Who and where are the Equator Banks? - IILJ
Who and where are the Equator Banks? - IILJ
Who and where are the Equator Banks? - IILJ
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Introduction 1<br />
What <strong>are</strong> <strong>the</strong> <strong>Equator</strong> Principles? 2<br />
<strong>Who</strong> <strong>and</strong> <strong>where</strong> <strong>are</strong> <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>? 3<br />
What <strong>are</strong> <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> looking for? 4<br />
Why have <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> adopted <strong>the</strong> <strong>Equator</strong> Principles? 5<br />
What difference have <strong>the</strong> <strong>Equator</strong> Principles made to <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>? 11<br />
What do NGOs think of <strong>the</strong> <strong>Equator</strong> Principles? 16<br />
Loan documentation issues 19<br />
Where next for <strong>the</strong> <strong>Equator</strong> Principles? 23<br />
Recommendations for <strong>Equator</strong> <strong>Banks</strong> 25<br />
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This is a summary report of <strong>the</strong> results of a survey into <strong>the</strong> impact of <strong>the</strong><br />
<strong>Equator</strong> Principles on <strong>the</strong> lending practices of <strong>the</strong> banks that have adopted<br />
<strong>the</strong>m. Members of our London environmental, planning <strong>and</strong> regulatory<br />
group carried out <strong>the</strong> survey, with <strong>the</strong> assistance of partners <strong>and</strong> associates<br />
in <strong>the</strong> firm’s project finance group. The summary report is very much a<br />
work in progress.<br />
The survey was conducted first, by means of specially tailored<br />
questionnaires addressed to <strong>the</strong> major project finance banks (both <strong>Equator</strong><br />
<strong>Banks</strong> <strong>and</strong> o<strong>the</strong>rs); sponsors of major projects, ethical funds, consultants,<br />
<strong>and</strong> public bodies; <strong>and</strong> environmental <strong>and</strong> o<strong>the</strong>r non-government<br />
organisations (NGOs) (including some which specifically monitor <strong>the</strong><br />
activities of banks). Secondly, a series of interviews was conducted with<br />
leading figures at <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>, non-<strong>Equator</strong> <strong>Banks</strong>, sponsors, NGOs,<br />
trade associations, law firms, accountancy firms, public bodies <strong>and</strong><br />
consultancies experienced in implementing <strong>and</strong> advising on <strong>the</strong> <strong>Equator</strong><br />
Principles. In some cases, it was possible to obtain good quality information<br />
in a single interview. However, in some cases more than one interview was<br />
carried out with <strong>the</strong> same person or with several people at one institution<br />
not only to fill in information gaps or deficiencies in knowledge but<br />
because we found that <strong>the</strong>y had important insights <strong>and</strong> valuable knowledge<br />
of aspects of <strong>the</strong> evolution, drafting, implementation or impact of <strong>the</strong><br />
<strong>Equator</strong> Principles.<br />
In this summary report, we have not identified any participants or<br />
organisations or attributed views or quotations to any participant <strong>and</strong> we<br />
have not cited more than a h<strong>and</strong>ful of written or electronic sources.<br />
We acknowledge gratefully <strong>the</strong> assistance of all those who participated in<br />
<strong>the</strong> survey.<br />
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The <strong>Equator</strong> Principles (Principles) <strong>are</strong> a set of voluntary guidelines,<br />
drafted by four banks (ABN Amro, Barclays, Citigroup <strong>and</strong> West LB) with<br />
assistance from <strong>the</strong> International Finance Corporation (IFC). The Principles<br />
were adopted in June 2003 by 10 banks <strong>and</strong> by <strong>the</strong> beginning of 2005 had<br />
been adopted by 28 financial institutions (27 banks <strong>and</strong> one export credit<br />
agency (ECA)).<br />
The Principles represent an attempt by a group of important banks<br />
influential in <strong>the</strong> project finance market (<strong>Equator</strong> <strong>Banks</strong>) to introduce into<br />
<strong>the</strong>ir lending decisions a more structured <strong>and</strong> rigorous consideration of <strong>the</strong><br />
social <strong>and</strong> environmental impacts of <strong>the</strong> projects <strong>the</strong>y <strong>are</strong> being asked to<br />
fund.<br />
An <strong>Equator</strong> Bank can only lend to projects whose sponsors <strong>the</strong> bank<br />
considers <strong>are</strong> able <strong>and</strong> willing to comply with comprehensive processes to<br />
ensure that projects <strong>are</strong> conducted in a socially responsible manner <strong>and</strong><br />
according to sound environmental management practices.<br />
The <strong>Equator</strong> <strong>Banks</strong> apply <strong>the</strong> Principles to all loans for projects with a<br />
capital cost of $50m or more.<br />
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Unsurprisingly, most (although not all) of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> <strong>are</strong> in north<br />
America or Europe. The <strong>Equator</strong> <strong>Banks</strong> account for about 80 per cent of<br />
global project finance.<br />
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The environmental <strong>and</strong> social screening process for projects is based on that<br />
used by <strong>the</strong> IFC. Projects <strong>are</strong> categorised as A, B or C projects<br />
(respectively, those displaying high, medium or low environmental or<br />
social risk). For all Category A <strong>and</strong> Category B projects (high <strong>and</strong> medium<br />
risk), a borrower must carry out an Environmental Assessment, which<br />
addresses <strong>the</strong> environmental <strong>and</strong> social issues identified in <strong>the</strong><br />
categorisation process.<br />
The Environmental Assessment must show that <strong>the</strong> project complies with<br />
host country laws, regulations <strong>and</strong> permits required by <strong>the</strong> project, with <strong>the</strong><br />
World Bank guidelines <strong>and</strong> IFC Pollution Prevention <strong>and</strong> Abatement<br />
Guidelines for <strong>the</strong> relevant industry sector. For projects in ‘low <strong>and</strong> middle<br />
income countries’ only 1 , <strong>the</strong> Environmental Assessment must also take into<br />
account <strong>the</strong> IFC Safeguard Polices, which provide guidance on issues such<br />
as natural habitats, indigenous peoples, involuntary resettlement, safety of<br />
dams, forestry, cultural property <strong>and</strong> o<strong>the</strong>r matters.<br />
For all Category A projects <strong>and</strong> certain Category B projects, <strong>the</strong> borrower<br />
or a third party expert must prep<strong>are</strong> an Environmental Management Plan<br />
(EMP).<br />
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1 See <strong>the</strong> World Bank Development Indicators Database, available at<br />
www.worldbank.org/data/countryclass/classgroups.htm<br />
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The <strong>Equator</strong> Principles have been accepted by many of <strong>the</strong> world’s leading<br />
project finance banks, but not by all of <strong>the</strong>m.<br />
