China drafts environmental guidelines for firms investing abroad

September 16, 2008

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.

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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/


Barclays robust approach to screening environmental risks

October 11, 2006

Barclays believes its increasingly robust approach to screening environmental risks surrounding corporate loans is helping customers to improve their regulatory compliance and environmental management programmes. Liesel van Ast from ENDS reports :

‘As environmental risks become more complex, and the extent and timing of hazards more ambiguous, the financial community must increasingly think outside its traditional approach. Impacts may occur over longer timescales and across borders…’

Commercial loans
To reduce the exposure of their ever-expanding commercial loans markets, banks are placing more importance on businesses’ ability to manage environmental liabilities. Barclays has become more robust in its environmental screening of clients.

Panel of consultants
Environmental consultants are used to help estimate the nature and likelihood of possible risks. Their advice informs the bank’s decisions on whether to accept, avoid, manage or mitigate risks, or whether to seek insurance cover.

This works well when risks are quantifiable and there is certainty that the future will follow the past. But it is the qualitative nature of many risks that generates ambiguity. Mr Bray says there are few explicit rights or wrongs and the bank relies on “stakeholder interests, as well as technical judgement” to inform analysis of materiality.

Therefore it relies on consultants to provide an opinion on the materiality of impacts rather than just recording observations.

Two consultant panels are used: four consultants tackled contaminated land work in the UK, while 22 consultants deal with global projects.

Consultants are asked to recommend actions to minimise risk and liability. This advice may be made a condition of lending.

Barclays is not positioning itself as an environmental consultant, says Mr Bray, but “if consultants come up with actions or gaps in terms of compliance with regulations, then that’s material and we have to require corrective action by the client.”

“For instance, where bunds are inadequate or above-ground storage does not comply with relevant regulations, putting these things right will be a condition of lending.”

Nonetheless, banks do not necessarily lose out when a business fails. Mr Wright believes that since customers carry the primary risk, “it is in their interest to have environmental risk high up on the agenda.”

Sector-specific screening
Barclays has internal guidance on 32 sectors and industries designated as having high environmental risks, including waste management, forestry and oil and gas. The guidance outlines the potential environmental and social impacts of lending, covering risks, regulation and international best practice.

The bank will soon post this guidance online, following NGO criticisms about lack of transparency.

It works to identify clients’ environmental risks and, rather than decline loans, tries to help reduce their exposure. Environmental consultants are often used to find solutions. Where necessary, loans are made conditional on clients taking measures to reduce risks.

Loan decisions are informed by three risk considerations: direct, dominated by land contamination; indirect, including regulatory impacts and changes; and reputational.


Dramatic global rise in corporate responsibility reporting

August 4, 2006

A record number of leading global companies are voluntarily reporting on social and environmental issues, according to a report published today (Global Corporate Responsibility Reporting Trends 2006) by the corporate responsibility consultancy ‘Context’.

The Context report, based on information from the CorporateRegister.com database, analyses reporting of the world’s 300 leading public companies. It shows:
point Only 10 of the top 100 in Europe do not report;
point A majority of the US top 100 now publish a report;
point Most companies report on a wide range of issues rather than focusing solely on environment or philanthropy;
point The majority of European reporters use external assurance to validate their reports, but this is less common elsewhere and very rare in the US; and
point A growing number of these companies acknowledge the Global Reporting Initiative (GRI) guidelines, but very few are formally “in accordance” with them.

But there are still question marks about the quality of reporting, Context directors argue:
Experienced reporters are eager to escape conformity with informal reporting standards to produce more effective communications;
point Companies need to focus on key issues, but find guidance on “materiality” issues unhelpful; and
point Reports need to be part of a process of improving performance and are not an end in themselves.

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Rachael Bailey discusses how to manage environmental and social risk in project finance

July 31, 2006

Applying the Equator Principles can dramatically improve the environmental and social risk profile of project financings. But their application can often be improved. Extract from the Article by Rachael Bailey and colleagues:

In the three years since their introduction, the Equator Principles have driven substantial environmental and social performance improvements in project finance. These voluntary guidelines, which essentially involve private sector banks committing to apply World Bank/International Finance Corporation (IFC) social and environmental risk management procedures to projects which they finance, have been adopted by institutions accounting for more than 80% of project finance flows.

There is now widespread awareness of the benefits of using the appropriate expertise at the outset to manage potential environmental and social risks throughout the project cycle, and thereby secure better financial terms at financial close and syndication. Ensuring that environmental and social risks are fully under control now plays a key part in securing confidence in project finance deals.

