Incorporating Environmental and Social considerations into Loan Documentation – New Guidance for Equator Principles Financial Institutions

A new guidance document ‘Guidance on incorporating environmental and social considerations into project finance loan documentation” has been release which can be expected to provide Equator Principles Financial Institutions with valuable advice on how to ensure the Equator Principles are applied to the projects they finance.

The loan documentation is a key document for ensuring the project sponsor applies the Equator Principles beyond the signing of the loan agreement, right through the construction and operation, and where appropriate the decommissioning, phases of the project. 

Failure to comply with the loan covenants may prevent or delay the project sponsor being able to drawdown on the loan, or even an event of default whereby, the lenders are entitles to cancel the loan, and all monies lend are immediately payable by the borrower.

New Climate Principles for Financial Institutions

On the 4th December 2008, five leading financial institutions signed up to the Climate Principles, new guidelines developed to deal with the risks and opportunities posed by climate change.

The initial take-up was not as wide as hoped, possibly due to the financial crisis. However, Banks Crédit Agricole, HSBC, Standard Chartered, and reinsurers Swiss Re and Munich Re in signing up to what the Climate Group describes as “the first comprehensive industry framework” to address climate change.

The Climate Principles address the management of operational greenhouse gas (GHG) emissions. More importantly, they provide strategic direction on managing climate change across the full range of financial products and services, including: research activities; asset management; retail banking; insurance & re-insurance; corporate banking; investment banking & markets; project finance.

New EBRD Performance Requirements

The European Bank for Reconstruction and Development (EBRD) new environmental and social policy was approved on 12 May 2008.

The policy has more explicit social provisions. In some areas, the EBRD’s requirements exceed IFC’s requirements. This includes EBRD’s reference to obtain a “consent” where operations are located in areas with indigenous populations. Reflecting its membership, EBRD also refers to a number of European provisions related to the Aarhus Convention on Public Participation and the EU EIA Directive.

EIA Reserve Matters

The amended EIA regulation came into force on the 1st September 2008.

These Regulations amend the Town and Country Planning (Environmental Impact Assessment) (England and Wales) Regulations 1999 (the 1999 Regulations”) so that they apply to applications for subsequent approval of matters under conditions attached to planning permissions.

In 2006, the House of Lords and the European Court of Justice (ECJ) ruled that the UK had failed to transpose the EIA Directive correctly, because the Regulations implementing the EIA Directive allowed only for EIA before the grant of outline planning permission and not at the later stage when reserved matters were approved.

The ECJ ruled that where development cannot be carried out until details relating to reserved matters are approved by a local planning authority, the decisions to grant outline planning permission and to approve the reserved matters must be considered to constitute, as a whole, a multi-stage development consent for the purposes of the EIA Directive. If it became apparent during the course of the second stage that the project was likely to have significant effects on the environment (for example, where those effects were not identifiable until then) then an environmental impact assessment was required. Since the Regulations then in force did not allow for EIA to be required at that stage, they did not fully implement the EIA Directive.

These Regulations amend the 1999 Regulations to close the loophole identified by the ECJ. As well as applying to applications for approval or reserved matters and other matters under a condition, they also apply to ROMP (review of mineral permissions) applications.

China drafts environmental guidelines for firms investing abroad

China is drafting environmental guidelines for companies investing in or providing economic aid to overseas countries.

 The work is being undertaken by the Chinese Academy for Environmental Planning (CAEP), in cooperation with the Global Environmental Institute (GEI) and the University of International Business and Economics. The first draft is now being discussed, the GEI said.

 A report released by the CAEP last week said the country lacked comprehensive environmental protection policies in its overseas projects, although investment had been expanding.

 Statistics show that between 2002 and 2006, China’s overseas non-financial direct investment grew by 60 percent annually. By the end of 2006, 5,000 Chinese companies had set up nearly 10,000 directly invested firms and invested $90.6 billion in 172 countries.

China’s overseas investment and aid mainly focuses on exploring oil and other resources, processing, manufacturing, and construction in African and Southeast Asian countries. Without proper management, such projects are likely to cause environmental problems, the report said.