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Why, <strong>the</strong>n, have some banks adopted <strong>the</strong> Principles <strong>and</strong> some have not?<br />
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<strong>Banks</strong> <strong>are</strong> extremely sensitive to <strong>the</strong> impact of damage to <strong>the</strong>ir reputation,<br />
which can have long-lasting <strong>and</strong> spectacular effects, particularly in <strong>the</strong> field<br />
of retail banking. The famous examples of <strong>the</strong> student boycott of Barclays<br />
over its investment in pre-M<strong>and</strong>ela South Africa <strong>and</strong> <strong>the</strong> seizure of Nazi<br />
gold held by certain Swiss banks haunt <strong>the</strong> imaginations of many bankers.<br />
Fur<strong>the</strong>rmore, banks see <strong>the</strong>mselves as particularly vulnerable, in that <strong>the</strong>ir<br />
own reputations may be adversely affected by <strong>the</strong> actions of a client over<br />
whose commercial strategy <strong>the</strong>y have no direct control – indeed, <strong>the</strong> actions<br />
which bring public criticism of <strong>the</strong> client (<strong>and</strong>, <strong>the</strong>refore, by implication, of<br />
<strong>the</strong> bank) may not be those in which <strong>the</strong> bank is directly concerned. As one<br />
consultee put it during <strong>the</strong> survey, consumer boycotts may not be fair, but<br />
that does not mean that <strong>the</strong>y <strong>are</strong> not effective!<br />
Fur<strong>the</strong>rmore, many banks value <strong>the</strong>ir inclusion in indexes such as<br />
FTSE4Good or <strong>the</strong> Dow Jones Sustainability Index highly, as an<br />
endorsement of <strong>the</strong>ir reputation. They see adoption of <strong>and</strong> compliance with<br />
<strong>the</strong> Principles as facilitating <strong>the</strong>ir inclusion in <strong>the</strong>se indexes.<br />
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Some <strong>Equator</strong> <strong>Banks</strong> signed up because <strong>the</strong>y thought that <strong>the</strong>y had nothing<br />
to lose, because <strong>the</strong>ir pre-existing lending practices already satisfied (or<br />
nearly satisfied) <strong>the</strong> requirements of <strong>the</strong> Principles in that <strong>the</strong>y had wellestablished<br />
in-house risk assessment capability <strong>and</strong> had adopted those<br />
principles, st<strong>and</strong>ards <strong>and</strong> policies to assess <strong>the</strong> social <strong>and</strong> environmental<br />
impacts of projects.<br />
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It was made clear to us during our survey that, for a number of <strong>Equator</strong><br />
<strong>Banks</strong>, adopting <strong>the</strong> Principles was a top-down initiative being driven hard<br />
by <strong>the</strong>ir chairmen, chief executives <strong>and</strong> senior bankers. In one case, we<br />
were told that it would be a c<strong>are</strong>er-limiting move for anyone at <strong>the</strong> bank to<br />
fail to appreciate <strong>the</strong> importance <strong>the</strong> bank, <strong>the</strong> chairman, <strong>the</strong> chief executive<br />
<strong>and</strong> <strong>the</strong> global head of project finance attached to <strong>the</strong> Principles.<br />
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Unsurprisingly, many banks see <strong>the</strong> Principles as a way of demonstrating<br />
<strong>the</strong>ir sensitivity to widespread public concern over environmental <strong>and</strong><br />
human rights issues. Many sh<strong>are</strong>holders now reference <strong>the</strong>se issues in<br />
making investment decisions, a trend which is most visible in <strong>the</strong> ‘ethical<br />
funds’ but is not confined to <strong>the</strong>m. Similarly, <strong>the</strong> feeling that <strong>the</strong> bank is a<br />
socially responsible business may influence employee satisfaction <strong>and</strong><br />
retention.<br />
The banking sector has also come under sustained pressure from<br />
environmental <strong>and</strong> human rights NGOs which see sponsor funding by<br />
banks as <strong>the</strong> oxygen of allegedly unsustainable projects. There <strong>are</strong> even<br />
NGOs which focus specifically on banking activities (of which BankTrack<br />
is perhaps <strong>the</strong> best-known).<br />
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Some <strong>Equator</strong> <strong>Banks</strong> have adopted <strong>the</strong> Principles in order to protect or<br />
increase <strong>the</strong>ir market sh<strong>are</strong>. This is based on <strong>the</strong> assumption that, in future,<br />
an increasing number of mature sponsors will choose an <strong>Equator</strong> Bank<br />
because <strong>the</strong> reputation <strong>and</strong> rigour of a leading <strong>Equator</strong> Bank may reduce<br />
political risk <strong>and</strong> protect projects against <strong>the</strong> possibility of expropriation by<br />
<strong>the</strong> host country as a result of non-compliance with its laws.<br />
Our survey suggested that <strong>the</strong>re might be a trend among major sponsors to<br />
prefer <strong>Equator</strong> <strong>Banks</strong> for <strong>the</strong>se reasons. There is, however, no hard<br />
evidence as yet that, in general, a virtuous circle of better social <strong>and</strong><br />
environmental assessment of projects <strong>and</strong> better risk assessment in lending<br />
decisions is being formed between <strong>Equator</strong> <strong>Banks</strong> <strong>and</strong> major sponsors.<br />
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A number of sponsors have recognised an advantage in creating a level<br />
playing field for social <strong>and</strong> environmental assessment of projects in<br />
providing a wider syndication market. Equally, it is widely recognised that<br />
<strong>the</strong> levelling of <strong>the</strong> playing field may raise st<strong>and</strong>ards generally <strong>and</strong> squeeze<br />
out of <strong>the</strong> market those players not applying such rigorous st<strong>and</strong>ards of<br />
assessment. There is also a moral basis for what may ultimately result in a<br />
uniformity of approach. In response to <strong>the</strong> survey, one very senior banker<br />
said that he felt that environmental due diligence was not a ground upon<br />
which any bank should be competing with o<strong>the</strong>r banks.<br />
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Most of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> endorse <strong>the</strong> view that <strong>the</strong> Principles, to quote <strong>the</strong><br />
Principles website, ‘have become <strong>the</strong> project finance industry st<strong>and</strong>ard for<br />
addressing environmental <strong>and</strong> social issues in project financing globally’ 2 .<br />
Opinion on this point outside <strong>the</strong> circle of <strong>Equator</strong> <strong>Banks</strong> is mixed. While<br />
some non-<strong>Equator</strong> banks recognised <strong>the</strong> Principles as ‘<strong>the</strong> only game in<br />
town’, o<strong>the</strong>rs (<strong>and</strong>, indeed, most <strong>Equator</strong> <strong>Banks</strong>) were sceptical whe<strong>the</strong>r<br />
sponsors would see any virtue in subjecting <strong>the</strong>ir projects to a more robust<br />
<strong>and</strong> expensive assessment process, although <strong>the</strong>y recognised that <strong>the</strong>re were<br />
pressures on sponsors to do so from stakeholders <strong>and</strong> governmental bodies.<br />
pìëí~áå~ÄäÉ=ÇÉîÉäçéãÉåí=<br />