The full article can be viewed on the Equator Principles Website or the Environmental Finance website.

A copy of this article is available here for downloading. ef7equator_bailey_p28-30-v2.pdf


Equator Principles improve financial performance – the evidence is clearer than ever

July 11, 2006

There are increasing indications that banks are successfully distinguishing themselves by how they handle the environmental and social dimension of their operations. Those banks such as HSBC, ABN AMRO and Barclays, to name a few, but by no means all, have made an impressive effort to establish themselves as leaders in this field.

The real indicators of this are the increased shareholder support for banks they consider to be more sustainable and the rapid growth in Socially Responsible Assets. This is emphasised by shareholders efforts to place pressure on banks involvement in particular deals.

A little while ago, private banks cared about sustainability because it was good for their reputation and brand. Now it is about their bottom line. There is emerging evidence of a correlation between good environmental and social behavior and good financial performance. We find plenty of examples of this in IFC’s own portfolio. Key Results In a recent survey of bankers, IFC found that 65 percent reported tangible benefits from sustainable policies.

The Sustainable Banking Awards co-organized by the Financial Times and IFC have shown that banks are using sustainability as a driver for business growth and asset quality. The Sustainability Yearbook 2006, published jointly by Sustainable Asset Management and PriceWaterHouseCoopers, says that it has been able to a show a conclusive link between performance on sustainability issues and financial performance, and a correlation to creation of shareholder value.

This trend has not gone unnoticed by private investors: In the United States, the Social Investment Forum published a report in January of this year which found that socially responsible assets grew faster than the entire universe of managed assets in the United States during the past 10 years.

By Lars Thunell, Executive Vice President
International Finance Corporation, World Bank Group
July 6, 2006


Banktrack feels new Equator Principles could be better – but are they failing to see the bigger picture?

July 10, 2006

It is interesting to consider some of the NGO views on the revisions to the Equator Principles. BankTrack (a network of civil society organisations and individuals tracking the operations of the private financial sector) have highlighted what they consider to be the key improvement to the Equator Principles, together with their main areas of concern:

BankTrack acknowledges the improvements in the new version of the revised Equator Principles (EP2), such as the expansion of the Principles to cover financial advising and the lower threshold, but also believes that the EP2 fail to live up to their potential. BankTrack’s suggestion to regularly review the Principles with an eye toward continuous improvement, was taken on board in the revision and is very much welcome.

However BankTrack feel that:

  • EP banks must adopt more robust governance and implementation systems, such as a procedure for dealing with “free riders” and a regular reporting requirement.
  • EP banks still are involved in environmentally and socially harmful projects. For example, at this time, EP banks represent the majority of financial institutions bidding on the deeply controversial and non-EP compliant Sakhalin II project.
  • BankTrack further believes that the EP banks should adopt an accountability mechanism that would allow communities affected by projects supposedly governed by the EPs to seek redress for problems they may encounter.

BankTrack welcomes the areas in which the revised EPs have embraced higher environmental and social standards. For example, the EPs now have stronger standards on labour and working conditions, and a new requirement to covenant clients to host-country environmental and social laws.

However BankTrack feels that:

  • EP2 did not adopt a new IFC requirement on revenue and contract transparency for extractive industries clients, a measure designed to promote good governance and combat corruption.
  • And on the important issue of Land Acquisition and Involuntary Resettlement, the IFC PS and EP2 actually reverses a previous World Bank policy and no longer recognizes people without ‘recognizable’ land titles.

BankTrack views the EPs as a baseline, rather than best practice, in the field of sustainable financing policies. A recent BankTrack study found that many banks have already adopted individual environmental and social financing policies that go beyond the Equator Principles.

As BankTrack has found out, some banks are already going far beyond the requirements of the Equator Principles, which has been a very positive outcome from this process. BankTrack are generally very supportive of the changes, and have clearly valued the opportunity they were given to comment on the proposed changes.

However, there is a need to recognise that whether or not EP banks finance a particular project is not necessarily the best measure of the success of the Equator Principles. A greater emphasis should be placed on the magnitude of the improvements that are made to individual projects as a result of an EPs banks involvement. NGOs often fail to recognise the need for client confidentiality in relation to particular projects and tend to have overly ambitious desires for disclosure.

It should be recognised that the recently completed Equator Principle revisions process has been a remarkable exercise in itself, with an impressive number of Financial Institutions getting together to discuss and reach a general consensus on how they will manage environmental and social risks. The outcomes have included clear and highly progressive improvements to the Equator Principles, which will certainly result in improved projects and increased shareholder satisfaction.