An Industry Approach to Managing Environmental and Social Risks

GROUP 4

THE EQUATOR PRINCIPLES: WHAT ARE THEY ?

Announced on June 4, 2003 by 10 international banks, the Equator Principles is a new policy framework designed to guide project finance lending decisions Experts Speak Represent the first global framework for addressing environmental and social issues. Project financings in all industrial sectors will be subject to consistent and rigorous reviews

The adaption of these principles by the private sector marks a profound victory for sustainable development
Were glad to see banks responding to pressure thats been brought on them. But I think that youll find broad consensus around the NGO community that the Equator Principles dont go far enough. The loopholes are wide enough for bulldozers to move through
The dilemma: Should Equator Banks encourage adoption by other banks and develop implementation procedures or should they respond to the criticism directly ?

PROJECT FINANCE
WHAT IS PROJECT FINANCE ?
Involves the creation of a legally independent project company financed with non recourse debt to facilitate investment in a single purpose capital asset Used for both infrastructure assets as well as industrial assets

INCREASING USE OF PROJECT FINANCE

Privatization of state owned assets Deregulation of key industries Globalization of markets PF was frequently used for large assets

FACT FILE
Total project lending grew at a CAGR of 23% from 96 - 01 Total amount of capital assets financed grew at a CAGR of 18% reaching a peak of $217 BN in 2001 Power, telecom and infrastructure have been the major sectors which have availed of project finance bank loans Bulk of project financing happened in Americas, Europe, Africa and Middle East with Asia Pacific accounting for just 15.2% of total financing between 98 - 02

ROLES PLAYED BY COMMERCIAL BANKS

Advisory role Help structure deals Arranger role Help raise capital Lending role Provide loans to project companies

THE CHAD CAMEROON PIPELINE

Exhibit 3 Size < $50 MN $50-$100 MN $100-$500 MN $500-$1 BN > $1 BN Total Distribution of projects financed from 97 - 02 By no of projects 14% 14 46 14 12 100% By value of projects 1% 2 21 19 57 100%

A $3.7 billion project which consisted of an inland oil-extraction facility and a 670 mile pipeline to loading facilities on the African coast Large development benefits in two of the worlds poorest countries Opposed by environmental groups which claimed that there were environmental risks such as deforestation ad oil spills as well as damage to the fragile ecosystem of the Atlantic littoral forest zone in Cameroon Resettlement of native tribes such as the Bakola people from the forest regions was also an issue The pipeline closed in 2001

Sustainable Development

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. - The World Commission on Environment and Development, 1987

Why?

Who should take responsibility?

Consumers Government Business Lenders

Sustainable Development

The best way to predict the future is to invent it. - Alan Kay

LONDON PRINCIPLES
Economic Prosperity
Principle 1: Provide access to finance and risk management
products for Investment Principle 2: Promote transparency and high standards of corporate governance

Environmental Protection
Principle 3: Reflect the cost of environmental and social risks in
the pricing of financial and risk management products

THE LONDON PRINCIPLES OF SUSTAINABLE FINANCE

Voluntary code for FIs Emphasize financial sector role in promoting Economic Prosperity as well as influencing Environmental Protection & Social Development

Principle 4: Exercise equity ownership to promote efficient and

sustainable asset use

Principle 5: Provide access to finance for the development of

environmentally beneficial technologies

Social Development
Principle 6: Exercise equity ownership to promote high
standards of corporate social responsibility by the activities being financed; Principle 7: Provide access to market finance and risk management products to businesses in disadvantaged communities and developing economies.

COLLEVECCHIO DECLARATION ON FINANCIAL INSTITUTIONS

The Role & Responsibility of Financial Institutions
FIs channel financial flows, create financial markets, and influence international policies in ways that are too often unaccountable to citizens and harmful to environment, human rights and social equity Relatively few Fis effectively use their power to deliberately channel finance into sustainable enterprises, or encourage their clients to embrace sustainability As a result, civil society is increasingly questioning the financial sectors accountability and responsibility, and challenging FIs social license to operate As major actors in the global economy, FIs should embrace a commitment to sustainability that reflects best practice from the corporate social responsibility movement, while recognizing that voluntary measures.

COLLEVECCHIO DECLARATION ON FINANCIAL INSTITUTIONS

Commitments to Six Principles
COMMITMENTS
To SUSTAINABILITY

IMMEDIATE STEPS
Measurement of Environmental & Social Impacts Continuous Improvements based on Environmental & Social Impacts Fostering Sustainability Implementation & Capacity Building Sustainability Procedures Sustainability Standards Bear Responsibility for Impacts of Transactions Recognize Role in Developing Country Debt Crisis Public Consultation Stakeholder Rights Corporate Sustainability Reporting Information Disclosure

To DO NO HARM To RESPONSIBILTY To ACCOUNTABILITY To TRANSPARENCY

To SUSTAINABLE MARKETS Public Policy & Regulation Financial Practices & GOVERNANCE

THE EQUATOR PRINCIPLES

The Equator Principles is a credit risk management framework for determining, assessing and managing environmental and social risk in project finance transactions.