Although <strong>the</strong> IFC sees <strong>the</strong> adoption of <strong>the</strong> Principles by private sector banks<br />
as representing a major advance, few <strong>Equator</strong> <strong>Banks</strong> took <strong>the</strong> view that <strong>the</strong><br />
Principles in <strong>the</strong>mselves marked a new chapter in sustainable development,<br />
but ra<strong>the</strong>r merely ano<strong>the</strong>r step on <strong>the</strong> road towards its attainment.<br />
cáå~åÅá~ä=êáëâ=ê~íáåÖ=<br />
Under <strong>the</strong> Basel II Framework agreement, as incorporated under <strong>the</strong><br />
forthcoming EU Capital Requirements Directive, internationally active<br />
banks have to satisfy minimum capital requirements against credit risks <strong>and</strong><br />
operational risks. However, <strong>the</strong> amount of capital reserved can be reduced<br />
if <strong>the</strong> bank can demonstrate to its banking supervisor that <strong>the</strong> internal risk<br />
assessment <strong>and</strong> management procedures employed by it <strong>are</strong> adequate to<br />
address those risks. Where banks have insufficiently developed internal risk<br />
assessment procedures to fully satisfy <strong>the</strong> entry criteria to qualify for <strong>the</strong><br />
Internal Ratings Based (IRB) approach to credit risk, <strong>the</strong>y will be obliged to<br />
follow a supervisory category for risk weighting for specialised lending<br />
such as project finance. The supervisory categories <strong>are</strong> based upon certain<br />
slotting criteria that rate <strong>the</strong> exposure of a project finance transaction to<br />
various grades of risk (such as political <strong>and</strong> legal environment, including<br />
2 See www.equator-principles.com.<br />
T= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜó=Ü~îÉ=íÜÉ=bèì~íçê=_~åâë=~ÇçéíÉÇ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\=<br />
EÅçåíáåìÉÇF=<br />
government support). It will be interesting to see whe<strong>the</strong>r banking<br />
supervisors will treat projects which <strong>are</strong> compliant with <strong>the</strong> Principles as<br />
contributing towards a higher supervisory rating grade <strong>and</strong> <strong>the</strong>reby<br />
requiring a reduced risk weighting.<br />
<strong>Banks</strong> that qualify for <strong>the</strong> advanced IRB approach <strong>are</strong> entitled to rely on<br />
<strong>the</strong>ir own internal estimates of risk components in determining <strong>the</strong> capital<br />
requirement for a given exposure. In order to achieve this st<strong>and</strong>ard, a bank<br />
must satisfy its supervisor that its credit risk management practices comply<br />
with certain minimum criteria. One such requirement is a credible track<br />
record in <strong>the</strong> use of internal ratings information for at least three years prior<br />
to qualification. To <strong>the</strong> extent that, based on such records, a bank has<br />
historical experience that projects which <strong>are</strong> Principles-compliant have<br />
lower default rates <strong>and</strong> loss estimates than similar projects which <strong>are</strong> not<br />
Principles-compliant, it would be entitled to allocate its own risk-weighting<br />
to <strong>the</strong> relevant risk component, which means that it could offer more<br />
competitive pricing to such a project. Similarly, compliance with <strong>the</strong><br />
Principles could justify a bank reducing <strong>the</strong> capital charge allocated to <strong>the</strong><br />
operational risk associated with <strong>the</strong> financing of such a project if this would<br />
mitigate <strong>the</strong> risk of <strong>the</strong> bank becoming directly liable for environmental<br />
losses.<br />
Linked to Basel II is <strong>the</strong> view of <strong>the</strong> rating agencies on <strong>the</strong> credit st<strong>and</strong>ing<br />
of banks <strong>and</strong> sponsors. Fitch Rating has stated that ‘in reflecting corporate<br />
governance within Fitch’s rating process, <strong>the</strong> focus primarily will be on<br />
how weak practices can impair a company’s financial position with<br />
somewhat less focus on how strong practices might help to enhance credit<br />
quality.’ However, our inquiries of rating agencies during <strong>the</strong> survey<br />
indicate that while corporate governance generally may be on <strong>the</strong> radar<br />
screen of <strong>the</strong> agencies, <strong>the</strong> Principles <strong>are</strong> not.<br />
tÜó=ëçãÉ=Ä~åâë=Ü~îÉ=çéíÉÇ=çìí=<br />
In <strong>the</strong> light of <strong>the</strong>se advantages, why have some major project finance<br />
banks opted to stay out of <strong>the</strong> <strong>Equator</strong> fold? Their reluctance, of course, is<br />
not attributable to lack of concern about environmental <strong>and</strong> human rights<br />
issues, but to more sophisticated doubts about <strong>the</strong> value of <strong>the</strong> <strong>Equator</strong><br />
process. It should be noted, incidentally, that <strong>the</strong> motivation of some (at<br />
least) of <strong>the</strong> non-<strong>Equator</strong> <strong>Banks</strong> in not adopting <strong>the</strong> Principles may bear<br />
comparison with <strong>the</strong> motives attributed by NGOs to those whom NGOs<br />
describe as ‘<strong>the</strong> PR <strong>Equator</strong> <strong>Banks</strong>’, i.e. <strong>Equator</strong> <strong>Banks</strong> which have adopted<br />
<strong>the</strong> Principles but <strong>are</strong> alleged to have done little more than emblazon <strong>the</strong><br />
Principles on <strong>the</strong>ir websites. This criticism may be unjust to those banks<br />
which do not engage heavily in project finance but which have adopted <strong>the</strong><br />
Principles in response to sh<strong>are</strong>holder pressure.<br />
U= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜó=Ü~îÉ=íÜÉ=bèì~íçê=_~åâë=~ÇçéíÉÇ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\=<br />
EÅçåíáåìÉÇF=<br />
A number of plausible reasons for staying out of <strong>the</strong> <strong>Equator</strong> group were<br />
advanced in answers to <strong>the</strong> survey.<br />
kÉÅÉëë~êó=áåíÉêå~ä=ëóëíÉãë=åçí=áå=éä~ÅÉ=<br />
Some non-<strong>Equator</strong> <strong>Banks</strong> feel that <strong>the</strong>y <strong>are</strong> not yet ready to implement <strong>the</strong><br />
Principles, because <strong>the</strong>y do not have <strong>the</strong> internal mechanisms ready or <strong>the</strong><br />
staff with <strong>the</strong> appropriate experience <strong>and</strong> expertise to enable <strong>the</strong>m to review<br />
<strong>the</strong> environmental <strong>and</strong> o<strong>the</strong>r assessment material generated by an <strong>Equator</strong><br />
project adequately. They <strong>are</strong>, <strong>the</strong>refore, afraid of being accused of<br />
hypocrisy if <strong>the</strong>y were to adopt <strong>the</strong> Principles in such circumstances. Some<br />
of <strong>the</strong>se banks, however, expressed an intention to adopt <strong>the</strong> Principles once<br />
<strong>the</strong>y felt equipped to implement <strong>the</strong>m properly.<br />
páãáä~ê=éêçÅÉÇìêÉë=~äêÉ~Çó=áå=éä~ÅÉ=<br />
One major UK bank already applies social <strong>and</strong> environmental review<br />
processes to all loans (not just project finance) of over £100,000 <strong>and</strong><br />
<strong>the</strong>refore felt it would be a retrograde step to adopt <strong>the</strong> less dem<strong>and</strong>ing<br />
obligations in <strong>the</strong> Principles.<br />
A major absentee group is made up of <strong>the</strong> Japanese banks: only one has<br />
