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 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.

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.

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.

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.

IFC Guidance to the Private Sector on Indigenous and Tribal Peoples

March 13, 2007- The International Finance Corporation (IFC) announced today the release of a new IFC publication, “ILO Convention 169 and the Private Sector: Questions and Answers for IFC Clients.”

The ILO Convention 169 and the Private Sector (PDF, 90kb) publication is intended as a practical guide for IFC clients who operate in countries that have ratified Convention 169 on Indigenous and Tribal Peoples. It is the first guidance of its kind written for the private sector in relation to Convention 169 which is directed at governments. IFC prepared this publication, in close consultation with the ILO, in response to the experiences that IFC has had in recent years with private investments affecting indigenous peoples and their lands in Latin America.

IFC hopes this publication will help to raise awareness about the Convention and its possible implications for private sector companies, and provide added clarity and guidance for IFC clients. The publication should be read in conjunction with IFC’s Performance Standard on Indigenous Peoples.

The Do’s and Don’ts of Sustainable Banking; a BankTrack manual

BankTrack, the NGO network monitoring the private financial sector, presented their new publication, ‘The Do’s and Don’ts of Sustainable Banking; a BankTrack manual’, at the Ethical Corporations’ ‘Sustainable Finance Summit’ in London.

According to Banktrack:
The manual seeks to answer the straightforward question posed to the panel; ‘what does a really sustainable bank look like?’.

• Banks should, for example, change their bonus schemes to emphasise implementation of environmental and social policy and long-term prudence instead of short-term profits.
• BankTrack advises banks to ensure that sustainability policies are actually implemented, rather than used as a public relations tool.
• International banks are told to engage with emerging banks to improve their standards, rather than just complain that there is an uneven playing field.
• Advising investors to put their money into shares that do not meet the bank’s own minimum standards is also listed as a “don’t” by BankTrack.

It follows the outline of the Collevecchio Declaration, released in 2003, which calls upon financial institutions to embrace six commitments:

1. Sustainability;
2. Do No Harm;
3. Responsibility;
4. Accountability;
5. Transparency; and
6. Sustainable Markets and Governance.

The new manual should be seen as the updated implementation guidelines to the Collevechio Declaration, incorporating the latest thinking and expectations of civil society groups on the subject.

Workers’ rights top list of ethical investor concerns

A survey of investor has found their key concerns include workers conditions, involvement in arms trade and environmental pollution.

Extract from Environmental Finance:

London, 16 November: Ethical fund managers should favour companies that maintain high standards of working conditions in their supply chains, according to a survey of investors released this week.

UK investment management company Standard Life polled close to 1,200 of its ethical investors, asking them to rank the issues of most importance to them.

Workers’ conditions topped the rankings, which also revealed that the environment was a major concern among investors. The provision of pollution control products or services, and the development and use renewable energy, were placed second and third in terms of importance.

Standard Life Investments manages approximately £130 billion ($245 billion) of assets, £425 million of which is ethically invested. It uses the survey to adapt its investment policy in line with investors’ views on issues such as community involvement, employment policies, corporate governance, alcohol, gambling and animal testing.

The investors said fund managers should avoid investing in companies and countries with poor human rights records, companies involved in the arms trade, and those that are responsible for clearing tropical forests.

Sustainable Finance Summit 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

 

New Report on Conflict-Sensitive Business Practice (CSBP)

A new report Conflict-Sensitive Business Practice: Engineering Contractors and their Clients, has been prepared by Engineers Against Poverty and International Alert

Contractors operating in unstable states face a range of conflict risks. Oil, gas and mining projects, which frequently have significant contractor involvement, can inadvertently trigger or sustain violence, or become the focus of resentment themselves. Produced in partnership with Engineers Against Poverty, this guidance note is addressed both to engineering contractors and their clients. It examines some key issues related to conflict, contractors and conflict sensitivity, and introduces conflict-sensitive business practice (CSBP) – steps through which these issues can be understood and managed.

The report outlines some of the key costs of conflict to projects, which include:
Direct costs:

• Security – Higher payments to state/private security firms; staff time spent on security management
• Risk management – Insurance, loss of coverage, specialist training for staff, reduced mobility and higher transport costs
• Material – Destruction of property or infrastructure
• Delays – Lost time through site blockades or disruption of materials and services
• Capital – Increased cost of raising capital
• Personnel – Kidnapping, killing and injury; stress; recruitment difficulties; higher wages to offset risk; cost of management time spent protecting staff
• Reputation – Consumer campaigns, risk-rating, share price, competitive loss
• Litigation – Expensive and damaging law suits

Indirect costs:

• Human – Loss of life, health, intellectual and physical capacity
• Social – Weakening of social capital
• Economic – Damage to financial and physical infrastructure, loss of markets
• Environmental – Pollution, degradation, resource depletion
• Political – Weakening of institutions, rule of law, governance movements