued by the Central Bank of Iraq in 2018 will also enhance the bank's performance scorecard rating, which may reach up to 100%, due to including more than 12 questions representing best practices for social and environmental principles.

Section 3 / Sustainable Finance Activities (3) When implementing sustainable finance, banks must adopt and gradually integrate sustainability principles into their vision, mission, strategic plan, and work program, as outlined in the Corporate Governance Guide issued by this Bank in 2018. (4) Sustainable finance development should be tracked alongside the bank's gradual absorption of the nine sustainable finance principles into its plans and business operations, as well as the development of its business products (business models). Banks will establish activities based on each bank's financial conditions, structure, size, and operational complexity. (5) Criteria for sustainable business activities: Sustainable commercial activities are defined as follows: 1-5. Projects, activities, products, and services that meet sustainable finance principles and are listed under the criteria for sustainable projects, activities, products, and services. 2-5. The relevant project, activity, product, or service must be an investment or financing activity that provides priority to efficiency and effectiveness in using natural resources sustainably, prevents, reduces, or corrects environmental damage, increases pollution and waste, ecosystem degradation, social injustice, inequality, or climate change impacts on affected persons. 3-5. Refers to the definition of sustainable business activities; below are criteria for sustainable projects: 1-3-5. Efficiency & Effectiveness: Prioritizing efficient and effective use of natural resources sustainably, including input material efficiency, alternative inputs, clean energy use, water provision, and non-conventional water sources. 2-3-5. Mitigation: Preventing, reducing, or correcting environmental damage, increasing pollution/waste, ecosystem harm, social inequality, including preventing/managing pollution/waste, avoiding social conflict, creating positive community welfare impacts, and protecting the environment/production using low-carbon processes. 3-3-5. Adaptation: Providing solutions for persons affected by climate change, including technology renewal for energy and emission reduction, resource conservation, recycling, and improving welfare for affected communities. International institutional experiences can be referenced to define the mentioned business activities (see Annex 1 of this guide). (6) Categories of sustainable commercial activities: As part of implementing sustainable finance, banks must register a financing/credit portfolio comprising (twelve) sustainable commercial activities that are environmentally sound, fulfilling one of the sustainable finance principles: inclusivity. Annex 1 provides a commercial activity classification paper based on economic sectors. When necessary, banks adopting this guide's principles must submit annual information and data to the Central Bank of Iraq as specified in Annex 2.

Section 3 / ESG Reporting (7) The sustainability report demonstrates the bank's commitment to supporting sustainable development goals. Therefore, sustainability reports must show progress in enhancing transparency and business operations, providing an overview of risks, challenges, and strategies to overcome them. (8) The sustainability report provides more quantitative and/or qualitative strategic information on regulatory positions and activities, maintaining/improving economic, social, and environmental performance according to the bank's priorities. It also serves as a measurement tool for other external stakeholders, acting as an audit mechanism and providing banks with stakeholder feedback. (9) Banks must communicate information on operational impacts, both positive and negative, according to stakeholder needs. Positive/negative operational impacts are linked to achieving the nine sustainable finance principles. Some annual report information can be used in sustainability reports, including economic, financial, vision, mission, and governance aspects. (10) Awareness of the need to provide comprehensive stakeholder information will positively impact the bank's performance. Developing a sustainability report yields benefits including: 1-10. Increased competitiveness. 2-10. Enhanced transparency in governance implementation. 3-10. Increased share value. 4-10. Regulatory reputation. 5-10. Consumer satisfaction and trust. 6-10. Increased bank attractiveness to investors. 7-10. Feedback on sustainable financial product/service innovations. 8-10. Attracting quality staff. 9-10. Increased employee motivation. 10-10. Cost savings. 11-10. Preventing stakeholder conflicts. 12-10. Reducing risks. Banks enjoy these long-term benefits, enhancing their competitive position locally and regionally/internationally. (11) Structure of sustainability reports: Sustainability reports can be separate from or part of the annual report. Contents include: 1-11. Sustainability Strategy Explanation: Translates vision and mission into comprehensive sustainable finance implementation, including required timelines (short/long term), risk management, and expected outcomes. Sustainability strategies are disclosed according to the Central Bank of Iraq's objectives/strategies. 2-11. Overview of Sustainability Performance: Covers the bank's performance over the past three years regarding economic, social, and environmental aspects integrated into products/services. Banks may disclose internal operational activities affecting social/environmental sectors. Reports can be detailed or use illustrations/tables. For banks under three years, an overview with available data is provided. 1-2-11. Economic Aspects: Cover sustainable economic performance, including at least (a) product/service types and nominal value; (b) bank operating revenues; (c) net profit/loss; (d) products/services meeting sustainable business criteria; (e) local parties involved in sustainable finance. Example: Table 1 Overview of Economic Performance.

