How did the
Equator Principles come about ?
For a number of years, banks working in the project
finance sector had been seeking ways to develop a common
and coherent set of environmental and social policies
and guidelines that could be applied globally and across
all industry sectors. In October 2002, a small number
of banks convened in London, together with the World
Bank Group's International Finance Corporation (IFC),
to discuss these issues. The Banks present decided jointly
to try and develop a banking industry framework for
addressing environmental and social risks in project
financing. This led to the drafting of the first set
of Equator Principles by these banks which were then
launched in Washington, DC on June 4 2003. These Principles
were ultimately adopted by over forty financial institutions
during a three year implementation period. A subsequent
updating process took place in 2006 leading to a newly
revised set of Equator Principles that were released
in July 2006.
Is there a risk management
rationale for financial institutions to adopt the Equator
Principles?
Equator Principles Financial Institutions ("EPFIs")
that adopt the Principles ought to be able to better
assess, mitigate, document and monitor the credit risk
and reputation risk associated with financing development
projects. Additionally, the collaboration and learning
on broader policy application, interpretation and methodologies
between EPFIs helps knowledge transfer, learning and
best practice development.
Has this changed the project
finance industry?
Development and application of the Equator Principles
has been a huge step forward for the industry, in terms
of having a common framework and language for the project
finance industry based on an external and respected
benchmark, namely the World Bank and IFC sector-specific
pollution prevention and abatement guidelines, and IFC
safeguard policies. The Equator Principles have consequently
become the standard for assessing and managing environmental
and social risk in project financings. This has helped
accelerate momentum in other areas of environmental
and social responsibility in the financial industry.
Why did the Equator Principles
need to be revised?
The IFC completed the review and updating process undertaken
to replace their existing Safeguard Policies when its
Board of Directors approved new "Performance Standards"
on February 21, 2006. Because the original Equator Principles
were based on IFC's environmental and social Safeguard
Policies, it was necessary to revise the Equator Principles
in order to reflect, and be consistent with, these changes.
The new, revised set of Equator Principles
also have incorporated learning from implementation,
and comments from a variety of external stakeholders
(including clients and NGOs) over the past 3 years.
The final draft of these revised Principles also benefited
from an external comment process with clients, NGOs
and Official Agencies (e.g., Export Credit Agencies).
The revised Equator Principles have now incorporated,
and are fully consistent with, IFC's environmental and
social "Performance Standards" ensuring that
there is one, consistent standard for private sector
project financing.
When do the new, revised set
of Equator Principles become effective? What standards
will be used for existing projects, or those currently
in the due diligence phase?
The new, revised Equator Principles become
effective July 6, 2006. However, it should be understood
that there are some projects that have been marketed
and reviewed, but perhaps not yet approved, using the
previous set of Equator Principles and requisite standards.
Other transactions may have ongoing due diligence still
occurring. EPFIs have therefore agreed that, in these
cases, certain projects commencing due diligence between
July 6, 2006 and January 6, 2007 may still utilize the
previous set of Equator Principles, and the previous
IFC Safeguard Policies. From January 7, 2007 and onwards,
EPFIs will expect all due diligence to be undertaken
utilizing the new set of Equator Principles, including
the new IFC Performance Standards, if applicable.
What does "adopt"
mean? Will financial institutions be signing an agreement
of some kind?
Each institution adopting the Equator Principles
individually declares that it has or will put in place
internal policies and processes that are consistent
with the Equator Principles.
Every financial institution will be
required to complete a simple adoption process.
Below is the existing adoption procedure,
which the secretariat introduces to the Institutions
who wish to adopt EPs:
1) An adoption form is filled out by
the adopting institution. The EP adoption form is available
here
2) Incoming institution prepares and
sends a press release announcing its adoption to be
posted on the EP Website
3) Incoming institution provides a
link to their home page and/or environmental page to
be linked to their name which will be added to the list
of adopting banks on the website
4) The adopting institution posts a
link to the Equator Principles web site on its web site.
There is also a new requirement (new
"Principle 10") that requires EPFIs to report
publicly regarding their EP implementation experience.
Why was the project finance
threshold lowered from $50 million to $10 million?
EPFIs' collective experience informed this
decision. EPFIs wanted to ensure that all significant
and sensitive projects were covered by the Equator Principles,
without getting caught up in transactions that include
the small business aspects of banking.
The new revised set of Equator
Principles still contains an aspirational preamble.
Is this preamble still considered too lofty by EPFIs?