In April, several companies, including China Mobile, Haier Group, and China International Marine Containers, joined “Caring for Climate”, a voluntary UN initiative to combat global climate change. Liu Meng, director of UN Global Compact China Office, told China Daily earlier that these companies’ participation suggests that China’s business sector is catching up with its international counterparts on climate issues.

China National Petroleum Corporation, the country’s largest oil producer, has pledged to stick to stringent environmental requirements before deciding on overseas projects.

Currently, only four banks in China have either formulated independent environmental standards for financing, or have joined the United Nations Environment Program Finance Initiative to reduce environmental risks.

Are PPP’s good at CSR?

This paper argues that the Public-Private Partnerships (PPP) are not always consistent with CSR and calls for an ethical code of practice to enhance PPP’s responsibility.

Key points include:

• In a PPP, if the shareholders of a parent company, who would have benefited if things had gone well, are legally under no obligation to do anything if they go badly.
• Trade Unions fear that PPP is an excuse for reducing pay, inflicting poorer working conditions and cutting staff levels.
• CSR companies behave responsibly in all their negotiations and contracts, which is why, in the long run, they keep their clients – and their reputations to be on the safe side. PPP industry globally needs an ethical code of practice urgently before the whole procurement method of PPP is discredited.

West African Sustainable Finance UNEP Event

Over 90 financial service executives from West Africa gathered in Lagos to celebrate the new financial successes that the region has enjoyed over the past few years in an event hosted by UNEP FI’s African Task Force (ATF) and Citigroup, and co-sponsored by Oceanic Bank and Bank of Industry. The involvement of bankers, asset managers, government officials and academics from West Africa was critical in exploring the latest global developments in sustainable finance.

Participants gathered to welcome five Nigerian financial institutions as the newest UNEP FI Signatories: UBA Foundation, Oceanic Bank, Bank of Industry, Zenith Bank and Fidelity Bank. Roundtable discussions focused on climate change, carbon finance and the CDM in Africa, and environmental and social credit risk management. In addition, the results of a UNEP FI study on the barriers and drivers to commercial microfinance in Africa were released, along with case studies on innovative financing mechanisms for sustainable small and medium enterprises (SMEs).

Equator Principles Celebrate Five Years of Positive Environmental Impact and Improved Business Practices

On May 8th sixty of the world’s leading financial institutions marked the fifth anniversary of the Equator Principles (EPs), voluntary standards for financial institutions to manage environmental and social risk in their project finance transactions.

The EPs have become the global standard for project finance and have transformed the funding of major projects globally. In 2007, of the US$74.6 billion total debt tracked in emerging markets, US$52.9 billion was subject to the EPs, representing about 71 per cent of total project finance debt in emerging market economies, according to Infrastructure Journal.

The EPs are now considered the financial industry ‘gold standard’ for sustainable project finance. The Principles were revised in June 2006 to reflect current implementation experience including introduction of a public reporting requirement, as well as changes made by the International Finance Corporation (IFC) to its environmental and social standards. They continue to evolve as more sophisticated funding is undertaken.

An Outreach Committee has been formed and is actively engaged with banks in China, Russia, India and other key emerging markets. Stakeholder engagement remains an important element of the EP’s implementation and the group regularly meets to share experiences with various stakeholders.

EBRD 2008 Environmental and Social Policy

The 2008 Environmental and Social Policy is a key document of the Bank which details the commitments of the agreement establishing the Bank particularly for the “promotion of environmentally sound and sustainable development”. The 2003 Environmental Policy has been revised in order to reaffirm and strengthen these commitments and also to enhance commitments to social issues and good governance.

EBRD Publishes Public Information Policy

The new EBRD Public information policy (PIP) was approved on the 12th May. It sets out how the EBRD discloses information and consults with its stakeholders so as to promote better awareness and understanding of its strategies, policies and operations. At the same time, the PIP establishes clear lines of demarcation to distinguish information which is made publicly available (either on a routine basis or upon request) from information which may not be disclosed on the grounds of being confidential. This is to ensure that mutual trust is maintained between the Bank, its business clients and other partners.

