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.

Financial sector responsibility: The state of the art

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

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

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:
Only 10 of the top 100 in Europe do not report;
A majority of the US top 100 now publish a report;
Most companies report on a wide range of issues rather than focusing solely on environment or philanthropy;
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
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;
Companies need to focus on key issues, but find guidance on “materiality” issues unhelpful; and
Reports need to be part of a process of improving performance and are not an end in themselves.

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

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

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?

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.

Risk Management Guidance for companies operating in “weak governance” zones

The risks associated with working in areas with weak Governance can be severe and far reaching. These risks can prevent companies and financial institutions investing in worthwhile projects in certain regions, even where they would provide widespead benefits.

For those banks that have traditionally only been involved in Project Finance deals in Europe and North America and now wish to expand their interest into lucrative new areas of operation, establising country specific guidance can reasssure risk adverse senior mangers that due attention will been given to managing the additional risks this may pose.

The new guidance offers an excellent opportunity to help companies understand the extent of these risks and ensure they are able to manage them effectively. In this way they can prevent potential damage to their reputations and still invest in challenging and rewarding projects in thses areas.

The Risk Awareness Tool can help them avoid actions that may hinder efforts to build better governance while at the same time encouraging them to consider whether there is a positive role they can play.

The OECD has come out with a Risk Awareness Tool to help multinationals operating in zones with “weak governance”. The guidance was requested by participants at the 2005 Gleneagles G8 summit.

The Risk Awareness Tool is non-prescriptive but sets out a range of questions for companies to consider in such areas as:

1. obeying the law and observing international instruments;
2. heightened care in managing investments,
3. knowing business partners and clients;
4. dealing with public sector officials; and
5. speaking out about wrongdoing.

A number of resources exist for multinationals hoping to answer these questions, such as International Alert’s Conflict-Sensitive Business Practice: Guidance for Extractive Industries (also in Spanish) and guidelines from the Global Reporting Initiative.

The Danish Institute for Human Rights has a more comprehensive tool, the Human Rights Compliance Assessment, that allows companies to self-assess risks specific to human rights violations. A quick assessment is free, but the full one is expensive at 4,000 euro. Or check out the (free) executive summaries of various country risk assessments, including China, Brazil and India. Posted by Christine Bowers

Investors warned on pulp mill risk

This is a timely report in view of the widespread concerns over the Botnia paper mills. This report provides useful guidelines for financial institutions to enable them to assess the implication of investing in a new Paper Mill, and either provide the impetuous to raise the standard of a mediocre project or avoid the reputation risk of being associated with a poor project.

Investment is pouring into emerging market pulp mills based on false assumptions about the origins and the cost of wood,according to a report from the Center for International Forestry Research – “setting up investors, forest-dependent communities, and the environment for a precipitous fall,” it says. The report, financed by the European Commission and the UK’s Department for International Development, says that some $40 billion has been invested in the sector over the past decade,and analysts project a further $54 billion in investments by 2015. The study found:

• Financial institutions and investors often have very limited information about a pulp mill’s wood supply.
• Detailed data on wood supply often is not reported in sufficient detail by project sponsors, or is not publicly available.
• Financial institutions and investors do not have sufficient information to properly assess the socio-enviro impacts and sustainability of planned pulp mill projects.

The report will:

• Encourage responsible investment by promoting a legal, transparent, and sustainable pulp and paper industry.
• Ensure projects provide income for business, tax revenues for governments, and benefits and jobs for local communities.
• Allow financial institutions to better assess whether proposed pulp mill projects have a secure and sustainable supply of wood fiber.
• The report provides a number of specific recommendations that will enable them to do so.

The report “Financing Pulp Mills – An Appraisal of Risk Assessment and Safeguard Procedures”, analyzes the type of information institutions such as banks and export credit agencies examine when they decide whether or not to finance pulp mill projects.

Mongolia benefits from credit rights from European Bank for Reconstruction and Development

This is excellent news for Mongolia as they will now be able to benefit directly from EBRD investment in infrastructure, and with the EBRD’s emphasis on managing environmental and social risks many projects can be expected to benefit from the application of the EBRDs environmental and social policy requirements.

European Bank for Reconstruction and Development (EBRD) has decided to grant credit rights to Mongolia. This issue will be decided in the near months. Besides, the EBRD is expected to establish its Resident Representative Office in the country. A Director for Russia, Central Asia Regional Group in the EBRD Hubert Pandza reported on the above on Wednesday.

