EQUATOR PRINCIPLESAN INDUSTRY APPROACH TO MANAGING ENVIRONMENTAL AND

SOCIAL RISKS

GROUP 4Vishal Balani A005Vipul Jain A027Anuj Kant A029Bhagyashree Sathe A048Satvinder SinghA054Darpan ThakkerA060Varun Verma A063

Introduction

Announcement of Equator Principle• Equator Principle : a new policy framework

designed to guide project-finance lending decisions. Announced on June 4, 2003

• Major step towards achieving sustainable development.

• Some banks were reluctant to accept the principles as a standard.

Problem Statement• Should Equator banks encourage adoption of

the principle by other banks and Export Credit Agencies (ECAs), focus on developing implementation procedures, o r respond to the criticism directly?

Project Finance

What is Project Finance?• In general it involves the creation of a legally

independent project company financed with nonrecourse debt to facilitate investment in a single-purpose capital asset.

• Use of Project finance increased because of : Privatization of state-owned assetsDeregulation of key industries

Globalization of markets

Role of Banks

• helped structure deals• Charged a small monthly fee• Time period of six months to 24

months or longer

Advisors

• Helped raise capital in return for a fee

Arrangers

• Made loans to project companies

Lenders

Effect on Environment

• Because of the large size, projects have significant financial, developmental, environmental and social effects on the communities in which they are working

• For example, Chad-Cameroon Pipeline• Environmental risks including deforestation and oil spills• Potential for the greatest damage in the fragile

ecosystem of the Atlantic littoral forest zone• Project’s settlement plan was incomplete and without

mechanisms to ensure enforcement

Starting of a debate on ‘sustainable development’

Economy vs. Environment

• Sustainable development : development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

• Initially it was focused only on sponsoring firms and their projects

• Gradually public and private financial institutions are also included in the dialogue of sustainable development

A Little Doze of History

Involve Pvt. & Public Institutions, UNEP create FI Initiative

UN & FIs create UNEP Statement on Environ. & Sustainable Development

1992

2002

OECD created Env. Guidelines for ECA known as “Rev.-6”Promote Coherent Policies for Sustainable Development

To develop common policies among member ECA

To achieve a high level of Environmental Protection

Objective

London Principles : Established by UK Govt. & Corporation of LondonMotto :To Guide behavior of FI’s in World’s Leading Financial Centers

Env. Protection Social Development Eco. Prosperity

Two PrinciplesFive Principles

Collevecchio Declaration

Commitment to Sustainability

Commitment to ‘Do No Harm’

Commitment to Responsibility

Commitment to Accountability

Commitment to Transparency

Commitment to Sustainable Markets & Governance

Identifies Environmental and Social Responsibility for Financial Institutions

Fin Institutions ‘Legal’ Responsible for Environmental & Social Risks they accept & create

Fin Institutions accountable for Creating Policies, Stds & Procedures with Transparency

Interest Permeation Moves by Dow Jones, World Economic Forum, GRI and UNEfforts by RANHolistic Solution : Control Capital flows that finance egregious investmentsBanks are uniquely Vulnerable to Pressure from Advocacy Groups like RANConfrontation & Negotiation through tactics like Days of Action, Media Campaign

RAN v/s CitigroupCampaign Against Citigroup for sponsoring Large Projects with Environ. RisksEncouraged College Students to boycott Education Loan & ServicesTelevision Commercials urging people to cut their Citibank Credit Cards

Foundation of Equator Principles

Late 1990’sABN AMRO

approaches IFC

• No established Principles for social and Environmental Risks

2001 ABN AMRO

Creates Forest Policy

• Not to Finance Projects that result in Resource Extraction from primary of High-Conservation- Value Forests

Oct 2002 ABN AMRO and IFC convene Meeting for

Project Financiers

Risks Covered by Industry-wide Framework

• Deal be delayed before closure causing opportunity cost

Deal Risk

• Govt. Action for causing harm to local environment- Closure of project

• Following standard policies enable faster implementation and avoid costly delays

Credit Risk

• Association with bad project damages reputation of the financier

Reputation Risk

Forming of Equator Principles

Social and Environmental Risks part of the “Equation”Credible, Widely used, and Broad Industry Covering Principles

Adaptation of IFC Policies• Developed over 30 years• Widely accepted• Comprehensive and covered social issues

Comments invited from Clients, NGOs & other banks

Introducing to other Project- Finance Banks

Announcing Equator PrinciplesJune 4, 2003: Adoption of Equator Principles by 10 Banks