adopted <strong>the</strong> Principles. This phenomenon is explained by <strong>the</strong> adherence of<br />
<strong>the</strong> Japanese private sector banks to <strong>the</strong> social <strong>and</strong> environmental guidelines<br />
issued by <strong>the</strong> Japan Bank for International Co-operation (JBIC), which<br />
address similar issues to <strong>the</strong> Principles (although in a slightly different<br />
way).<br />
pÅÉéíáÅáëã=<br />
Some outsiders doubted <strong>the</strong> real value of <strong>the</strong> Principles <strong>and</strong> whe<strong>the</strong>r <strong>the</strong><br />
<strong>Equator</strong> <strong>Banks</strong> had in fact <strong>the</strong> capacity to implement <strong>the</strong>m properly. They<br />
also felt that <strong>Equator</strong> <strong>Banks</strong> which claim that <strong>the</strong> Principles represent<br />
‘business as usual’ ra<strong>the</strong>r than a radical reform were both being<br />
disingenuous in promoting <strong>the</strong>m as a new or important development <strong>and</strong><br />
unnecessarily providing stakeholders <strong>and</strong> NGOs with ano<strong>the</strong>r stick to beat<br />
<strong>the</strong> banks with, while <strong>the</strong> non-joiners were left relatively undisturbed.<br />
^ííÉãéíë=íç=áåÅêÉ~ëÉ=ã~êâÉí=ëÜ~êÉ=Äó=ëí~óáåÖ=çìí=<br />
There <strong>are</strong> market rumours that some banks which have not adopted <strong>the</strong><br />
Principles <strong>are</strong> using that fact to suggest to less particular clients that it<br />
might be cheaper, quicker <strong>and</strong> less troublesome to finance a project through<br />
a bank which will not require costly <strong>and</strong> time-consuming environmental<br />
<strong>and</strong> social assessment. While this practice may occur in some localised<br />
project finance markets, it is unlikely to occur when loan syndication in<br />
more than one country is required. Our survey produced no hard evidence<br />
to support this view.<br />
V= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜó=Ü~îÉ=íÜÉ=bèì~íçê=_~åâë=~ÇçéíÉÇ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\=<br />
EÅçåíáåìÉÇF=<br />
cÉ~ê=çÑ=Åçåí~Öáçå=<br />
Some non-<strong>Equator</strong> <strong>Banks</strong> have hesitated to adopt <strong>the</strong> Principles because<br />
<strong>the</strong>y see no rational grounds for confining social <strong>and</strong> environmental review<br />
to project lending <strong>and</strong> <strong>the</strong>y <strong>are</strong> consequently uncertain of <strong>the</strong> extent of <strong>the</strong><br />
final commitment <strong>and</strong> of its impact on <strong>the</strong>ir businesses.<br />
qÜÉ=fc`=êÉîáÉï=<br />
A particular manifestation of this concern about uncertainty surrounds <strong>the</strong><br />
forthcoming review of <strong>the</strong> IFC Safeguard Policies. As <strong>the</strong> Principles <strong>are</strong><br />
linked to <strong>the</strong> Safeguard Policies, some banks have decided to ‘sit out’ <strong>the</strong><br />
first stage until <strong>the</strong> Policies have been revised in a manner satisfactory to<br />
<strong>the</strong> private banking sector.<br />
NM= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=ÇáÑÑÉêÉåÅÉ=Ü~îÉ=íÜÉ=bèì~íçê=<br />
mêáåÅáéäÉë=ã~ÇÉ=íç=íÜÉ=bèì~íçê=<br />
_~åâë\=<br />
Our survey revealed that <strong>the</strong>re is a vanguard of about four leading <strong>Equator</strong><br />
<strong>Banks</strong>, in terms of <strong>the</strong>ir commitment to <strong>and</strong> development of <strong>the</strong> Principles.<br />
These banks were responsible for drafting <strong>and</strong> negotiating <strong>the</strong> Principles<br />
with <strong>the</strong> IFC. They liaise with each o<strong>the</strong>r on a regular basis <strong>and</strong> <strong>are</strong> at <strong>the</strong><br />
forefront of development of policies <strong>and</strong> procedures.<br />
There follows a chasing pack of banks, which have demonstrated very real<br />
commitment to <strong>the</strong> Principles from top to bottom of <strong>the</strong>ir organisations.<br />
Behind <strong>the</strong> chasing pack <strong>are</strong> some ‘solid citizens’ who, while not leading<br />
<strong>the</strong> way on <strong>the</strong> Principles, never<strong>the</strong>less contribute fully to <strong>the</strong>ir<br />
development.<br />
There is, however, a fourth group of <strong>Equator</strong> <strong>Banks</strong> about which less<br />
positive views <strong>are</strong> expressed by NGOs <strong>and</strong> even by some of <strong>the</strong> <strong>Equator</strong><br />
<strong>Banks</strong> <strong>and</strong> leading non-<strong>Equator</strong> <strong>Banks</strong>. It is said that members of this group<br />
do little project finance work, or have done little more than put <strong>the</strong>ir<br />
adoption of <strong>the</strong> <strong>Equator</strong> Principles on <strong>the</strong>ir websites <strong>and</strong> free-ride on <strong>the</strong><br />
efforts of <strong>the</strong> o<strong>the</strong>r <strong>Equator</strong> <strong>Banks</strong>.<br />
o~áëáåÖ=~ï~êÉåÉëë=~åÇ=íê~áåáåÖ=<br />
Our survey revealed pockets of deep ignorance about <strong>the</strong> Principles, but<br />
also that <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> <strong>are</strong> putting a great deal of resources, money <strong>and</strong><br />
effort into training staff in order to correct this shortcoming. Former IFC<br />
staff provide much of this training on a consultancy basis. However, several<br />
<strong>Equator</strong> <strong>Banks</strong> have a self-st<strong>and</strong>ing IFC training package which can be run<br />
internally.<br />
Some banks only train very senior people, while o<strong>the</strong>rs put all front-line<br />
staff through <strong>the</strong> programme.<br />
oÉÅêìáíáåÖ=bèì~íçê=mêáåÅáéäÉë=ëí~ÑÑ=<br />
Some banks already had significant in-house expertise, although usually<br />
only on environmental risk assessment. There is also a wide variation in<br />
numbers of staff deployed on <strong>Equator</strong> work. Some banks only employ a<br />
small specialist unit, while o<strong>the</strong>rs have rapidly exp<strong>and</strong>ed <strong>the</strong>ir teams. There<br />
has been some outside recruitment, but in most cases staff have been<br />
redeployed internally.<br />
Few banks have panels of external expert advisers on social <strong>and</strong><br />
environmental matters, although a small number of <strong>Equator</strong> <strong>Banks</strong><br />
suggested that <strong>the</strong>y had at this stage sufficient expertise in-house to provide<br />
complete coverage of all relevant issues.<br />
NN= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=ÇáÑÑÉêÉåÅÉ=Ü~îÉ=íÜÉ=bèì~íçê=mêáåÅáéäÉë=ã~ÇÉ=íç=íÜÉ=<br />
bèì~íçê=_~åâë\=EÅçåíáåìÉÇF=<br />
One <strong>are</strong>a <strong>where</strong> <strong>the</strong>re was uniform concern was social impact assessment,<br />
in spite of <strong>the</strong> fact that bilateral <strong>and</strong> multilateral lenders <strong>and</strong> export credit<br />
agencies have been carrying out such assessments for some time.<br />
<strong>Equator</strong> <strong>Banks</strong> <strong>and</strong> sponsors, in our view at least, have made some<br />
surprising choices when appointing external experts. For example,<br />
engineering firms (ra<strong>the</strong>r than environmental or legal experts or<br />
economists) appear to be charged with a wide range of tasks that <strong>are</strong> not<br />
wholly or partly within <strong>the</strong>ir field of expertise, qualification or knowledge.<br />
Equally worrying was <strong>the</strong> discovery that some <strong>Equator</strong> <strong>Banks</strong> appear to<br />