“The EBRD is delighted to be able to start working fully with Mongolia. We see Mongolia’s admission as a recipient country of the EBRD as a natural continuation of the work the Bank started in central and eastern Europe 15 years ago,” said EBRD President Jean Lemierre. “Our experience and our expertise will help move forward the process of economic and political transformation.” President Lemierre is expected to visit Mongolia in September.

Map courtesy of the University of Texas Libraries, The University of Texas at Austin

Equator Principles lead to increased third party pressure

As this situation demonstrates, once banks sign up to the Equator Principles Banks their finance decisions and come under greater scrutiny. While EP banks generally apply more stringent environmental and social policies than other financial institutions, NGOs increasingly use the Equator Principles as a means to place increased pressure on EP banks not to finance projects that the NGOs consider to be environmentally and socially unacceptable.

In the face of this third party pressure, the EP banks need to consider the specialist environmental and social reports prepared by their consultants to make a fully informed decisions. This will ensure their finance decisions are based on the scientific evidence, opposed to responding to excessive pressure. Particularly, if these reports indicate that the risks can be managed in an acceptable manner and the project sponsor demonstrates a clear comittment to improving their environmental and scoial perfromance.

Conversely, NGOs need to recognise that project finance provides opportunities for substantial economic improvements and simply not financing a project may not be the best way of managing the environmental and social risks – after all you can have a greater influence from the inside opposed to the outside.

While the anticipated increased scrutiny may make financial institutions think twice about signing up to the principles, the additional risk management the EPs provide and the shareholder support for such actions can be expected to make it worthwhile.

An example of the ongoing pressure placed on EP banks – this project is considere by many to be a tesing ground for the effectiveness of the Equator Principles:

Thursday May 18th, 2006 – Nine organizations including broad civil society networks in 6 countries, filed a complaint today against Calyon, the international financial investment arm of Crédit Agricole of France, for violations of the Equator Principles, in Calyon’s support of the highly controversial Finnish papermill in Uruguay in construction by Botnia. The complaint was modeled after an earlier complaint presented to ING Group of Netherlands, soon after which ING withdrew US$480 million in pledged support to Botnia. The filing will be followed by public protests outside of the French Embassy in Buenos Aires, the headquarters of Calyon and Crédit Agricole in Paris, and launches what will be a rigorous international campaign against Calyon and Crédit Agricole to withdraw its support to the mills being constructed on the Uruguay River, the natural waterway border between Argentina and Uruguay.

The complaint was discussed and prepared in collaboration between the 9 institutions, in 6 countries and consists of 17 pages of evidence that Botnia does not comply with the Social and Environmental Safeguards of the International Finance Corporation (IFC), and suggests that if Calyon finances Botnia, it will be complicit in violations of human rights and environmental law.

EIB and EBRD will apply the EU’s principles on environmental protection to project financing

London, 1 June: The European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) have signed a declaration promising to apply the EU’s principles on environmental protection to project financing.In order to secure a loan from the banks, a project should now adhere to the European Principles for the Environment (EPE), which are based on EU environmental legislation and the environmental principles enshrined in the treaties underpinning the EU.

However, campaign groups are already saying that the declaration does not go far enough, because the requirement is subject to the banks’ environmental policies and, outside of Europe, subject to local conditions.

Stoczkiewicz also expressed concern about how the principles would be applied to projects financed by the EIB in Latin America and Asia. “These conditions will not necessarily come from the country’s legislation or the country’s government itself,” she said.

Arango said that it would not be practicable to expect projects in developing countries to adhere to some EU legislation. He said: “We do not go down the line of dumping environmental externalities on developing countries. When you go into developing countries, you have to be realistic.”

Environmental Risks and EIA training in Mongolia

A brief summary of the EIA training course for Mongolian EIA consultants that I held Ulan Bataar, Mongolia, in March this year: The EIA course was extremely well attended with 40-50 consultants putting in daily attendances at the 2 week course. We used a varied of examination techniques to evaluate the attendees, and awarded them with certificates on completion of the course.

The consultants were very grateful for the course as many had had no formal EIA training and they often experience difficulty gaining access to information. The participants had a huge range of abilities, from first year students with no previous training, to very senior consultants who had prepared the Mongolian EIA legislation and worked on most of the major EIAs in Mongolia.

