Post on 18-Apr-2015
transcript
EQUATOR PRINCIPLESAN INDUSTRY APPROACH TO MANAGING ENVIRONMENTAL AND
SOCIAL RISKS
GROUP 4Vishal Balani A005Vipul Jain A027Anuj Kant A029Bhagyashree Sathe A048Satvinder SinghA054Darpan ThakkerA060Varun Verma 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 assetsDeregulation of key industries
Globalization of markets
Role of Banks
• helped structure deals• Charged a small monthly fee• Time period of six months to 24
months or longer
Advisors
• Helped raise capital in return for a fee
Arrangers
• Made loans to project companies
Lenders
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• Project’s 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
Involve Pvt. & Public Institutions, UNEP create FI Initiative
UN & FIs create UNEP Statement on Environ. & Sustainable Development
1992
2002
OECD created Env. Guidelines for ECA known as “Rev.-6”Promote Coherent Policies for Sustainable Development
To develop common policies among member ECA
To achieve a high level of Environmental Protection
Objective
London Principles : Established by UK Govt. & Corporation of LondonMotto :To Guide behavior of FI’s in World’s Leading Financial Centers
Env. Protection Social Development Eco. Prosperity
Two PrinciplesFive Principles
Collevecchio Declaration
Commitment to Sustainability
Commitment to ‘Do No Harm’
Commitment to Responsibility
Commitment to Accountability
Commitment to Transparency
Commitment to Sustainable Markets & Governance
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
Interest Permeation Moves by Dow Jones, World Economic Forum, GRI and UNEfforts by RANHolistic Solution : Control Capital flows that finance egregious investmentsBanks are uniquely Vulnerable to Pressure from Advocacy Groups like RANConfrontation & Negotiation through tactics like Days of Action, Media Campaign
RAN v/s CitigroupCampaign Against Citigroup for sponsoring Large Projects with Environ. RisksEncouraged College Students to boycott Education Loan & ServicesTelevision Commercials urging people to cut their Citibank Credit Cards
Foundation of Equator Principles
Late 1990’sABN AMRO
approaches IFC
• No established Principles for social and Environmental Risks
2001 ABN AMRO
Creates Forest Policy
• Not to Finance Projects that result in Resource Extraction from primary of High-Conservation- Value Forests
Oct 2002 ABN AMRO and IFC convene Meeting for
Project Financiers
Risks Covered by Industry-wide Framework
• Deal be delayed before closure causing opportunity cost
Deal Risk
• Govt. Action for causing harm to local environment- Closure of project
• Following standard policies enable faster implementation and avoid costly delays
Credit Risk
• Association with bad project damages reputation of the financier
Reputation Risk
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 PrinciplesJune 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
Declared as default if failed to comply
Inclusion of steps into Loan Covenants
All ‘A’ required EMP outlining risk mitigation procedures followed
A & B Required Environmental assessment
Categorize Projects Depending on type of project and location A (High) B (Medium) C (Low)
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 EPsMixed 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 guidelinesNeed for overt transparency & greater commitment to social
issuesEP 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.
“ In adopting these principles, we seek to ensure that the projects we finance are developed in manner that is socially responsible …..”
Implementation & Acceptance
Issues : No standard implementation standardsLack of enforcement mechanismsNo disclosures No review mechanismWhy other banks stayed away: BNP Paribas: Declaration of intent too vague with
no clear implementation rules and timetableANZ : Principles not applied universally, leading to
competitive disadvantage
EP- 2003 Onwards
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)
Revised in 2006EPIISignificant growth in the number of EP adopters from the original 10 to 75 financial institutions from 32 countries across the globe
EP III DraftKey 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 LoansChanges reflecting the recent update of the International
Finance Corporation (IFC) Performance StandardsNew requirements related to managing impacts on climateGreater 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
A strengthening of reporting and transparency requirements
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 concessions—reduced 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