1. Equator Principles Roundtable
Equator Principles and Project Finance
Standards for Sustainability:
The Challenges and Opportunities
Sarah Murfitt, Principal Consultant
Environmental Resources Management
2nd December 2010
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2. 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
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3. 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
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4. Equator Principles: Evolution
Environmental Pollution
Bank Environmental
WorldBank Assessment
Pollution
Abatement World Bank
World Assessment Abatement World Bank
OP4.01
4.01 updated ten
Sourcebook Handbook updatedten
OP Sourcebook Handbook
Environmental 1991 1998 Safeguard
Environmental 1991 1998 Safeguard
Assessment Policies
Assessment Policies
1979 1998
1979 Safeguard Policies 1979-1998 1998
Safeguard Policies 1979-1998
IFC General
IFC adopted IFC IFC General
IFC adopted IFC andIndustry
Industry
Safeguard Performance and
Safeguard Performance Sector EHS
Policies Standards Sector EHS
Policies Standards Guidelines
1998 2006 Guidelines
1998 2006 2007+
2007+
Equator Equator
Equator Equator
Principles Principles II
Principles Principles II
2003 2006
2003 2006
1979 1991 1999 2003 2006
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5. 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
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6. 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
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7. 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.
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8. 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
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9. 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.
Stakeholder Consultation
Identify and Assess the Impacts
Describe Implement
Scope
the the
the ESIA Baseline Findings
Predict Evaluate Mitigate/Enhance
-
Design and Decision-Making
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10. Impacts of ESIA on Project Timing
Project
operational
Project
finance
secured
Local permit
approvals Project
approval
ESIA
Scoped Ongoing
Project finance
EP assessment
project
appraisal
‘application’ bottleneck
Feasibility
studies Environment & social
impact assessment
2-4 years 1-2 years Ongoing
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11. Key Challenges
• Navigating the guidance and keeping abreast
of 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
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12. 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
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13. 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.
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14. Case Studies: Financial
Project: Framework contract to provide
independent Environmental and Social
consultancy services for EBRD
Date: 2010 - ongoing
Location: EBRD countries
What we did: 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.
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15. Case Studies: Oil and Gas
Project: Nabucco Gas Pipeline
International, Environment and
Social Due Diligence Services
Lenders: EBRD, IFC and EIB
Date: 2010 (ongoing).
What we did: 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’s
role 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.
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16. Case Studies: Timber Salvage
Project: Lake Volta Timber Salvage Project
Borrower: Clark Sustainable Resource
Lead advisor: Developments (CSRD)
Date: 2007-2008
Location: Ghana
What we did: 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 issues
examined 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 as
part of project financing, and supported CSRD through the
permitting process with the Ghanaian EPA.
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17. Case Studies: Mining and Metals
Project: Kandinsky
Client: United Company RUSAL
Date & Location: 2008, Russia, Ukraine, Kazakhstan,
Caribbean, Africa, S America,
Deal Size: Europe
Transaction type: $30 billion (Initial Public Offering)
What we did: 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.
How we In spite of the tight time constraints and logistical issues, ERM was
added value: 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.
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18. Case Studies: Oil and Gas
Project: Project Finance - Oil Refinery,
Egyptian Refining Company
Date & Location: 2006 – present, Egypt
Project Value: $3.7 billion
What we did: 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.
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19. Case Studies: Oil and Gas
Project: Brass LNG Due
Diligence to Equator
Principles for lender
banks
Date: 2007
Location: Nigeria
What we did: 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.
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20. Contact Details:
Sarah Murfitt Laura Street
Principal Consultant Consultant
ERM ERM
2nd Floor, Exchequer Court Eaton House, Wallbrook Court
St Mary Axe North Hinksey Lane
London, EC3A 8AA Oxford, OX2 0QS
Telephone: +44 20 3206 5200 Telephone: +44 1865 384 800
Direct Line: +44 20 3206 5362 Direct Line: + 44 1865 384 904
sarah.murfitt@erm.com laura.street@erm.com
www.erm.com www.erm.com
Delivering sustainable solutions in a more competitive world