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Equator News Coverage
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FAQ Frequently Asked Questions About the Equator Principles 1. 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 (see FAQ #4 below). 2. Is there a risk management rationale for financial institutions to adopt the Equator Principles? Definitely. 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. 3. 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. 4. 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. 5. 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. 6. 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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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:
12. Will there be specific industry sector standards added to the Equator Principles? No. 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. 13. Have the Equator Principles hurt banks' business? No. 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. 14. 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. 15. 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. 16. 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."The IFC Performance Standards are available in English at the following website (with translations in Arabic, Chinese, French, Portuguese and Spanish also available): http://www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards 17. 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:
Various comments received included the following:
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. |
Institutions Which Have Adopted the Equator PrinciplesAbsa Bank LimitedAccess Bank ANZ Arab African International Bank ASN Bank NV Banco Bradesco Banco de la República Oriental del Uruguay Banco do Brasil Banco Galicia Banco Santander Bancolombia S.A. BankMuscat Bank of America Bank of Tokyo-Mitsubishi UFJ Barclays plc BBVA BES Group BMO Financial Group BNP Paribas Caixa Econômica Federal Caja Navarra Calyon CIBC CIFI Citigroup Inc. CORPBANCA Credit Suisse Group Dexia Group DnB Nor E+Co EFIC EKF Export Development Canada FirstRand Bank Ltd FMO Fortis Bank Nederland Fortis Bank NV/SA HBOS HSBC Group HypoVereinsbank Industrial Bank Co., Ltd ING Group Intesa Sanpaolo Itau Unibanco S/A JPMorgan Chase KBC KfW IPEX-Bank la Caixa Lloyds TSB Manulife Mizuho Corporate Bank Millennium bcp National Australia Bank Nordea Nedbank Group Rabobank Group RBC Scotiabank SEB Societe Generale Standard Bank Group Standard Chartered Bank SMBC TD Bank Financial Group The Royal Bank of Scotland Wells Fargo & Company WestLB AG Westpac Banking Corporation Mailing ListClick here to start receiving press releases and other news about the Equator Principles.World Bank/IFC LinksWorld Bank Guidelines and Criteria Referenced in the Equator PrinciplesDevelopment Indicators Database IFC Guidelines and Policies Referenced in the Equator Principles Sector-Specific EHS Guidelines Performance Standards |
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Environmental standards loom ever larger in banks' lending decisions, by Susanne Bergius, ENDS Report, December 2008
60 Second Profile on the Equator Principles, Good Practice Newsletter from ICMM, December 2008
Banks increase their environmental requirements
Promoting Greater Responsibility in Project Financing by Natasha Cappon, Canada, Spring, 2008
China to bring in green loan benchmark, 25 January, 2008
A Question of Principles, Infrastructure Magazine, by Kimberley Gaskin, June 2007
Citigroup to scale up its green spending,The Financial Times, 8 May 2007.
Polluters Clean Up Act to Attract Lenders, The Moscow Times, 12 October 2005
Mizuho To Adopt Environmental Standards In Project Financing, CNNfn, 26 October 2003
Dexia adhère aux "Equator principles", La Tribune, 22 September 2003 (in French)
Western Banks Set Standards for Eco-Friendly Lending. Japanese Banks Far Behind. NGO Keeping Close Watch, Nikkei, 5 September 2003
Equator Principles — Why Indian Banks Too Should be Guided by Them, The Hindu, 25 July 2003
Project finance — Standards for Lending, Financial Mail, 25 July 2003
Banks' green pledge earns mixed response, swissinfo, 10 June 2003
Major Banks Endorse Equator Principles, The Peninsula, Qatar, 5 June 2003
Loan rules with an eye on nature, International Herald Tribune, 5 June 2003
IFC Head's Remarks at Equator Principles Press Conference, 4 June 2003