take <strong>the</strong> view that <strong>the</strong>y had discharged <strong>the</strong>ir duty in respect of <strong>the</strong> <strong>Equator</strong><br />
Principles by accepting <strong>the</strong> findings of sponsors’ consultants. In many<br />
cases, irrespective of <strong>the</strong> project categorisation, it may be prudent for <strong>the</strong><br />
<strong>Equator</strong> <strong>Banks</strong> to engage independent consultants to review <strong>the</strong> reports<br />
provided by <strong>the</strong> sponsor or <strong>the</strong> sponsor’s technical consultants.<br />
fåíÉêå~ä=éêçÅÉëëÉë=<br />
There is a very real danger that information will be received by <strong>Equator</strong><br />
<strong>Banks</strong>, but not acted upon or that <strong>the</strong> actions taken will be inadequate or<br />
unnecessarily delayed. As inaction may trigger civil or criminal liability for<br />
<strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>, it is important that <strong>the</strong>re should be a clear chain of<br />
communication within <strong>the</strong> bank discharging <strong>the</strong> <strong>Equator</strong> Principles function<br />
(<strong>the</strong> Environment Bank), <strong>and</strong> that a senior officer within <strong>the</strong> Environment<br />
Bank should be charged with supervising information assessment <strong>and</strong><br />
communication within <strong>the</strong> Environment Bank itself <strong>and</strong> within <strong>the</strong><br />
syndicate. This should be an ongoing process, ra<strong>the</strong>r than, as was suggested<br />
to us by a leading environmental consultant of an IFC practice, one <strong>where</strong><br />
reports <strong>are</strong> left to fester over <strong>the</strong> year <strong>and</strong> <strong>the</strong>n given superficial<br />
examination to comply with internal deadlines.<br />
Where a loan is syndicated, syndicate members will have to be confident<br />
that <strong>the</strong> Environment Bank (whe<strong>the</strong>r an <strong>Equator</strong> Bank or non-<strong>Equator</strong><br />
Bank) nominated to ensure that <strong>the</strong> project is compliant with <strong>the</strong> Principles<br />
is sufficiently robust in its approach <strong>and</strong> application, in order to ensure that<br />
<strong>the</strong> reputation of each syndicate member is protected.<br />
j~âáåÖ=~=ÇáÑÑÉêÉåÅÉ=íç=íÜÉ=éêçàÉÅí=<br />
A problem with project assessment by <strong>Equator</strong> <strong>Banks</strong> which applies to all<br />
projects is that <strong>the</strong> lending banks may not become involved in projects early<br />
enough to influence <strong>the</strong> fundamentals of <strong>the</strong> project, laying <strong>the</strong> banks open<br />
to <strong>the</strong> charge that <strong>the</strong> Principles <strong>are</strong> just window-dressing or, in<br />
NGO-speak, carrying out ‘greenwash’.<br />
NO= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=ÇáÑÑÉêÉåÅÉ=Ü~îÉ=íÜÉ=bèì~íçê=mêáåÅáéäÉë=ã~ÇÉ=íç=íÜÉ=<br />
bèì~íçê=_~åâë\=EÅçåíáåìÉÇF=<br />
A particularly difficult assessment issue is raised by staged projects. Where<br />
<strong>the</strong> initial stages of a project, such as motorway projects, have not been <strong>the</strong><br />
subject of review in accordance with <strong>the</strong> Principles but current or future<br />
stages <strong>are</strong> so assessed, complications arise. <strong>Equator</strong> <strong>Banks</strong> at <strong>the</strong> early stage<br />
of <strong>the</strong> development <strong>and</strong> implementation of <strong>the</strong> Principles have tended to be<br />
pragmatic in <strong>the</strong>ir approach to staged projects. At least as far as <strong>the</strong> future<br />
stages of staged projects <strong>are</strong> concerned, <strong>the</strong> difficulty of financing <strong>and</strong><br />
syndication without some sort of framework for environmental <strong>and</strong> social<br />
review will mean that sponsors will, probably, have to adhere to <strong>the</strong><br />
Principles, although doing so may well involve a more detailed assessment<br />
than cursory examination of <strong>the</strong> cumulative impact of <strong>the</strong> various stages of<br />
<strong>the</strong> project.<br />
Similar difficulties may arise with regard to projects that have been a long<br />
time in planning before <strong>the</strong> adoption of <strong>the</strong> Principles <strong>and</strong> cannot be<br />
unwound simply. It remains to be seen how this will be addressed in light<br />
of <strong>the</strong> Principles.<br />
During <strong>the</strong> course of our survey, it was made clear to us that a number of<br />
<strong>Equator</strong> <strong>Banks</strong> had decided not to participate in loan syndication of certain<br />
projects. This was not because <strong>the</strong> bank considered <strong>the</strong> environmental or<br />
social impacts of a project to be unacceptable, but simply because it felt that<br />
<strong>the</strong> project did not fit <strong>the</strong> risk profile of its existing loan portfolio or it did<br />
not have <strong>the</strong> resources or expertise to assess <strong>the</strong> project adequately in <strong>the</strong><br />
time given by <strong>the</strong> sponsor or arranging bank to come to a conclusion.<br />
O<strong>the</strong>r <strong>Equator</strong> <strong>Banks</strong> may feel that, because of <strong>the</strong>ir greater resources or<br />
expertise in projects of a certain type, an adequate assessment of <strong>the</strong> project<br />
could be made in <strong>the</strong> time available or that a project of a particular type can<br />
be accommodated within its loan portfolio.<br />
mêçàÉÅí=Å~íÉÖçêáë~íáçå=<br />
Some NGOs <strong>are</strong> concerned about ‘categorisation creep’ <strong>where</strong> <strong>the</strong> <strong>Equator</strong><br />
<strong>Banks</strong>, under pressure from sponsors <strong>and</strong> loan arrangers, <strong>and</strong> given <strong>the</strong><br />
scope for subjectivity in categorisation, may be tempted to place projects in<br />
lower risk categories to reduce costs associated with carrying out social <strong>and</strong><br />
environmental impact assessment. Our own impression is that projects <strong>are</strong><br />
not systematically downgraded in this way by <strong>Equator</strong> <strong>Banks</strong>.<br />
Many issues addressed by <strong>the</strong> Principles involve some element of<br />
judgement as to which equally qualified leading professional advisers may<br />
legitimately hold different opinions. That professionals acting for banks or<br />
sponsors may disagree does not necessarily involve a degree of artificial<br />
manipulation of categorisation of a project.<br />
NP= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=ÇáÑÑÉêÉåÅÉ=Ü~îÉ=íÜÉ=bèì~íçê=mêáåÅáéäÉë=ã~ÇÉ=íç=íÜÉ=<br />
bèì~íçê=_~åâë\=EÅçåíáåìÉÇF=<br />
bèì~íçê=mêáåÅáéäÉë=ÇìÉ=ÇáäáÖÉåÅÉ=<br />
What should <strong>the</strong> <strong>Equator</strong> Bank do by way of due diligence? NGOs have<br />
questioned whe<strong>the</strong>r, <strong>and</strong> to what extent, <strong>Equator</strong> <strong>Banks</strong> should rely on <strong>the</strong><br />
work done by <strong>the</strong> sponsor or <strong>the</strong> advisers to <strong>the</strong> sponsor. If <strong>Equator</strong> <strong>Banks</strong><br />
rely on such studies, it is clear that <strong>the</strong>y must c<strong>are</strong>fully examine <strong>the</strong> scope<br />
of <strong>the</strong> due diligence to ensure that it covers all relevant environmental <strong>and</strong><br />
social issues <strong>and</strong> that sufficient time <strong>and</strong> resources were devoted to it.<br />
