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Delivering sustainable solutions in a more competitive world
Equator Principles Roundtable
Equator Principles and Project Finance Standards for Sustainability:
The Challenges and Opportunities
Sarah Murfitt, Principal ConsultantEnvironmental Resources Management2nd December 2010
Delivering sustainable solutions in a more competitive world
Environmental Resources Management (ERM)
• A leading global provider of environmental, health and safety, risk and social consulting services
• 137 offices in 39 countries and approx. 3,300 staff
• Gross revenues of US$695 million (fiscal year ending 31 March 2009)
• Five broad practice areas:
• Sustainability and Climate Change
• Impact Assessment and Planning
• Performance, Assurance and Risk Management
• Transaction Services
• Contaminated Site Management
• Website: www.erm.com
Delivering sustainable solutions in a more competitive world
What is Project Finance?
• Project finance is a specific type of financial transaction in which lenders rely solely on the revenues generated by a “project” as the source of repayment and security for the loan (aka Revenue Based Finance)
• Financial institutions involved in Project Finance recognise that social and environmental risks may affect the ability of the project to generate revenues
• In 2003 the Equator Principles (or EPs) were launched to manage these risks for private sector financial institutions
Delivering sustainable solutions in a more competitive world
Equator Principles: EvolutionWorld Bank
OP 4.01 Environmental Assessment
1979
World BankOP 4.01
Environmental Assessment
1979
Environmental Assessment Sourcebook
1991
Environmental Assessment Sourcebook
1991
Equator Principles
2003
Equator Principles
2003
IFC General and Industry Sector EHS Guidelines
2007+
IFC General and Industry Sector EHS Guidelines
2007+
1979 1991 1999
IFC Performance
Standards2006
IFC Performance
Standards2006
Equator Principles II
2006
Equator Principles II
2006
2003 2006
World Bankupdated tenSafeguard Policies
1998
World Bankupdated tenSafeguard Policies
1998
IFC adoptedSafeguard Policies
1998
IFC adoptedSafeguard Policies
1998
Pollution Abatement Handbook
1998
Pollution Abatement Handbook
1998
Safeguard Policies 1979-1998Safeguard Policies 1979-1998
Delivering sustainable solutions in a more competitive world
Equator Principles• “Voluntary framework“ to reduce the environmental and social risks of
Project Finance
• Established in June 2003 by four banks, updated in July 2006 (Equator Principles II)… now over 65 banks have adopted!
• Some basic rules:• Project must fully comply with local environmental and social laws,• Conform to policies and guidelines of the IFC, • Banks commit to annual reporting on compliance and independent monitoring,
• Applies to new developments (>$10m USD) or significant extensions
• Some exemptions for projects in high‐income OECD countries (as defined by the World Bank Development Indicators Database).
• Website: www.equator‐principles.com
Delivering sustainable solutions in a more competitive world
Importance of Project Finance Standards• Lenders:
• Tool to manage the environmental and social risks and therefore credit risk and reputational risk
•Working closely with developers to improve project sustainability and establishing a ‘social license to operate’
• Developers:
• A condition of finance from many international banks, development banks and Export Credit Agencies
•Direct implications for the way you do business, specifically:- Activities and processes need to align with standards e.g. ESIA, ESMP- Costs of meeting the standards need to be considered early on- Management of EPC contractors - Monitoring and reporting
Delivering sustainable solutions in a more competitive world
Equator Principles in Israel• In June 2009, the Banks Supervisor in the Central Bank published a Draft
Notice stating:
"A bank must know that identifying and assessing environmental risk is part of the due diligence process of risk assessment. A bank must therefore include an assessment of environmental risk as part of its overall risk management, including procedures for identifying substantial risk when granting credit and integrating risk assessment in quarterly credit quality assessments."
• Israel's banks were expected to apply environmental risk management standards when granting credit, based on Equator Principles Financial Institutions. Israeli banks were given until July 2010 to approve a plan and timetable for adopting them, but this is still pending.
Delivering sustainable solutions in a more competitive world
What are we currently doing?
• ERM provides a range of services related to Project Finance:
• E&S due diligence for Project Lenders
• ESIA/ESMP for Project proponents
• Lenders' Environmental and Social Advisor reviewing the Project ESIA, ESMP, management system and loan covenants
• EHS management systems for Projects on behalf of Project proponents
• Training on EP and IFC PSs
• Monitoring implementation of ESMP and compliance with loan covenants
Delivering sustainable solutions in a more competitive world
Environmental and Social Impact Assessment (ESIA)
• ESIA – a process for identifying, assessing and developing measures to minimise or mitigate significant impacts resulting from the project.
Scopethe ESIA
Describethe
Baseline
Implement the
Findings
Identify and Assess the Impacts
Predict Evaluate Mitigate/Enhance
-
Stakeholder Consultation
Design and Decision-Making
Delivering sustainable solutions in a more competitive world
Impacts of ESIA on Project Timing
Project finance secured
Project finance securedLocal permit
approvalsLocal permit approvals Project
approvalProject
approval
Ongoing project
appraisal
Ongoing project
appraisalProject finance
‘application’Project finance
‘application’
Feasibility studies
Feasibility studies
Project operational
Project operational
Environment & social impact assessment
Environment & social impact assessment
OngoingOngoing1-2 years1-2 years2-4 years2-4 years
ESIA Scoped EP assessment
bottleneck
Delivering sustainable solutions in a more competitive world
Key Challenges
• Navigating the guidance and keeping abreastof updates
• Aligning with national regulatory frameworks
• Division of responsibilities with third parties (e.g. local and national governments, and contractors and suppliers)
• Considering project finance standards early
• Requirements for social assessment and stakeholder engagement
• Determining scope of the assessment – e.g. associated facilities, transboundary and cumulative impacts
• Developing robust, workable environmental and social management systems
Delivering sustainable solutions in a more competitive world
Key Opportunities
• Responsible project development: more effective risk management and improved project outcomes
• Reduced project delays and associated cost
• Lower reputational risks and protection of shareholder value
• Overall, streamlined/more efficient development and investment decisions
Delivering sustainable solutions in a more competitive world
Who are our clients?