The Preamble still contains aspirational language
because EPFIs play an important role in development
throughout the world. EPFIs believe the new Preamble
is more focused on the key policy statement: we will
not provide loans to projects where the borrower will
not or is unable to comply with our respective social
and environmental policies and procedures that implement
the Equator Principles. The Preamble has also been strengthened
considerably by new language that demonstrates EPFIs
will seek to avoid negative impacts on project-affected
ecosystems and communities where possible. The Preamble
is followed by a new Scope section, and then this is
followed by the Principles themselves, which are very
concrete steps that EPFIs will follow, or require their
Borrower to follow.
Do EPFIs apply the Equator
Principles to all projects in all industry sectors globally?
Or, are the Equator Principles only for projects in
emerging markets?
Consistent with language in the new Scope
section of the revised Equator Principles, the Principles
apply to all new project financings globally with total
project capital costs of US$10 million or more, and
across all industry sectors.
Under Principle 3 ("Applicable
Social and Environmental Standards"), there is
a detailed explanation of the requirements for projects
located in non-OECD countries, and those located in
OECD countries not designated as High-Income, as defined
by the World Bank Development Indicators Database. For
these projects, the Assessment will refer to the then
applicable IFC Performance Standards (Exhibit III) and
the then applicable Industry Specific EHS Guidelines
("EHS Guidelines").
Principle 3 ("Applicable Social
and Environmental Standards") also outlines the
requirements for projects located in High-Income OECD
Countries (e.g., US, Canada, Western Europe, Japan,
etc). EPFIs deem that the regulatory, permitting and
public comment process requirements in High-Income OECD
Countries, as defined by the World Bank Development
Indicators Database, generally meet or exceed the requirements
of the IFC Performance Standards (Exhibit III) and EHS
Guidelines (Exhibit IV). Consequently, to avoid duplication
and streamline EPFI's review of these projects, successful
completion of an Assessment (or its equivalent) process
under and in compliance with local or national law in
High-Income OECD Countries is considered to be an acceptable
substitute for the IFC Performance Standards, EHS Guidelines
and further requirements as detailed in Principles 4,
5 and 6 below. For these projects, however, the EPFI
still categorises and reviews the project in accordance
with Principles 1 and 2 above.
The Assessment process in both cases
should address compliance with relevant host country
laws, regulations and permits that pertain to social
and environmental matters.
What are the steps that financial
institutions will follow?
As per previous practice, EPFIs will continue
to use common terminology in categorising projects into
high, medium and low environmental and social risk,
based on the IFC's categorisation process. They will
apply this to projects globally and to all industry
sectors. This will be helpful in developing consistent
approaches to dealing with high and medium risk projects.
Second, EPFIs will require their borrowers
to demonstrate in their Social and Environmental Assessments,
and in their Action Plans, the extent to which they
have met the applicable World Bank and IFC sector-specific
EHS Guidelines and IFC Performance Standards, or to
justify deviations to them. This will give EPFIs much
better information on which to make judgments.
Third, EPFIs will insert into the loan
documentation for high and medium risk projects covenants
for borrowers to comply with the Action Plan. Where
a borrower is not in compliance with its social and
environmental covenants, EPFIs will work with the borrower
to bring it back into compliance to the extent feasible,
and if the borrower fails to re-establish compliance
within an agreed grace period, EPFIs reserve the right
to exercise remedies, as they consider appropriate.
Some stakeholders have claimed
that IFC's new Performance Standards represent a weakening
of standards, and that this has had a negative effect
on the Equator Principles standards as well. Do EPFIs
agree with this interpretation?
No, we do not. As IFC has explained, the intent
of IFC's policies is to focus on impact on the ground
and not simply on process. Obviously, the proof will
be in the implementation process. EPFIs are committed
to implementing these Principles in a manner consistent
with our public commitments.
We also believe that the newly revised
Equator Principles are a significant step forward in
terms of integrating social and environmental impacts,
assessment and management of these impacts into project
financings. The new Principles include much stronger
and clearer requirements for both EPFIs and for our
borrowers. Some of the refinements to the Equator Principles
include:
lowering of the threshold from USD 50 million to USD
10 million
inclusion of project finance advisory mandates in the
new Principles, and existing projects with significant
environmental and social impacts in the new Scope section
clearer requirements for projects in low and medium-income
countries, and more streamlined and clearer requirements
for projects located OECD countries deemed "high
income" stronger consultation requirements consistent
with IFC language regarding "free, prior and informed
consultation" (and also including language noting
"consultation with Indigenous Peoples must conform
to specific and detailed requirements as found in Performance
Standard 7")
inclusion of labor and working conditions requirements
for projects in low and medium-income countries consistent
with IFC's Performance Standard 2 new covenant requirement
for compliance with all applicable local, state and
host-country laws, regulations and permits pertaining
to environmental and social matters, and a new Principle
requiring that EPFIs report publicly at least annually
on their EP implementation
Will there be specific industry
sector standards added to the Equator Principles?