There is also a degree of cynicism sh<strong>are</strong>d by NGOs as to whe<strong>the</strong>r sponsors<br />
<strong>are</strong> being wholly transp<strong>are</strong>nt <strong>and</strong> comprehensive in <strong>the</strong>ir disclosures about<br />
projects <strong>and</strong> whe<strong>the</strong>r advisers who may have an existing relationship or<br />
hope for a future relationship with sponsors <strong>are</strong> or can be truly independent<br />
<strong>and</strong> objective.<br />
This is a criticism that can be levelled at all environmental assessment<br />
systems which rely on sponsor-sourced material. The difference, NGOs<br />
might say, is that those systems <strong>are</strong> ultimately reviewed by a public<br />
authority that is politically accountable, <strong>where</strong>as that is not true in <strong>the</strong> case<br />
of a private sector bank. On <strong>the</strong> o<strong>the</strong>r h<strong>and</strong>, assessment by <strong>the</strong> <strong>Equator</strong><br />
<strong>Banks</strong> of <strong>the</strong> environmental <strong>and</strong> social impact of a project tends to take<br />
place after or, at best, alongside assessment by a public authority.<br />
However, it is also true that sponsors or lenders sometimes like to have<br />
funding from a bilateral or multilateral lender or an export credit agency as<br />
a form of legitimisation of <strong>the</strong> project <strong>and</strong> this would involve clearance<br />
under <strong>the</strong> lending policies of <strong>the</strong> relevant institutions.<br />
Critical questions for banks arranging finance or members of a bank<br />
syndicate <strong>are</strong>: which of <strong>the</strong> banks involved in arranging or syndicating a<br />
project loan should carry out <strong>the</strong> Technical Bank or Environment Bank<br />
function <strong>and</strong>, as part of that role, lead <strong>the</strong> Principles due diligence <strong>and</strong><br />
subsequently monitor <strong>the</strong> construction <strong>and</strong> operation of <strong>the</strong> project?<br />
We believe this role is critical to <strong>the</strong> successful implementation of <strong>the</strong><br />
Principles as <strong>the</strong> reputation of all participating banks is dependent on <strong>the</strong><br />
Environment Bank, both during <strong>the</strong> project assessment stage <strong>and</strong> when <strong>the</strong><br />
Environment Bank is charged with monitoring <strong>the</strong> construction <strong>and</strong><br />
operational stages of <strong>the</strong> project.<br />
The Environment Bank responsibilities should include:<br />
• advising <strong>the</strong> o<strong>the</strong>r banks whe<strong>the</strong>r <strong>the</strong> pre-condition requiring<br />
compliance with <strong>the</strong> Principles has been satisfied <strong>and</strong> monitoring<br />
compliance with <strong>the</strong> Environmental Management Plan (EMP) required<br />
for <strong>the</strong> project; <strong>and</strong><br />
NQ= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=ÇáÑÑÉêÉåÅÉ=Ü~îÉ=íÜÉ=bèì~íçê=mêáåÅáéäÉë=ã~ÇÉ=íç=íÜÉ=<br />
bèì~íçê=_~åâë\=EÅçåíáåìÉÇF=<br />
• having special responsibility for protecting <strong>the</strong> reputation of each of <strong>the</strong><br />
participating banks.<br />
Some <strong>Equator</strong> <strong>Banks</strong> <strong>are</strong> adamant that it is inappropriate for a non-<strong>Equator</strong><br />
Bank to lead <strong>the</strong> Principles due diligence, while o<strong>the</strong>rs <strong>are</strong> reluctant to<br />
question that bank’s commitment to carrying out a thorough Principles due<br />
diligence just because it has not itself adopted <strong>the</strong> Principles.<br />
None<strong>the</strong>less, a non-<strong>Equator</strong> Environment Bank leading a Principles due<br />
diligence on behalf of <strong>Equator</strong> <strong>Banks</strong>, which has by definition not adopted<br />
<strong>the</strong> Principles, does look distinctly odd.<br />
If <strong>the</strong> Principles aim at providing more robust projects <strong>and</strong> protection of <strong>the</strong><br />
reputation of banks from public criticism by stakeholders, it is difficult, in<br />
principle at least, to underst<strong>and</strong> why <strong>Equator</strong> <strong>Banks</strong>, even if <strong>the</strong>y retain a<br />
veto or have weighted voting rights, would concede <strong>the</strong> Environment Bank<br />
role to a bank which does not sh<strong>are</strong> <strong>the</strong>ir ambitions for, belief in or<br />
commitment to <strong>the</strong> Principles.<br />
NR= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=Çç=kdlë=íÜáåâ=çÑ=íÜÉ=bèì~íçê=<br />
mêáåÅáéäÉë\=<br />
NGO criticism has focused not only on <strong>the</strong> Principles but also on <strong>the</strong><br />
perceived failure to apply <strong>the</strong> Principles, or inconsistent application by <strong>the</strong><br />
<strong>Equator</strong> <strong>Banks</strong> of <strong>the</strong> Principles.<br />
k~êêçïåÉëë=çÑ=ëÅçéÉ=~åÇ=ÅçåíÉåí=<br />
NGOs <strong>are</strong> critical of <strong>the</strong> Principles, which <strong>the</strong>y see as selective. Although<br />
based on <strong>the</strong> IFC model, <strong>the</strong>y fail to reproduce some important elements of<br />
it. For example, none of <strong>the</strong> extensive obligations as to disclosure <strong>and</strong><br />
transp<strong>are</strong>ncy of IFC decision-making appear in <strong>the</strong> Principles. In <strong>the</strong> view<br />
of some NGOs, <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> have merely ‘cherry-picked’ from <strong>the</strong><br />
model which <strong>the</strong> international community has adopted, leaving aside<br />
important safeguards.<br />
The Principles <strong>are</strong> limited to project finance above a $50m threshold. This<br />
is seen by NGOs as potentially ignoring:<br />
• <strong>the</strong> social <strong>and</strong> environmental impacts of activities funded by <strong>the</strong><br />
<strong>Equator</strong> <strong>Banks</strong> from general or non-project finance lending; <strong>and</strong><br />
• that <strong>the</strong> effect of projects under $50m may be much more harmful to<br />
society <strong>and</strong> <strong>the</strong> environment than <strong>the</strong> effect of more costly projects.<br />
The NGO community also has reservations about <strong>the</strong> scope of <strong>the</strong><br />
Principles. It is said, for example, that <strong>the</strong> Principles ignore climate change.<br />
Certainly, <strong>the</strong>re is no express mention of this important issue in <strong>the</strong> text of<br />
<strong>the</strong> Principles (although it may be subsumed within <strong>the</strong> concept of<br />
sustainable development). However, <strong>the</strong>re <strong>are</strong> many o<strong>the</strong>r important<br />
environmental <strong>and</strong> social issues which <strong>the</strong> Principles do not specifically<br />
draw to <strong>the</strong> attention of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> but which undoubtedly must be<br />
addressed as part of <strong>the</strong> Principles assessment.<br />
i~Åâ=çÑ=~ÅÅçìåí~Äáäáíó=~åÇ=íê~åëé~êÉåÅó=<br />
Some NGOs <strong>are</strong> concerned about a lack of transp<strong>are</strong>ncy of <strong>Equator</strong> Bank<br />
decision-making. They observe that <strong>the</strong>re is no mechanism for monitoring<br />
that <strong>Equator</strong> <strong>Banks</strong> actually implement <strong>the</strong> Principles <strong>and</strong> that <strong>the</strong> <strong>Equator</strong><br />
<strong>Banks</strong> tend not to disclose what decisions <strong>the</strong>y made or <strong>the</strong> basis of<br />
