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    Equator Principle Final

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    This document provides an overview of the Equator Principles, which are a set of standards for determining, assessing, and managing environmental and social risk in project finance. The Principles were announced in 2003 and have been adopted by over 75 financial institutions globally. They aim to provide a common framework for managing environmental and social issues in project financing. The document discusses the background and development of the Principles over time, including reactions, implementation challenges, and revisions made in later years.

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    Equator Principle Final

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    Varchas Bansal
    419 views23 pages
    This document provides an overview of the Equator Principles, which are a set of standards for determining, assessing, and managing environmental and social risk in project finance. The Principles were announced in 2003 and have been adopted by over 75 financial institutions globally. They aim to provide a common framework for managing environmental and social issues in project financing. The document discusses the background and development of the Principles over time, including reactions, implementation challenges, and revisions made in later years.

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    This document provides an overview of the Equator Principles, which are a set of standards for determining, assessing, and managing environmental and social risk in project finance. The Principles were announced in 2003 and have been adopted by over 75 financial institutions globally. They aim to provide a common framework for managing environmental and social issues in project financing. The document discusses the background and development of the Principles over time, including reactions, implementation challenges, and revisions made in later years.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    419 views23 pages

    Equator Principle Final

    Uploaded by

    Varchas Bansal
    This document provides an overview of the Equator Principles, which are a set of standards for determining, assessing, and managing environmental and social risk in project finance. The Principles were announced in 2003 and have been adopted by over 75 financial institutions globally. They aim to provide a common framework for managing environmental and social issues in project financing. The document discusses the background and development of the Principles over time, including reactions, implementation challenges, and revisions made in later years.

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    of 23

    EQUATOR PRINCIPLES

    AN INDUSTRY APPROACH TO MANAGING ENVIRONMENTAL AND SOCIAL RISKS

    GROUP 4 Vishal Balani Vipul Jain Anuj Kant Bhagyashree Sathe Satvinder Singh Darpan Thakker Varun Verma A005 A027 A029 A048 A054 A060 A063

    Introduction
    Announcement of Equator Principle
    Equator Principle : a new policy framework designed to guide project-finance lending decisions. Announced on June 4, 2003 Major step towards achieving sustainable development. Some banks were reluctant to accept the principles as a standard.

    Problem Statement
    Should Equator banks encourage adoption of the principle by other banks and Export Credit Agencies (ECAs), focus on developing implementation procedures, o r respond to the criticism directly?

    Project Finance
    What is Project Finance?
    In general it involves the creation of a legally independent project company financed with nonrecourse debt to facilitate investment in a single-purpose capital asset. Use of Project finance increased because of :

    Privatization of state-owned assets Deregulation of key industries Globalization of markets

    Role of Banks
    Advisors helped structure deals Charged a small monthly fee Time period of six months to 24 months or longer Arrangers Helped raise capital in return for a fee

    Lenders Made loans to project companies

    Effect on Environment
    Because of the large size, projects have

    significant financial, developmental, environmental and social effects on the communities in which they are working For example, Chad-Cameroon Pipeline
    Environmental risks including deforestation and oil

    spills Potential for the greatest damage in the fragile ecosystem of the Atlantic littoral forest zone Projects settlement plan was incomplete and without mechanisms to ensure enforcement
    Starting of a debate on sustainable development

    Economy vs. Environment


    Sustainable development : development that

    meets the needs of the present without compromising the ability of future generations to meet their own needs.
    Initially it was focused only on sponsoring firms

    and their projects


    Gradually public and private financial institutions

    are also included in the dialogue of sustainable development

    A Little Doze of History


    1 9 9 2 Involve Pvt. & Public Institutions, UNEP create FI Initiative

    UN & FIs create UNEP Statement on Environ. & Sustainable Development


    OECD created Env. Guidelines for ECA known as Rev.-6 Promote Coherent Policies for Sustainable Development Objective To develop common policies among member ECA To achieve a high level of Environmental Protection London Principles : Established by UK Govt. & Corporation of London Motto :To Guide behavior of FIs in Worlds Leading Financial Centers Five Principles Env. Protection Social Development Two Principles Eco. Prosperity

    2 0 0 2

    Collevecchio Declaration
    Identifies Environmental and Social Responsibility for Financial Institutions Fin Institutions Legal Responsible for Environmental & Social Risks they accept & create Fin Institutions accountable for Creating Policies, Stds & Procedures with Transparency Commitment to Sustainability Commitment to Do No Harm Commitment to Responsibility Commitment to Accountability Commitment to Transparency

    Commitment to Sustainable Markets & Governance

    Interest Permeation
    Moves by Dow Jones, World Economic Forum, GRI and UN Efforts by RAN
    Holistic Solution : Control Capital flows that finance egregious investments Banks are uniquely Vulnerable to Pressure from Advocacy Groups like RAN Confrontation & Negotiation through tactics like Days of Action, Media Campaign

    RAN v/s Citigroup


    Campaign Against Citigroup for sponsoring Large Projects with Environ. Risks Encouraged College Students to boycott Education Loan & Services Television Commercials urging people to cut their Citibank Credit Cards

