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The Equator Principles

The Equator Principles. Transparency and the Fight Against Corruption Panel Discussion Paris, France - January 26, 2004 Suellen Lazarus. The Equator Principles. A framework for banks to manage environmental and social issues in project finance A major step forward for the banking industry

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The Equator Principles

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  1. The Equator Principles Transparency and the Fight Against Corruption Panel Discussion Paris, France - January 26, 2004 Suellen Lazarus

  2. The Equator Principles • A framework for banks to manage environmental and social issues in project finance • A major step forward for the banking industry • A voluntary, private-sector initiative • Nothing is signed • Based on IFC environmental and social policies and guidelines

  3. Why did they do it? • Increased awareness of the risks: • Financial loss • Reputation damage • Shareholder pressure • No longer someone else’s problem • Demonstrate leadership and sound environmental management practices and social responsibility • Could not do it alone: • Level the playing field • Need a common framework and baseline

  4. How did it happen? • IFC asked to convene a meeting of banks to discuss “the problem” (October 2002) • From denial to acceptance in a few hours • Working group formed to explore options • (ABN Amro, Barclays, Citigroup, WestLB, IFC) • Proposal presented (February 2003) • Consultations with clients and NGOs • Agreement to move to adoption and development of timetable (April 2003) • June 4, 2003: 10 banks announce adoption of Equator Principles at IFC headquarters, Washington, DC

  5. The New Industry Standard • 10 banks from 7 countries: • ABN AMRO, Barclays, Citigroup, Credit Lyonnais, CSFB, HVB Group, Rabobank, Royal Bank of Scotland, West LB, Westpac • 10 more banks from 5 more countries have joined: • ING, Royal Bank of Canada, MCC of Italy, Dresdner,HSBC, Dexia, Standard Chartered, Mizuho, KBC • 20 Equator banks arranged over 78% of project finance market through October 2003 (Dealogic ProjectWare). • More are coming!

  6. Role of IFC • A convening role: neutral party • Based on IFC/World Bank standards: internationally recognized, applied throughout the developing world, comprehensive coverage, time tested • Facilitating more international banks to adopt Equator • Training

  7. Implementation • Implementation of a risk management process across the project cycle • Environmental and social review will be integrated into the business process • There will be many different implementation models • Banks will put in place their own internal policies and procedures that are consistent with the principles • No monitoring agency • Transparency will be expected

  8. Application • Projects with total capital cost of $50 million or more • All industries • Environmental risk categorization & industry standards apply globally. Safeguard Policies apply to low and middle income countries (as defined by the World Bank).

  9. The Equator Principles Preamble Important Policy Statement in the Preamble: • “We will not provide loans directly to projects where the borrower will not or is unable to comply with our environmental and social policies and processes.”

  10. Categorization Step 1 Categorize projects as A, B or C (high/medium/low environmental or social risk) • Based on IFC screening process • Equator banks in syndicates agree on classification of projects in order to design the appropriate treatment

  11. Environmental Assessments Step 2 A’s and B’s require sponsor to complete an EA • Addresses key environmental and social issues identified in the categorization process • Based on IFC EA process • Globally: addresses host country laws and also IFC/WB environmental, health and safety guidelines (industry standards) • Emerging markets only: addresses IFC Safeguard Policies • Borrower demonstrates compliance (or justifies deviations) to banks’ satisfaction

  12. Environmental Management Plan Step 3 Borrower prepares an Environmental Management Plan for all A’s (and for B’s as appropriate) • Draws on conclusions of the EA • Addresses mitigation and monitoring • For A’s, the EA and EMP will be subject to independent expert review

  13. Consultation Step 4 Consultation and Disclosure • the borrower consults with affected groups for all A’s (and for B’s as appropriate) • Includes indigenous peoples and local NGOs • EA or summary to be made available by the borrower to the public for a reasonable period

  14. Covenants Step 5 Borrower covenants to: • Comply with EMP • Provide regular reports on compliance with the EMP • Where borrower is not in compliance with EMP, banks will engage the borrower in its efforts to come back into compliance • May default the loan

  15. Independent Expertise Step 6 Lenders may appoint an independent environmental expert to provide additional monitoring and reporting services

  16. The Benefits • A global standard. Easier to navigate than the multiple requirements currently in place. • Save borrowers time and money on sensitive projects • Implementation is, over time, expected to raise global environmental and social performance • Reduce “loan-shopping” based on environmental and social criteria • Better information for banks to make decisions • Provide basis for stakeholder engagement • Expedite consensus-reaching among banks in large loan syndications

  17. www.equator-principles.comequatorprinciples.ifc.org

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