decision-making. There is no mechanism for affected communities to have<br />
recourse to <strong>the</strong> financial institutions, such as <strong>the</strong> availability of a dispute<br />
resolution mechanism for third parties (such as <strong>the</strong> IFC Compliance<br />
Advisory Ombudsman) in cases <strong>where</strong> st<strong>and</strong>ards <strong>are</strong> allegedly not being<br />
met or implemented, as <strong>the</strong> loan documentation places most of <strong>the</strong><br />
responsibility in this respect on <strong>the</strong> borrower.<br />
NGOs have criticised <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> for failure to explain why <strong>the</strong>y<br />
have supported or declined to support specific projects, sometimes<br />
comparing <strong>the</strong>ir decision to support an allegedly unsustainable project<br />
NS= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜ~í=Çç=kdlë=íÜáåâ=çÑ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\=EÅçåíáåìÉÇF<br />
unfavourably with that of <strong>the</strong> banks that declined to do so. <strong>Equator</strong> <strong>Banks</strong><br />
may, though, have very good reasons for not explaining <strong>the</strong>ir actions<br />
publicly:<br />
• <strong>the</strong> Principles <strong>are</strong> general rules which do not eliminate discretion or <strong>the</strong><br />
need for interpretation;<br />
• a bank may decline to support a project for reasons o<strong>the</strong>r than breach of<br />
<strong>the</strong> Principles;<br />
• client confidentiality;<br />
• it is primarily for <strong>the</strong> sponsors (who have access to better <strong>and</strong> more<br />
detailed information) <strong>and</strong> not for <strong>the</strong> banks to disclose information<br />
about sponsors’ projects; <strong>and</strong><br />
• banks which have intimate knowledge of a sponsor or a greater<br />
exposure to an industry will be able to make more informed decisions<br />
in a shorter time than banks which have less experience of <strong>the</strong> sponsor<br />
or less exposure to that industry.<br />
For legal <strong>and</strong> practical reasons, it is difficult to see why, except in<br />
exceptional circumstances, <strong>the</strong> banks should make disclosure in respect of<br />
specific projects, but we see some merit in general disclosure by <strong>the</strong><br />
<strong>Equator</strong> <strong>Banks</strong> of support for, or failure to support, projects in different<br />
industry sectors. In some jurisdictions, however, it is a criminal offence to<br />
reveal confidential information. A possible compromise may be for banks<br />
to disclose <strong>the</strong> number of applications approved or rejected, but not to name<br />
applicants, although this would not catch cases in which <strong>the</strong> bank did not<br />
tender for <strong>the</strong> project because of its incompatibility with <strong>the</strong> Principles.<br />
lé~Åáíó=çÑ=íÜÉ=bèì~íçê=mêáåÅáéäÉë=<br />
The Principles do not state that all projects must comply with IFC<br />
guidelines, but merely emphasise <strong>the</strong> need for environmental assessment.<br />
They refer to projects being ‘generally consistent’ with IFC criteria <strong>and</strong> to a<br />
‘reasonable minimum period.’ Some NGOs argue such wording is vague<br />
<strong>and</strong> could lead to poor implementation.<br />
tÉ~â=çå=ëçÅá~ä=áëëìÉë=<br />
The Principles <strong>are</strong> modelled on IFC Safeguard Policies, which, comp<strong>are</strong>d to<br />
World Bank st<strong>and</strong>ards, inadequately address social concerns in relative<br />
terms 3 . This may be addressed in <strong>the</strong> course of <strong>the</strong> current consultation on<br />
<strong>the</strong> review of <strong>the</strong> IFC Safeguard Policies 4 .<br />
3 The IFC’s Compliance Advisor Ombudsman has identified <strong>the</strong> assessment of social impact as a<br />
shortcoming of <strong>the</strong> operation of <strong>the</strong> IFC’s Safeguard Policies. See Compliance Advisor<br />
Ombudsman: A Review of IFC’s Safeguard Policies published January 2003 available at<br />
www.cao-ombudsman.org/html-english/advisor.htm.<br />
4 See ‘Where next for <strong>the</strong> <strong>Equator</strong> Principles?’ section on page 23 for fur<strong>the</strong>r details.<br />
NT= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
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tÜ~í=Çç=kdlë=íÜáåâ=çÑ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\=EÅçåíáåìÉÇF<br />
Project assessment is particularly problematic when dealing with nonenvironmental<br />
assessment (such as <strong>the</strong> assessment of social, human rights,<br />
cultural, political <strong>and</strong> o<strong>the</strong>r impacts). This is because of <strong>the</strong> comparatively<br />
‘soft’ nature of <strong>the</strong> issues being assessed or <strong>the</strong> absence of agreed st<strong>and</strong>ards<br />
or a unified approach to assessment of <strong>the</strong>se issues, as well as a shortage of<br />
established recognised experts working in <strong>the</strong> <strong>are</strong>a. There is also, according<br />
to NGOs, a western developed economy bias in <strong>the</strong> Principles <strong>and</strong> a<br />
resulting absence of tailoring <strong>the</strong> regime to <strong>the</strong> specific needs of developing<br />
countries in Africa, Latin America, Asia <strong>and</strong> central Asia.<br />
_ê~âÉ=çå=ÇÉîÉäçéãÉåí=çÑ=ÖççÇ=éê~ÅíáÅÉ=~åÇ=éçäáÅáÉë=<br />
Many NGOs fear that <strong>the</strong> Principles will have a limiting effect, preventing<br />
or delaying <strong>the</strong> adoption of best practice sector st<strong>and</strong>ards, such as <strong>the</strong> ABN<br />
Amro forestry policy. Some NGOs see <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> as wedded to<br />
profits, ra<strong>the</strong>r than being enlightened <strong>and</strong> principled institutions seeking<br />
better ways to protect <strong>the</strong> environment <strong>and</strong> society. They say this is<br />
evidenced by <strong>the</strong> collective opposition of 11 of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> to <strong>the</strong><br />
Extractive Industry Review <strong>and</strong> by <strong>the</strong> approach which <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong><br />
have adopted towards <strong>the</strong> IFC review of its Safeguard Policies (although<br />
<strong>the</strong> involvement of <strong>the</strong> banks in <strong>the</strong> review contrasts with <strong>the</strong> attitude of<br />
several NGOs which have boycotted <strong>the</strong> process altoge<strong>the</strong>r).<br />
NU= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
iç~å=ÇçÅìãÉåí~íáçå=áëëìÉë=<br />
Adoption of <strong>the</strong> Principles effectively requires <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> to review<br />
<strong>the</strong>ir loan documentation packages in light of <strong>the</strong> wider social <strong>and</strong><br />
environmental assessment, monitoring <strong>and</strong> enforcement obligations that<br />
apply. The Principles, however, <strong>are</strong> voluntary guidelines adopted by<br />
<strong>Equator</strong> <strong>Banks</strong>. It is <strong>the</strong>refore inappropriate for lenders to oblige borrowers<br />
to comply with <strong>the</strong>m. It is competent <strong>and</strong> desirable for lenders to require<br />
borrowers to comply with <strong>the</strong> EMP <strong>and</strong> environmental laws (defined as is<br />
appropriate to each case to cover social <strong>and</strong> environmental laws of <strong>the</strong> host<br />