Description / Year	2018	2019	2020
Bank Operating Revenues	* xx
Net Bank Profit	* xx
Economic Performance Related to Sustainability
Product Types Meeting Sustainable Business Criteria	xx
Products/Services Nominal Value Meeting Sustainable Business Criteria	xx
Percentage of Total Commercial Business Portfolio to Total Portfolio (%)
a. Fundraising	xx
b. Fund Distribution		xx	XX

2-2-11. Environmental Aspects: Overview of bank activities meeting environmental sustainable business criteria, including: 1-2-2-11. Internal activities like efficient energy use (electricity, water), green buildings, paper/plastic efficiency. Example: Cooling system saves xx% in 2019; e-office reduces paper by XX reams (equivalent to XXX Iraqi Dinar). 2-2-2-11. Allocation of Central Bank financing to high environmental impact activities, e.g., bank sponsorship funds for remote villages to preserve ecosystems; or waste disposal facilities for riverside residents, followed by community-led waste management. 3-11. Social Aspects: Overview of bank activities related to regional/community empowerment, including positive impacts and efforts to reduce negative ones, covering fund allocation: 1-3-2-11. Internal performance, e.g., management/branch head gender ratios relative to local staff numbers. 2-3-2-11. Fund allocation for high social impact activities (e.g., scholarships for deprived communities amounting to xx Iraqi Dinar, up by xx% from previous year). 3-3-2-11. Central Bank-sponsored activities empowering communities and supporting core bank operations (e.g., SME mentoring in city xxx amounting to xxx Iraqi Dinar in 2017). 4-3-2-11. [Text continues as per source] 3-11. Executive Summary: Consists of at least: 1-3-11. Vision, mission, and bank sustainability value/company culture. 2-3-11. Name, address, phone/fax, email, website, branch/representative office details. 3-3-11. Brief business scope, including total assets/liabilities (in millions of Dinars), staff count by gender/role/age/education/title, share ownership ratio, and operational area. 4-3-11. Brief explanation of products/services/activities (e.g., savings, financing, securities, e-banking). 5-3-11. Membership in regional/national/local associations (e.g., bank XXX member of Iraqi Bank Association since 2010 or Arab Bank Association since 2008, or other international institutions). 4-11. Board of Directors Statement: Contains board member data and an overview of achievements, challenges, and strategies covering economic, social, and environmental aspects, including: 1-4-11. Brief info on bank policies responding to sustainability strategy implementation challenges, and efforts to build internal sustainability culture supporting sustainable/consistent performance. Includes management data: • Interpretation of sustainability value in implementing sustainable financial programs. • Bank's response to sustainable finance implementation issues. • Management commitment to financial sustainability implementation. • Performance achievement. • Challenges in sustainable finance implementation. 2-4-11. Brief info on sustainable finance implementation includes: • Performance achievement in sustainable finance (economic, social, environmental) vs. target. • Descriptions of achievements/challenges, including key events during the reporting period. 3-4-11. Brief info on target achievement strategies; at least mentions: • Risk management info for sustainable finance (economic, social, environmental). • Utilization of opportunities and business prospects. • Explanation of external economic, social, environmental conditions likely to affect bank sustainability. 5-11. Governance Sustainability: Conveys the bank's commitment to governance by considering economic, social, and environmental aspects, including: 1-5-11. Description of Board/Executive Management duties/powers/responsibilities, staff, and responsible business units for sustainable finance implementation (e.g., Board members ensuring governance/operational standards cover sustainable finance principles; staff manage the formulated sustainable finance program). 2-5-11. Competency development for Board/Management/staff/responsible units, e.g., training: In 2020, credit-related Board members participated in sustainable finance training; Risk Management and Business Unit heads participated in environmental auditor training. 3-5-11. Bank procedures for identifying, measuring, tracking, and monitoring risks related to sustainable finance (economic, social, environmental), including Board/Management roles in periodic reviews and corporate governance effectiveness. Example: Bank has a unified operational risk management procedure for environmental/social aspects. Implementation steps include periodic Director evaluation of objectives supporting sustainable finance, followed up by responsible officials. 4-5-11. Director reports planning/implementation/target results related to credit/financing to the Manager as a form of duty/responsibility. 5-5-11. Stakeholder description: 1-5-5-11. Stakeholder participation based on management assessment/other results: Bank engages stakeholders in every decision, identifies strategies including determining issue importance for reporting. 2-5-5-11. Bank's stakeholder engagement approach in sustainable finance, including dialogues, surveys, seminars. Example: Direct face-to-face discussions with customers/practitioners/academics, obtaining feedback via interviews with stakeholders, staff, partners, media, government. 6-5-11. Challenges faced and developments/impacts on sustainable finance implementation. Contains brief info on challenges, current sustainable governance development status. Challenges may include operational/external conditions; development info includes bank's efforts to resolve them. 6-11. Sustainability Performance: Shows the bank's commitment to building a sustainability culture for all stakeholders, crucial for achieving performance. Details company performance in economic, social, environmental aspects, integrated into the bank's product/service portfolio. Disclosed via narrative/illustrations/tables. Example: Banks commit to reducing paper use; bank commits to replacing all non-economic bulbs with energy-efficient ones. 7-11. Economic Performance: Description of the last three years' economic performance, including (a) comparison of target vs. actual performance, portfolio, financing/investment targets, revenues, profits/losses. If sustainability report is separate from annual report, this chapter contains a brief description with minimal formatting:

Description / Year	2020	2021	2022
Total Assets	xx
Productive Assets	xx
Bank Credit/Financing	xx
Third-Party Financing		xx
Operating Revenues			xx
Operating Costs
Net Profit
Performance by Indicators (%)
Minimum Capital Adequacy Ratio	xx
Non-Productive Assets to Total Productive & Non-Productive Assets	xx
Non-Productive Assets to Total Productive Assets	xx
Financial Asset Impairment vs. Productive Assets		xx
Total Gross Non-Performing Loans			xx
Net Non-Performing Loans
Return on Assets (ROA)
Return on Equity (ROE)
Net Interest Margin
Efficiency Ratio
Loan-to-Deposit Ratio
(b) Comparison of target performance for portfolio, financing/investment targets in financial instruments/projects aligning with sustainable finance implementation:
Description / Year	n-2	n-1	N
---	---	---	---
Number of Products Meeting Sustainable Business Activity Criteria
a. Fundraising	xx
b. Fund Distribution		xx
c. Total Productive Assets for Sustainable Business Activities
a. Total Credit/Financing for Sustainable Business Activities	xx
b. Total Non-Credit/Non-Financing Sustainable Activities		xx
Percentage of Total Credit/Financing for Ongoing Business Activities to Total Bank Credit/Financing (%)	xx

8-11. Social Performance: Description of the last three years' social performance, including: 1-8-11. Bank commitment to providing equal services to consumers for targeted products/services, plus accurate product/service information. Example: Bank provides financing to persons with disabilities/micro/small/medium enterprises. 2-8-11. Employment, including at least: 3-8-11. Equal employment opportunity statement and presence/absence of forced/child labor. Example: Bank XXX commits to equal opportunities/rank levels based on staff competencies, and not employing underage workers per labor laws. 4-8-11. Permanent staff salary percentage must be at the minimum level per government regulations. Example: Company provides compensation of xx Iraqi Dinars, xx% above the provincial minimum wage set by government. Salaries/bonuses are granted to all permanent staff based on position level and tenure, plus other benefits. 5-8-11. Ensuring a decent and safe work environment for all workers, including clean restrooms/dining rooms, nursing rooms, smoke detectors, fire extinguishers, workspaces, bicycle parking, etc. 6-8-11. Staff training and capacity building, especially to support sustainable finance implementation. 7-8-11. Community: Describes community empowerment information, describing the company-community relationship as a key stakeholder, including at least: 1-7-8-11. Information on activities generating positive/negative community impacts and developing operational areas in deprived regions, including financial literacy and inclusion. 2-7-8-11. Public complaint mechanisms and number of complaints received/processed. Example: Customer complaints are received/responded to by a dedicated unit in each branch. In 2020, xx complaints were received, mostly regarding ATM cards. Of total xx complaints, xx% were completed. 3-7-8-11. Activities related to community empowerment and supporting core bank operations, linked to 17 (seventeen) Sustainable Development Goals in Iraq, prioritizing goals per business strategy. Example: This information...