The Equator Principles already apply to all industry
sectors. The IFC industry sector EHS Gudelines will
be updated in the coming year, and EPFIs will remain
engaged in that process.
Have the Equator Principles
hurt banks' business?
EPFIs have not seen any decline in business because
of adoption, application or implementation of the Equator
Principles over the past 3 years. Indeed, the Equator
Principles have been championed by the project finance
business heads of participating EPFIs. They continue
to believe that having a framework for the industry
will lead to greater learning among project finance
institutions on environmental and social issues, and
that having greater expertise in these areas will better
enable them to advise clients and control risks. In
other words, they continue to believe it is good for
business.
What about implementation?
Do EPFIs really have to change their business processes
to ensure robust implementation?
EPFIs are organized differently internally, and each
EPFI commits to embedding the implementation of the
Principles into its business and risk management processes
in a manner consistent with its organisational structure.
EPFIs which have adopted the Principles have concentrated
on implementation steps within their organisations,
including formal changes to internal credit policies
and processes to mandate the use of the Equator Principles.
Any changes to the newly revised Equator Principles
will need be reflected in updates or enhancements to
each EPFI's respective credit policies and procedures
once the endorse the new Principles.
Additionally, a new Principle (Principle
10: EPFI Reporting) requires that each EPFI adopting
the Equator Principles commit to report publicly at
least annually about its Equator Principles implementation
processes and experience, taking into account appropriate
confidentiality considerations. Such reporting should
at a minimum include the number of transactions screened
by each EPFI, including the categorisation accorded
to transactions (and may include a breakdown by sector
or region), and information regarding implementation.
EPFIs believe strongly that this will significantly
increase transparency regarding Equator Principles implementation
across the industry.
What are the World Bank and
IFC Environmental, Health and Safety (EHS) Guidelines?
As the IFC is currently updating these EHS Guidelines,
what will EPFIs do when these new sets of guidelines
are updated?
EPFIs will utilise the appropriate environmental, health
and safety (EHS) guidelines used by IFC which are now
in place, and as may be amended from time-to-time. IFC
is using two complementary sets of EHS Guidelines available
at the IFC website (www.ifc.org/enviro). These sets
consist of all the environmental guidelines contained
in Part III of the World Bank's Pollution Prevention
and Abatement Handbook (PPAH) which went into official
use on July 1, 1998 and a series of environmental, health
and safety guidelines published on the IFC website between
1991 and 2003. Ultimately new guidelines, incorporating
the concepts of cleaner production and environmental
management systems, will be written to replace this
series of industry sector, PPAH and IFC guidelines (to
be issued by IFC for public comment in July 2006). Where
no sector specific guideline exists for a particular
project then the PPAH's General Environmental Guidelines
and the IFC Occupational Health and Safety Guidelines
(2003) are applied, with modifications as necessary
to suit the project. EPFIs will closely watch the updating
of the new set of EHS Guidelines, and will participate
in the process of public comment to ensure the new EHS
standards match industry practice.
Why does the IFC have a different
set of environmental and social Performance Standards
from the World Bank, and how do they differ from the
World Bank safeguard policies?
IFC uses a set of environmental and social policies
called "Peformance Standards" that are geared
to its private sector operating context. IFC states
the following:
"IFC and World Bank standards are consistent and
fully aligned in terms of the environmental and social
objectives both development institutions share. But
there are differences. These differences reflect the
differences between the two institutions... IFC's environmental
and social Performance Standards are tailored to the
role and responsibilities of the private sector. Private
sector firms can not take on the role of government.
They can not pass or enforce laws. They have to operate
their business in compliance with existing laws and
regulations…That said, the Bank and IFC have worked
very hard together to ensure that IFC's new standards
are fully in line with the Bank's. There are no differences
in desired outcomes for the environment, people and
communities."
For information on IFC Performance Standards click
here
What was the process for getting
stakeholder input into the new revised EPs? Were comments
received from these parties really taken into account
and considered in the final draft of the newly revised
Principles?