Need for Equator Principles For a number of years, banks working in the Project Finance sector had been seeking ways to assess and manage the environmental and social risks associated with such investment activities.
Risks Deal risk Credit Risk Reputation Risk

London, October 2002 nine international banks convened together with the International Finance Corporation, to present their cases describing issues in controversial projects
Equator Principles were announced on June 4 2003. 4 drafting banks + 6 other banks adopted EP

IFC Safeguard Policies World Bank Pollution Prevention Abatement Guidelines (IFC Performance standards) EQUATOR PRINCIPLES

THE STATEMENT OF PRINCIPLES

EP Financial Institutions will only provide loans to projects that conform to Principles 1-10 below:
1 Review and Categorisation: EPFI will categorise projects based on the magnitude of its potential impacts and risks in accordance with the environmental and social screening criteria of the International Finance Corporation (IFC) Social and Environmental Assessment: For Category A or Category B project the borrower should conduct a Social and Environmental Assessment. The Assessment should propose mitigation and management measures Applicable Social and Environmental Standards: the Assessment should refer to the applicable IFC Performance Standards

Action Plan and Management System: the borrower has to prepare an Action Plan which addresses the relevant findings, and draws on the conclusions of the Assessment
Consultation and Disclosure: borrower or third party expert needs to consult with project affected communities in a structured and culturally appropriate manner

THE STATEMENT OF PRINCIPLES (Contd.)

Grievance Mechanism: the borrower will, scaled to the risks and adverse impacts of the project, establish a grievance mechanism as part of the management system.

Independent Review: an independent social or environmental expert will review the Assessment, Action Plan and consultation process documentation Covenants: the borrower will add social and environmental covenants in financing documentation and where a borrower is not in compliance with covenants, EPFIs will work with the borrower to bring it back into compliance to the extent feasible Independent Monitoring and Reporting: the borrower retain qualified and experienced external experts to verify its monitoring information which would be shared with EPFIs EPFI Reporting: Each EPFI adopting the Equator Principles commits to report publicly at least annually about its Equator Principles implementation processes and experience

10

THE SCREENING PROCESS

To determine the extent of EA. Projects classified depending on type, location, sensitivity, project scale and magnitude of ENVIRONMENTAL AND SOCIAL IMPACTS

A. Significant Adverse
Sensitive, diverse or unprecedented impacts EA examines potential + and impacts Compared with feasible alternatives Measures recommendeda full EIA required

B. Potential Adverse
Potential impacts on population or important areas Site-specific impacts Easier mitigation than Category A Very few risks are irreversible Eg: Pulp & Paper, Cement, Hospitals

C. Minimal or Nil
No adverse environmental impacts Beyond screening no EA action

Environmental Audit

TYPES of E.A

Social Assessment

Hazard Assessment Resettlement Assessment and Plan

REACTIONS
Mixed Reactions- Praised for Commitment but Particularly Criticized by the Collevecchio NGOs

Fallen short of Societys need and scope for Sustainability in Financial Sector IFC policies- foundation of EPs criticized- especially Sustainability Indicators used Ecologically sensitive areas ignored

MAIN CATEGORIES

1 2 3

SCOPE

IMPLEMENTATION PROCEDURES

Financial vehicles like IPOs and Bonds out of purview

Did not address Human Rights

ENFORCEMENT MECHANISMS

EXPECTATIONS FROM EQUATOR PRINCIPLES

Industry wide approach written on real environmental standards and not just a PR practice
Requirements to disclose either the processes banks have in place or the actions they have taken Declaration of deviation from the Equator Principles and what kind of covenants bank is using in replacement of EP Should be best existing practices, not settling for the least common denominator Wait and See approach of most of the banks

BNP Paribas
Too Vague, No clear implementation rules and timetable Need to work on issues, we will re-evaluate the merits on a ongoing basis

ANZ Investment bank

Should be consistent and universal for both developed and developing countries Cover project bonds and Corporate loans in the declaration

GOING FORWARD EP II AND III

6 July 2006, EPFI launched of the final revised Equator Principles.
1 Reflect revisions to the IFC's Performance Standards The Equator Principles apply globally and to all sectors All project with capital costs above $10 mn. Lowered from $ 50 mn Now also apply to project finance advisory activities Specifically cover upgrades or expansions of existing projects where the additional environmental or social impacts are significant Report on the progress and performance of Equator Principles' implementation on an annual basis Stronger and better social and environmental standards, including more robust public consultation standards More robust governance and implementation systems, such as a procedure for dealing with "free riders

July 2011, EP Association launched EP III update process. Key Areas: Scope of EPs, Reporting and Transparency, Governance issues, Membership Criteria, Stakeholder Engagement, etc.

CONCLUSION
Tool to leverage resources, skills and expertise towards addressing societal challenges such as climate change and environmental protection Acknowledge the importance of inclusive finance Play a vital role in combating environmental challenges and catalyzing sustainable development Ensure that financing and investment policies are structured around strongly embedded social, ethical and environmental criteria Advise on potential environmental and social sensitivities at both the client and transaction level Provision for continuous monitoring and evaluation once the business engagement is clinched. Each FI needs to define the process and governance model Spreading awareness of potential environmental and social risks and mitigation opportunities

THANK YOU
Presented By : Group 4
Ishant Bhatia Agrim Bothra Tanya Chaudhary Rajat Goel Manoj Jain Virang Shah C007 C008 C011 C020 C025 C050