There are clearly some substantial environmental issues to tackle in Mongolia. The students were given a practical insight into these issues on the site visit, they visited a Power Station with potentially high levels of uranium in the settlement beds, a sewage works that was receiving excessive qualities of chromium due to complex upstream administrative issues, and a tannery that would benefit from improved health and safety procedures.

The attendees were taught new approaches and techniques for environmental and social risk management. Mining is an important sector in Mongolia but many of the processes used are severely out of date, so we introduce the concept of Best Available Techniques. The EIAs that are currently prepared are limited in what they can achieve as they are essentially trying to mitigate and clear up bad technology, this should help to prevent the current situation and will provide consultants with another service offering.

On completion of the course the participants prepared a document to issue to the Government setting out how they would like the EIA process to be improved – this was the first time the EIA consultants had worked together and they said how much they had valued the opportunity to put forward suggestions for improvements to the EIA process in Mongolia. This was clearly a valuable exercise that provides an important starting point for future procedural improvements.

There is a need to improve the transparency of the EIA process in Mongolia. Currently, the Government selects who carries out the EIAs and the EIA documents are not released to the public. This approach does not allow the public to gain access to environmental information, or allow consultants to share good practice. A guest speaker on the course explained why Mongolia would benefit from signing the Aarhus Convention.

We were delighted by the enthusiasm and dedication of the attendees, all of whom worked extremely hard throughout the training course. We were also impressed by the insightful questions and the contributions that attendees made to the in-depth technical debates that were held on leading edge issues. The attendees also discussed projects they had worked on in Mongolia, which was extremely interesting and allowed us to ensure the training reflected the needs of the participants.

The project also helped to support the newly created Mongolian Association of Impact Assessors and will provide the continued mentoring of bank professionals. This project was funded by the World Bank Netherlands Trust Fund and was run in conjunction with Development Steppes NGO.

Report claims the biggest French banks are behind on their Environmental Policies

This report has looked at some of the key areas that shareholders are interested in when considering how Banks are managing their environmental risks. While having a plethora of environmental policies is place is not the only indication of how well a bank is performing environmentally, it is clear that having robust policies in place can reassure shareholders.

Friends of the Earth France published a new report today claiming that there is an absence of effective environmental policy within eight of the biggest French banks. As a consequence, Friends of the Earth is asking for a reinforcement of the Reporting Law and the implementation of specific environmental policies within banks, especially regarding their indirect environmental impacts.

“Banques françaises et environnement: Presque tout à faire” analyses banks environmental policies according to four main criteria: environmental management system, environmental policy evaluation system, direct environmental impacts and indirect environmental impacts (investment and finance policies).

The report emphasizes four major elements:

• • Secrecy is the rule, transparency the exception: An uncompromising law is highly needed.
  • The most worrying findings are with the finance and investment policies, which are in general very weak though their environmental impacts are high.
  • Environmental objectives are hazy and not ambitious enough.
  • Finally, in-house environmental training is scarce.

IFC Board Approves new Environmental and Social Standards

 

IFC Board Approves new Environmental and Social Standards on February 21, 2006. The Equator Principles are expected to be revised in light of these new standards

Environment & Social Development Department

Washington D.C., February 21, 2006 – The Board of Directors of the International Finance Corporation (IFC) adopted today new environmental and social standards for the organization. The new standards build upon the environmental and social requirements that IFC currently applies to private sector projects it finances in the developing world. A new policy on disclosure, adopted at the same time, will increase transparency requirements.

The main benfits of the new standards are:

1. New requirements for community health, safety, and security; labor conditions; pollution prevention and abatement; integrated social and environmental assessments; and management systems.

2. Stronger requirements for community engagement and consultation; biodiversity protection; community and worker grievance mechanisms; use of security forces; greenhouse gas monitoring; and greater disclosure of information to the public by IFC and client companies.

3. New outcomes-based approach, which requires client companies to have in place effective management systems that allow them to handle social and environmental risks as an integral part of their basic operations and business model.

Lars Thunell, IFC’s Executive Vice President said:

“The new IFC standards are stronger, better, and more comprehensive than those of any other international finance institution working with the private sector. We aim, with these new policies, to increase the development impact of projects in which we invest. We also seek to give companies operating projects in emerging markets the capacity to manage fully their environmental and social risks and to compete better in a global economy.”

In approving the new set of standards, IFC’s Board requested some refinement of the language. Accordingly, the final version of the Performance Standards and Disclosure Policy will be issued as a complete text in the coming weeks. For more information, visit http://www.ifc.org.