When deciding that the Equator Principles
needed to be updated, EPFIs committed themselves early
on to listening and learning from a broad range of interested
stakeholders (including clients, NGOs and Official Agencies)
on their varied experiences over the past three years.
During this comment process, comments received from
these stakeholders were obviously diverse, but have
greatly improved the final draft. The process included:
A number of meetings and conference calls with a wide-selection
of EPFI clients in various sectors and regions, and
industry associations
bi-lateral meetings/conference calls (and a meeting
in London) with 25 NGOs interested in the Principles
an EPFI meeting with environmental practitioners of
Export Credit Agencies
an extension of the comment time period in order to
receive and consider fully all comments
Various comments received included
the following:
EPFI implementation reporting: NGOs raised concerns
related to lack of information on EP implementation
and transparency including better EPFI reporting. EPFIs
heard this, and added a new Principle 10 on EPFI Reporting.
"Free prior and informed consultation": EPFIs
felt that including more robust language in the new
Equator Principles on both consultation and grievance
mechanisms at the project level will help improve transparency
and accountability. Various NGOs noted that they strongly
preferred "consent" language. EPFIs considered
this comment, but felt that "free prior and informed
consultation" is now accepted by industry. EPFIs
also felt it was important to have one standard for
project financings, based on IFC's approved language.
We believe "free prior and informed consultation"
is a big step-forward with regard to Equator Principles
requirements.
Concerns related to the rights of Indigenous Peoples:
EPFIs heard these concerns, and made changes to the
final draft of the Equator Princples recognizing that
Indigenous Peoples do have specific rights under certain
national laws, and that consultation with them would
need to conform with the IFC's Performance Standard
7 on Indigenous Peoples.
Assessment Process in High Income Countries: a number
of clients raised the issue of considering a more streamlined
review of the Assessment process in High Income countries,
which EPFIs have addressed in the final draft
Concerns related to governance (i.e., a "formal
association") with the EPFIs: EPFIs have considered
this comment, and will reflect on options related to
this comment in the coming year.
Other sustainability issues: NGO stakeholders asked
EPFIs to look at broader sustainability issues, including
transparency related to extractive industry payments
(EITI). EPFIs considered this suggestion, however, as
this issue was raised late in the process, it was deemed
difficult to consult on and gain acceptance from all
interested stakeholders, including our clients. Other
EPFIs felt this was not an appropriate issue for the
Equator Principles themselves, however, individual EPFIs
are following up with civil society organizations interested
in this issue.
When do the new, revised set
of IFC's industry-specific Environmental Health and
Safety Guidelines become effective?
The Equator Principles reference the IFC's
industry-specific Environmental Health and Safety Guidelines.
These Guidelines have, after widespread consultation,
been updated by the IFC. Many Guidelines were published
on 30 April 2007, others were published later in 2007
and one on Thermal Power is expected in 2008.The EPFIs
recognise that some Social and Environmental Assessments
(SEAs) would have commenced while the old Guidelines
were in place, but may be finalised after the publication
of the new Guidelines. It would be inappropriate to
request new due diligence based on the new Guideline
in these circumstances. Accordingly, the EPFIs will
accept SEAs based on either the old or new Guidelines
for a 6-month period immediately following the publication
of a new Guideline. Thereafter, the EPFIs expect SEAs
to be based on the new Guidelines, although flexibility
will be considered where the production of an SEA is
particularly long
---------------------------------------------------------------
EPFI ENGAGEMENT IN THE IFC
PERFORMANCE STANDARDS REVIEW PROCESS
On 8 September 2009, the International Finance Corporation
(IFC) launched the process to review and update its
Performance Standards (for more information on this
process, click here). The process is expected to last
until October 2010 and the updated framework to be released
by January 2011. The IFC Performance Standards Review
Process is extremely important for the Equator Principles
and all EPFIs as it will define the Standards applied
by the Equator Principles in the coming years. As part
of the Phase 1 initial consultation process between
IFC and key stakeholders, the EPFI Steering Committee
and other EPFIs actively participating in some of the
EP Working Groups, met with IFC representatives in London
on 12 October 2009. The purpose of the meeting was to
hold an informal discussion on some of the key issues
and challenges for the upcoming IFC Performance Standards
Review Process. The EPFIs will continue to be closely
engaged with the IFC, civil society, clients, and other
stakeholders during the Performance Standards Review
Process, and we look forward to sharing valuable experience
and insight.
|