Engineers Against Poverty provides practical guidance to oil, gas and mining companies on local enterprise development

EAP has produced an eight-page briefing note to guide oil, gas and mining (OGM) companies on how they can maximise the contribution of local enterprises to the supply chain of their projects in low income countries. The document was produced with the support and assistance of the International Finance Corporation (IFC) PENSA Program in Indonesia.

Embedding Human Rights in Business Practice II

The Global Compact Office and the Office of the UN High Commissioner for Human Rights have announced the release of the second edition in the Embedding Human Rights in Business Practice series. The publication features 20 case studies from Global Compact signatories around the world.

Among the companies profiled are: ABB, Achilles, Anglogold Ashanti, AREVA, Barloworld, BASF, Eskom, Ipek Kagit, Ketchum, MAS Holdings, Newmont Mining Corporation, NIKE Inc, Novartis, Sasol, Royal Dutch Shell, Starbucks, Titan Industries, Volkswagen and Westpac Banking Corporation.

Chinese Banks would benefit from disclosed environmental policies

Banktrack has released an interesting report on the environmental performance standards of China’s financial institutions. The report recognises the need for policies to be put in place, as China’s financial institutions are becoming important players in financing environmentally and socially sensitive activities around the world.

The report found that:

Only two of China’s ten most important banks — China Development Bank (CDB) and the Export-Import Bank of China (Chexim) — have publicly-disclosed environmental policies…   … The rest of the eight banks surveyed had no publicly-available environmental financing standards.

There are also some encouraging sign that suggest progress is being made:

The Peoples’ Bank of China has recently developed a new credit database which includes borrowers’ environmental compliance data. This will allow Chinese banks to evaluate how well companies have followed environmental laws before offering loans.

The report also claims that many international banks, who own significant shares of Chinese banks, have the ability to institute world-class environmental standards through their strategic investment agreements. This is another example of the growing environmental demands being placed on international banks, and there needs to be careful consideration as to whether the demands are reasonable and if there is genuine scope for influence.

2008 FT Sustainable Banking Awards

There have been a record number of entries for the FT Sustainable Banking Awards this year, with 128 institutions in 54 countries submitting a total of 181 applications

The awards were created by the Financial Times and IFC, a member of the World Bank Group, to recognise banks and other financial institutions that have shown leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.

The winners of the awards will be announced at a special dinner at the Dorchester in London on 3 June 2008.

Equator Principle Financial Institutions Meet to Share Best Practice

• On 3 December representatives from 25 EPFIs met to discuss the ongoing development of the Equator Principles. The meeting was hosted by ING Group. The discussions focussed on Equator Principle governance and the management structure, reporting, and shared good practice.
• On 4 December the EPFIs met with 15 NGOs at ABN Amro’s headquarters. A pre-agreed agenda was followed based on items of mutual interest, which included governance, transparency, and grievance mechanisms at the project level.
• On 5 December EPFIs were pleased to be invited to meet 23 OECD Export Credit Agencies in Hamburg, hosted by Euler Hermes. The meeting provided an opportunity to better understand each others approach on transparency, experience in implementing the IFC Performance Standards, and how to further cooperation between the EPFIs and ECAs. The EPFIs also presented their experience in implementing the Equator Principles. In each instance, the meetings proved useful in furthering a better understanding by all sides and facilitating future discussion.
  

Inadequate integration of human rights law – the need for additional risk management

The risks associated with financing projects can vary significantly according to the geographical location of the project. While many projects that the banks are asked to consider financing are in compliance with national legislation and permit requirements, they may fall short of international standards and best practice. A detailed understanding of the project’s political and legal framework is required in order to judge the extent to which national requirements meet the risk management needs of international financial organisations.

Use, misuse and abuse of human rights rhetoric: the case of Serbia

National application of human rights law is one of the most important tests of its efficacy. This article examines the integration of international human rights law into Serbia’s legal system. The paper argues that the use of human rights language does not necessarily indicate the proper and correct use of human rights norms

The paper covers the following:

• an overview on the intersection of international and national law with special reference to Serbia and Montenegro
• the existing legal framework for the integration of international human rights law
• an examination of the propriety of human rights law language discourse
• a discussion on the separation of the executive and the judiciary

The paper makes the following conclusions:

• the legislative framework in Serbia favours the integration of human rights law
• despite some successes there some legislative acts and a lack of human right jurisprudence indicates that international human rights law has not been properly integrated into the legal system
• there has been a misuse of human rights law and clash between judicial and political discourse on human rights
• the inadequate training of the judiciary has led to judicial deference to the executive branch of government.