• Financial:
• EPFIs (over 65 Banks, 50% of which are ERM clients)
• Multi‐ and Bi‐Laterals (IFC, EBRD), Export Credit Agencies
• Trade:
• Sponsors and developers
• Other advisors – technical, legal, insurance
• Sectors:
• O&G, Power, Metals & Mining, Infrastructure & Transport, Manufacturing.
Delivering sustainable solutions in a more competitive world
Case Studies: Financial
ERM has just been appointed to a multi-year contract to provide lenders advisory and due diligence services to the European Bank for Reconstruction and Development.
2010 - ongoingEBRD countries
Framework contract to provide independent Environmental and Social consultancy services for EBRD
What we did:
Date:Location:
Project:
Delivering sustainable solutions in a more competitive world
Case Studies: Oil and Gas
This proposed pipeline project is planned to serve as a gas bridge from Asia to Europe linking Eastern Turkey to Austria via Bulgaria, Romania and Hungary. When completed the pipeline will be some 3,300 km in length, with construction due to start in 2011 and first gas in 2014. ERM’srole in this high profile project is to act as Independent Environmental and Social Advisor to the group of financial institutions (currently comprising EBRD, EIB and IFC, as well as various Export Credit Agencies) that are considering contributing financing for the project. Our role will be to ensure that project standards are applied consistently across the five Nabucco transit countries and that the expectations of the Lenders Group are fully complied with.
2010 (ongoing).
Nabucco Gas Pipeline International, Environment and Social Due Diligence Services EBRD, IFC and EIB
What we did:
Date:
Project:
Lenders:
Delivering sustainable solutions in a more competitive world
Case Studies: Timber Salvage
ERM was commissioned by CSRD to prepare an ESIA to fully comply with all Ghanaian EIA Regulations, IFC Performance Standards and World Bank Safeguard Policies, as well as any other directly relevant policies of the IFC and World Bank. Key issuesexamined in the ESIA include: water quality, fisheries, risks to the population of manatees (a rare aquatic mammal), and fishing livelihoods. ERM prepared the ESIA to international standards aspart of project financing, and supported CSRD through the permitting process with the Ghanaian EPA.
2007-2008
Ghana
Lake Volta Timber Salvage Project Clark Sustainable Resource Developments (CSRD)
What we did:
Date:Location:
Project:Borrower:
Lead advisor:
Delivering sustainable solutions in a more competitive world
Case Studies: Mining and Metals
In spite of the tight time constraints and logistical issues, ERM was able to visit all sites over a 4-week period and assimilate the findings into summary report for UC RUSAL and their advisors within 1 month.
ERM visited 44 facilities including bauxite mines, alumina refineries and aluminium smelters in 11 countries operated by the world’s largest aluminium company. ERM produced reports in English and Russian with details of material liabilities associated with environmental, health and safety and social issues.
2008, Russia, Ukraine, Kazakhstan, Caribbean, Africa, S America, Europe
$30 billion (Initial Public Offering)
KandinskyUnited Company RUSAL
How we added value:
What we did:
Date & Location:
Deal Size:
Transaction type:
Project:Client:
Delivering sustainable solutions in a more competitive world
Case Studies: Oil and Gas
ERM is currently advising a consortium of lenders on the financing of a downstream oil and gas Project in Egypt. An assessment of the Sponsor’s commitment to the Equator Principles and IFC Performance Standards has been completed. ERM reviewed the ESIA and other project documentation. Specific issues relating to the cumulative environmental impacts of the asset and resettlement of communities have been thoroughly reviewed. ERM has also assisted in the wording of the lending covenant to monitor compliance during the construction and operation of the asset and will commence monitoring activities once financial close is reached.
2006 – present, Egypt$3.7 billion
Project Finance - Oil Refinery, Egyptian Refining Company
What we did:
Date & Location:Project Value:
Project:
Delivering sustainable solutions in a more competitive world
Case Studies: Oil and Gas
ERM undertook a social and environmental due diligence of the ESHIA for the Brass River LNG plant and associated off shore facilities to the Equator principles and the 9 IFC performance standards. This work included reviewing the ESIAs and associated management plans to ensure they complied with international lender requirements.
2007Nigeria
Brass LNG Due Diligence to Equator Principles for lender banks
What we did:
Date:Location:
Project:
Delivering sustainable solutions in a more competitive world
Contact Details:
Sarah Murfitt Laura StreetPrincipal Consultant ConsultantERM ERM2nd Floor, Exchequer Court Eaton House, Wallbrook CourtSt Mary Axe North Hinksey LaneLondon, EC3A 8AA Oxford, OX2 0QS
Telephone: +44 20 3206 5200 Telephone: +44 1865 384 800Direct Line: +44 20 3206 5362 Direct Line: + 44 1865 384 [email protected] [email protected] www.erm.com