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.

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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.


Equator Principle Financial Institutions Meet to Share Best Practice

January 27, 2008
  • 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

    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.

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

    September 17, 2007

    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)

    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.