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

August 14, 2009

A new guidance document ‘Guidance on incorporating environmental and social considerations into project finance loan documentation” has been released 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.


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

January 23, 2008

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.

New IFC Report – Banking on Sustainability (March 2007)

March 30, 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.


Key discussions at the Ethical Finance Summit

December 5, 2006

There were some excellent discussions on the Equator Principles (EP) at the Ethical Corporation – Sustainable Finance Summit. The main hot topics were:

  • The need to manage the success of the principles. The need to prevent their extension to areas other than Project Finance weakening the brand, due to insufficient leverage in such areas.
  • The EP’s have lead to an unprecedented level of collaboration by Financial Institutions.
  • There is a lack of mechanisms for demonstrating how the adoption of the EP’s have contributed to business performance and financial benefits, but despite this FI’s are see these issues as key to their core branding.
  • There is a need for a pragmatic approach to their application, in certain situations when good project sponsors and FI’s have turned down projects with high potential environmental and social risks, the projects have been progressed by weaker parties and consequently developed more severe environmental and social problems.
  • There is a need to manage expectations about what the EP’s will achieve – e.g. they have not been established to be a tool for equity.
  • There has been a lack of developing market banks and a notable absence of leading French Banks adopting the EP’s.
  • The need for sufficient lead in times to review Finance deals to avoid situations where problems are picked up too late on a project to enable compliance.
  • Some banks are striving to be leaders in sustainability, while others believe the EP’s have created a level playing field.

Sustainable Finance Summit 2006

November 15, 2006

I will be attending this event at the end of November, and I hope to see all those of you who are interested in this topic there. This will be a key event for all practitioners in this area, and will provide an excellent forum to share best practice. I’ll be posting feedback after the event, so if you don’t make it, come back here and catch up on what you missed.

Sustainable Finance Summit 2006

Recognition of the key role of financial institutions in stable and sustainable development has come. This leading-edge conference will show the way forward on these difficult, but essential issues. As banks go truly global, many for the first time, they are entering and whole new world of trust, risk – and opportunity – that must be well managed.

The newly revised Equator Principles now represent some 85% of global project finance , and that percentage is going up almost daily.

How banks can manage both profit and sustainability will be addressed early on by Jon Williams , a leading thinker and practitioner who is also Head of Group Sustainable Development at financial behemoth HSBC Holdings.

Among those speakers will be:

F&C Investments * The Co-operative Bank * Standard Chartered * FTSE * Barclays * ABN AMRO * HSBC Holdings * UBS Investment Bank * Wall Street Journal * Financial Times * KLD Research & Analytics * Henderson Global Investors

 


IFC Launches Lessons of Experience on BTC and Chad-Cameroon Pipeline Projects

October 30, 2006

The International Finance Corporation (IFC) has launched two new Lessons of Experience publications on “The BTC Pipeline Project” and “External Monitoring of the Chad-Cameroon Pipeline Project.” The publications provide key environmental and social lessons and good practices for the benefit of staff, clients, and the wider private sector.

The sharing of project experience is an exemplary approach to risk management, it is excellent to see the IFC sharing their findings and contributing to the development of Good Practice in this way.

The Baku-Tbilisi-Ceyhan (BTC) Pipeline Project:
The BTC pipeline is 1,760km long and runs from Azerbaijan through Georgia to the Mediterranean coast of Turkey. At the time of its commencement, BTC was the largest crossborder infrastructure construction project in the world. The project faced a wide variety of complex and often difficult environmental and social challenges. Financing was agreed in February 2004 after more than two years of appraisal of the potential environmental and social impacts. Construction was completed in late 2005 and export from the new terminal in Ceyhan commenced in June 2006.
While it is impossible to capture all the challenges and complexities encountered during the design and construction phase of the BTC project, this publication focuses on six thematic areas where environmental and social lessons learned were thought to be most valuable and applicable to other IFC-financed projects.

External Monitoring of the Chad-Cameroon Pipeline Project
The Chad-Cameroon pipeline project is a US$3.5 billion development of an oil field in Chad by a consortium headed by ExxonMobil, and a 1,070 km long pipeline extending through Chad and Cameroon to the Atlantic coast. The External Compliance Monitoring Group (ECMG), funded and logistically supported by the Consortium, serves as the team responsible for auditing the implementation of the Consortium’s environmental and social commitments for this project. “External Monitoring of the Chad-Cameroon Pipeline Project: Lessons of Experience” provides lenders and project sponsors with an understanding of the business case for employing an external monitor, as well practical advice regarding the major steps and key issues for designing, implementing, and operating an external monitoring mechanism for complex projects. To highlight the practical challenges and value of the external monitoring mechanism, the publication draws illustrative examples from the experiences of IFC during the Chad-Cameroon pipeline Project.
PDF files can be downloaded at: http://www.ifc.org/enviropublications


Financial sector responsibility: The state of the art

October 30, 2006

The report discusses how greater transparency in implementing the Equator Principles can enable NGO’s to provide a fuller regulatory role, of this voluntary approach to Social and Environmental risk management.

The improved dialogue between NGOs and Financial Institutions that have been brought about through intitatives such as the Equator Principles.

The growing need to recognise that employees awareness of their personal accountability if growing, and employees are increasingly unprepared to compromise their ethics and standards in the workplace.

This special report is designed to offer the reader insights into how major institutions are responding to the sustainable development agenda. Also covered are increased expectations on business transparency and the role of regulators.

An interesting Case study discussed in the Report is the Baku-Tbilisi-Ceyhan (BTC) pipeline – which is now transporting oil from the Caspian Sea to the Mediterranean.

The $4 billion project showed how difficult it can be to address the social impacts of large infrastructure projects, such as the resettlement of local people and their compensation.
In Turkey, 300 villages were cleared during the building of the pipeline. Compensating villagers involved negotiating complex local laws – one piece of land was owned by 800 different people – and the fact that 70% of affected land owners had no legal right to compensation.
BP managed to compensate all land owners, but still there were disputes over what villagers were entitled to – for example, whether corn compensation was to be calculated at cost or market value, and over three years or just one. These disputes show how messy project finance can be on the ground.

The free PDF version of Ethical Corporation’s special 44-page report, Financial sector responsibility: The state of the art, is available to download at: www.ethicalcorp.com/fsr/