    Foundation of Equator Principles


    Late 1990s ABN AMRO approaches IFC

    No established Principles for social and Environmental Risks


    Not to Finance Projects that result in Resource Extraction from primary of High-Conservation- Value Forests

    2001 ABN AMRO Creates Forest Policy

    Oct 2002 ABN AMRO and IFC convene Meeting for Project Financiers

    Risks Covered by Industry-wide Framework


    Deal Risk
    Deal be delayed before closure causing opportunity cost

    Credit Risk
    Govt. Action for causing harm to local environmentClosure of project Following standard policies enable faster implementation and avoid costly delays

    Reputation Risk
    Association with bad project damages reputation of the financier

    Forming of Equator Principles


    Social and Environmental Risks part of the Equation Credible, Widely used, and Broad Industry Covering Principles Adaptation of IFC Policies Developed over 30 years Widely accepted Comprehensive and covered social issues Comments invited from Clients, NGOs & other banks

    Introducing to other Project- Finance Banks

    Announcing Equator Principles


    June 4, 2003: Adoption of Equator Principles by 10 Banks

    Applicable on Projects worth more than $ 50 Million

    Important for Developing Nations who tended to ignore environment protection and human rights IFC Safeguards- Assess impact on natural environment and society World Bank Pollution guidelines- Minimum standards for pollution discharge

    Methodology
    Categorize Projects Depending on type of project and location
    A (High) B (Medium) C (Low)

    A & B Required Environmental assessment All A required EMP outlining risk mitigation procedures followed Inclusion of steps into Loan Covenants

    Declared as default if failed to comply

    Impact
    Leadership Role in Global Environmental and Social Issues Affect Project Financing in Dozens of Industries globally Could impact investments worth $ 100 Billion in 10 Yrs.

    Reaction to the EPs


    Mixed Reaction from the NGO and the banking communities Applauded by Environmental Defense group praised

    Citigroup committing to this and being ahead of other supposedly green export credit agencies
    Collevecchio NGOs did not endorse the Equator Principles

    consider it a mix of other principles such as UNEP-FI, the Collevecchio Declaration & London Principles that lack broader commitments to sustainability
    Criticized IFC policies focus on revenue generation &

    economic growth and not sustainable development indicators


    Concerns on 3 Fronts SCOPE, IMPLEMENTATION

    PROCEDURES & MECHANISMS.

    SCOPE
    EP did not contain no-go zones, unlike the IFC

    guidelines Need for overt transparency & greater commitment to social issues EP does not prevent banks from financing the oil and logging companies that are kicking people out of their homes & destroying rain forests EP focussed on project finance lending and not on other financial vehicles such as IPOs and bonds. (e.g. forestry projects) It did not adequately address Human Rights. Instead the words socially responsible were included., which have an unclear meaning.

    Implementation & Acceptance


    Issues :
    No standard implementation standards
    Lack of enforcement mechanisms No disclosures

    No review mechanism

    Why other banks stayed away: BNP Paribas: Declaration of intent too vague with no clear implementation rules and timetable ANZ : Principles not applied universally, leading to competitive disadvantage

    EP- 2003 Onwards


    Revised in 2006EPII Significant growth in the number of EP adopters from the original 10 to 75 financial institutions from 32 countries across the globe

    In 2010, the EP Association initiated a Strategic Review


    Series of recommendations on key thematic areas, namely scope, climate change, human rights ,reporting and transparency, stakeholder engagement and governance

    The EP III Update process was launched in July 2011 and consists of three distinct phases
    PHASE I: Internal Consultation and Initial Drafting of EP III (July 2011 - August 2012) PHASE II: Formal 60 day Stakeholder Consultation and Public Comment Period (August - October 2012) PHASE III - Finalisation and Launch of EP III (October 2012 January 2013)

    EP III Draft
    Key themes and areas of development proposed in

    the EP III draft include:


    An extension in the scope of the EP to Project-Related

    Corporate Loans and Bridge Loans Changes reflecting the recent update of the International Finance Corporation (IFC) Performance Standards New requirements related to managing impacts on climate Greater emphasis on human rights considerations in due diligence and an acknowledgment of the UN "Protect, Respect and Remedy" Framework for Business and Human Rights and Guiding Principles on Business and Human Rights

    Where does India Stand?


    Project developers are required by regulation to undertake an Environment Impact Assessment (EIA) in order to obtain the Environmental Clearance Major prerequisite for starting projects and demanded by banks in all project finance deals Although the process appears sound, there are loopholes in its implementation In many cases, the EIA reports are not authentic, the public consultation does not take place as per the Act Sometimes the project's impact on local communities and the surrounding environment remains unclear

    In December 2007 the Reserve Bank of India (RBI) issued a circular citing the importance for banks to act responsibly and to contribute to sustainable development referred banks to the Equator Principles suggested that there is a need for Indian banks to evolve institutional mechanisms to enshrine sustainability.

    Some of the Initiatives by Banks


    SBI Green Home Loans
    Support environmentally-friendly residential projects Offer various concessionsreduced margins, lower interest rate and zero processing fee. These loans will be sanctioned for projects rated by the Indian Green Building Council (IGBC)

    ICICI Bank's Support for Clean Technology


    Clean Coal Technologies Zero Emission Vehicles Finance for Innovative Products

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