Equator Principles Signatories: Progress with Disclosure

The Equator Principles website now has a “disclosure section” which provides information on how the EP signatories are progressing with their annual disclosure reports.

Disclosure Reports

The progress made by the 56 EP signatories on the 13 December 2007 was as follows:

• 33 – Reported (including some in the 1st year grace period)
• 10 – In the 1st year grace period
• 9 – No information made available
• 4 – Will report soon

It is encouraging to note that EP signatories in their 1st year grace period are producing disclosure reports. A few of the signatories clearly need to get on and prepare their report in order to comply with the requirements of Principle 10 . This section provides a valuable addition to the EP website with useful links to the available disclosure reports.

First bank from the Middle East to adopt the Equator Principles

BankMuscat is the first bank from the Middle East region to take this ‘environment-friendly’ stand and adopt the ‘Equator Principles’, a set of globally recognized, voluntary guidelines established to assess and manage social and environmental risk in project financing, especially in the emerging markets (August 18, 2007).

Speaking on the occasion, AbdulRazak Ali Issa, Chief Executive, BankMuscat said:

I am delighted that BankMuscat is the first bank from the Sultanate to join a select and of environment-conscious financial institutions. Environmentalists from across the world have lauded the pristine beauty of our beloved country. Given these lessings, and the vision of His Majesty Sultan Qaboos bin Said, to manage the growth and development of the nation while preserving the natural beauty of Oman, we believe it our duty to take meaningful steps in the same direction.

Minimum Requirements for Equator Principle Reporting and one year of EPII Implementation and

A template which sets out the minimum reporting requirements for EPII has also been released. This covers:

• An annual report;
• The number of projects screened each year;
• The category and number of projects reviewed;
• A discussion on EP implementation (although the scope of this is completely up to the bank concerned).

• The template also contains suggested formats for providing regional and sectoral information, but this is not obligatory.

The template certainly is minimal and unsurprisingly many organisations and shareholders will be expecting the banks to provide substantially more information than is set out in the requirements. Many EP banks are already providing far more information and are setting an excellent example for those that have signed up to the principles more recently.

On May 14, 26 out of 51 EPFIs met to discuss lessons learned and challenges related to EPII implementation.

6 recent adopters attended the event and made a significant contribution to the success of the meeting. EPFIs have been implementing the new Principles for nearly one year following their revision and launch in London last July. Bank of America hosted the day-long event in Washington, DC. Issues related to EPFI governance, disclosure and transparency related to Principle 10, and other items were discussed. This EPFI meeting was then followed by a 2-day series of meetings at the International Finance Corporation (IFC’s) “Community of Learning” event which focused on lessons learned from application of the IFC Performance Standards. EPFIs interacted with and heard from IFC senior management and staff, and also had the opportunity to interact with a number of environmental representatives of Development Finance Institutions (DFIs) from across the globe.

New IFC Report – Banking on Sustainability (March 2007)

A new IFC report “Banking on Sustainability,” has been released.  It provides practical examples of 14 financial institutions in 12 countries that have taken concrete steps to integrate sustainability into their policies, practices, products, and services.

“While detailing the evidence of potential benefits for banks in integrating sustainability into their business strategy, the report reveals a dramatic shift in banks’ awareness of these benefits,” said Rachel Kyte, IFC Director of Environment and Social Development.

In a 2005 IFC survey, 86 percent of 120 financial institutions interviewed reported positive changes as a result of steps they had taken to integrate social and environmental issues in their business.The report shows evidence of the potential benefits of adopting sustainability as a business strategy. It also shows a dramatic shift in banks’ awareness of these benefits. Banks can tap vast benefits by reassessing their business practices and engaging in sustainability-oriented risk management and product development.

It is notoriously difficult to quantify the financial benefits of adopting sustainable business practices, however this report demonstrates some clear business benefits from adopting and integrating environmental and social considerations into core business strategies.