Applicable on Projects worth more than $ 50 Million

Important for Developing Nations who tended to ignore environment protection and human rights

IFC Safeguards- Assess impact on natural environment and society

World Bank Pollution guidelines- Minimum standards for pollution discharge

Methodology

Declared as default if failed to comply

Inclusion of steps into Loan Covenants

All ‘A’ required EMP outlining risk mitigation procedures followed

A & B Required Environmental assessment

Categorize Projects Depending on type of project and location A (High) B (Medium) C (Low)

Impact

Leadership Role in Global Environmental and Social

Issues

Affect Project Financing in Dozens of Industries globally

Could impact investments worth $ 100 Billion in 10 Yrs.

Reaction to the EPsMixed Reaction from the NGO and the banking communities

Applauded by “Environmental Defense” group – praised Citigroup committing to this and being ahead of other supposedly green export credit agencies

Collevecchio NGOs did not endorse the Equator Principles – consider it a mix of other principles such as UNEP-FI, the Collevecchio Declaration & London Principles that lack broader commitments to sustainability

Criticized IFC policies – focus on revenue generation & economic growth and not sustainable development indicators

Concerns on 3 Fronts – SCOPE, IMPLEMENTATION PROCEDURES & MECHANISMS.

SCOPE EP did not contain “no-go” zones, unlike the IFC guidelinesNeed for overt transparency & greater commitment to social

issuesEP does not prevent banks from financing the oil and logging

companies that are kicking people out of their homes & destroying rain forests

EP focussed on project – finance lending and not on other financial vehicles such as IPOs and bonds. (e.g. forestry projects)

It did not adequately address Human Rights. Instead the words “socially responsible” were included., which have an unclear meaning.

“ In adopting these principles, we seek to ensure that the projects we finance are developed in manner that is socially responsible …..”

Implementation & Acceptance

Issues : No standard implementation standardsLack of enforcement mechanismsNo disclosures No review mechanismWhy other banks stayed away: BNP Paribas: Declaration of intent too vague with

no clear implementation rules and timetableANZ : Principles not applied universally, leading to

competitive disadvantage

EP- 2003 Onwards

In 2010, the EP Association initiated a Strategic Review

• Series of recommendations on key thematic areas, namely scope, climate change, human rights ,reporting and transparency, stakeholder engagement and governance

The EP III Update process was launched in July 2011 and consists of three distinct phases

• PHASE I: Internal Consultation and Initial Drafting of EP III (July 2011 - August 2012)

• PHASE II: Formal 60 day Stakeholder Consultation and Public Comment Period (August - October 2012)

• PHASE III - Finalisation and Launch of EP III (October 2012 – January 2013) 

Revised in 2006EPIISignificant growth in the number of EP adopters from the original 10 to 75 financial institutions from 32 countries across the globe

EP III DraftKey themes and areas of development proposed in the

EP III draft include:An extension in the scope of the EP to Project-Related

Corporate Loans and Bridge LoansChanges reflecting the recent update of the International

Finance Corporation (IFC) Performance StandardsNew requirements related to managing impacts on climateGreater emphasis on human rights considerations in due

diligence and an acknowledgment of the UN "Protect, Respect and Remedy" Framework for Business and Human Rights  and Guiding Principles on Business and Human Rights

A strengthening of reporting and transparency requirements

Where does India Stand?

•Project developers are required by regulation to undertake an Environment Impact Assessment (EIA) in order to obtain the Environmental Clearance

•Major prerequisite for starting projects and demanded by banks in all project finance deals

•Although the process appears sound, there are loopholes in its implementation• In many cases, the EIA

reports are not authentic, the public consultation does not take place as per the Act

• Sometimes the project's impact on local communities and the surrounding environment remains unclear

In December 2007 the Reserve Bank of India (RBI) issued a circular •citing the importance for banks to act responsibly and to contribute to sustainable development•referred banks to the Equator Principles•suggested that there is a need for Indian banks to evolve institutional mechanisms to enshrine sustainability.

Some of the Initiatives by Banks

SBI Green Home Loans• Support environmentally-friendly residential

projects • Offer various concessions—reduced margins,

lower interest rate and zero processing fee. These loans will be sanctioned for projects rated by the Indian Green Building Council (IGBC)

ICICI Bank's Support for Clean Technology• Clean Coal Technologies• Zero Emission Vehicles• Finance for Innovative Products