country <strong>and</strong> transnational <strong>and</strong> international legislation, conventions <strong>and</strong><br />
treaties dealing with <strong>the</strong> environment, employment, health <strong>and</strong> safety <strong>and</strong><br />
human rights) <strong>and</strong> <strong>the</strong> policies <strong>and</strong> guidelines of <strong>the</strong> World Bank <strong>and</strong> IFC<br />
that underpin <strong>the</strong> Principles.<br />
aÉÑáåáíáçå=~åÇ=ÇÉêçÖ~íáçå=<br />
From <strong>the</strong> survey <strong>and</strong> in our experience it is market practice that, to <strong>the</strong><br />
extent it is used at all in loan documentation, <strong>the</strong> definition of <strong>the</strong> Principles<br />
is fixed by reference to <strong>the</strong> date of <strong>the</strong> current published version at financial<br />
close. However, this practice may create a tension between <strong>the</strong> expectation<br />
of NGOs <strong>and</strong> stakeholders that <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> will implement <strong>the</strong><br />
Principles as <strong>the</strong>y evolve over time <strong>and</strong> <strong>the</strong> need of borrowers for certainty.<br />
Ano<strong>the</strong>r important issue is whe<strong>the</strong>r <strong>Equator</strong> <strong>Banks</strong> will entertain borrower<br />
requests for specific derogation from <strong>the</strong> policies <strong>and</strong> guidelines of <strong>the</strong> IFC.<br />
If <strong>Equator</strong> <strong>Banks</strong> follow <strong>the</strong> IFC <strong>and</strong> allow exceptions to <strong>the</strong> Principles, this<br />
presents interesting questions of principle, implementation <strong>and</strong><br />
transp<strong>are</strong>ncy.<br />
båîáêçåãÉåí=_~åâ=<br />
Almost without exception, at least in our view, one of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> in<br />
<strong>the</strong> syndicate should be allocated <strong>the</strong> role of Environment Bank. The loan<br />
documentation should expressly provide that <strong>the</strong> role of Environment Bank<br />
is not capable of delegation to a non-<strong>Equator</strong> Bank as <strong>the</strong> Environment<br />
Bank role entails onerous assessment, monitoring <strong>and</strong> enforcement<br />
obligations as a means of managing <strong>the</strong> reputation risk to which each<br />
<strong>Equator</strong> Bank is exposed.<br />
oÉéêÉëÉåí~íáçåë=~åÇ=ï~êê~åíáÉë=<br />
Our survey <strong>and</strong> experience indicate that specific provisions should be<br />
included under which a borrower represents <strong>and</strong> warrants that:<br />
• it has provided to <strong>the</strong> lenders all reports <strong>and</strong> (material) information in<br />
relation to social <strong>and</strong> environmental matters in its possession or control;<br />
NV= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
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• no Environmental Claims (defined, if thought necessary, to include<br />
social matters, such as claims of human rights abuse, or subject to<br />
being in writing or an appropriate level of materiality) have been<br />
commenced or threatened against it; <strong>and</strong><br />
• it has developed, constructed <strong>and</strong> (if applicable) operated <strong>and</strong><br />
maintained <strong>the</strong> project (or procured <strong>the</strong> same) in compliance with <strong>the</strong><br />
EMP <strong>and</strong> <strong>the</strong> following defined terms: (i) Environmental Laws; <strong>and</strong> (ii)<br />
<strong>the</strong> Lenders’ Environmental <strong>and</strong> Social Policies <strong>and</strong> Guidelines. The<br />
Lenders’ Environmental <strong>and</strong> Social Policies <strong>and</strong> Guidelines can be<br />
defined as <strong>the</strong> underlying World Bank <strong>and</strong> IFC policies <strong>and</strong> guidelines,<br />
with any derogation agreed by <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>.<br />
There will usually be some tension between <strong>the</strong> borrower <strong>and</strong> <strong>the</strong> lender as<br />
to <strong>the</strong> nature of <strong>the</strong> compliance warranty. <strong>Equator</strong> <strong>Banks</strong> should be wary of<br />
diluting compliance warranties by <strong>the</strong> use of materiality thresholds<br />
(particularly <strong>the</strong> use of Material Adverse Effect or Material Adverse<br />
Change thresholds) as <strong>the</strong> more such warranties <strong>are</strong> qualified <strong>the</strong> greater <strong>the</strong><br />
risk of reputation damage <strong>and</strong>, as <strong>the</strong> IFC has suggested, <strong>the</strong> less<br />
straightforward enforcement becomes. Never<strong>the</strong>less, <strong>the</strong> use of<br />
environmental hair triggers is not to be encouraged if this will lead to<br />
acceleration of <strong>the</strong> loan merely to protect <strong>the</strong> reputation of some of <strong>the</strong><br />
lenders.<br />
The <strong>Equator</strong> <strong>Banks</strong> need also to bear in mind <strong>the</strong> potential risks of<br />
exercising step-in rights or taking o<strong>the</strong>r action to enforce <strong>the</strong>ir security over<br />
a project which is not environmentally compliant, given <strong>the</strong> greater<br />
likelihood of exposure to environmental liabilities, whe<strong>the</strong>r directly through<br />
lender liability or indirectly through contractual indemnities granted to stepin<br />
vehicles or receivers. <strong>Banks</strong> may wish to have step-in rights, but no bank<br />
enters into loan agreements with <strong>the</strong> expectation or hope that step-in rights<br />
will be exercised.<br />
råÇÉêí~âáåÖë=<br />
In addition to <strong>the</strong> general undertaking in <strong>the</strong> loan agreement to comply with<br />
all laws, a separate undertaking should be drafted that obliges <strong>the</strong> borrower<br />
to comply (or procure compliance) in all respects with (i) <strong>the</strong> EMP; (ii)<br />
Environmental Laws; <strong>and</strong> (iii) <strong>the</strong> Lenders’ Environmental <strong>and</strong> Social<br />
Policies <strong>and</strong> Guidelines.<br />
Borrowers may resist an obligation to comply with <strong>the</strong> Principles on an<br />
ongoing basis for <strong>the</strong> reasons explained above, but <strong>the</strong> same effect can be<br />
achieved if <strong>the</strong> obligation is cast as an obligation to procure compliance<br />
with <strong>the</strong> requirements of <strong>the</strong> EMP prep<strong>are</strong>d (both for construction <strong>and</strong><br />
operational phases) for <strong>the</strong> project. Undertakings relating to <strong>the</strong> EMP<br />
should also include obligations to prep<strong>are</strong> <strong>and</strong> deliver (in a satisfactory<br />
OM= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
iç~å=ÇçÅìãÉåí~íáçå=áëëìÉë=EÅçåíáåìÉÇF<br />
form, annually or more frequently if an environment related default has<br />
occurred) an update of <strong>the</strong> EMP incorporating any required changes to <strong>the</strong><br />
project; <strong>and</strong> periodically to review <strong>the</strong> EMP <strong>and</strong> to inform <strong>the</strong> relevant<br />
agent if any modification is required based on changes to <strong>the</strong> project.<br />
The reporting obligations in <strong>the</strong> loan documentation should provide that <strong>the</strong><br />
borrower is obliged on receipt to provide promptly all material information<br />
<strong>and</strong> reports provided to <strong>the</strong> borrower by <strong>the</strong> construction contractor,<br />
environmental <strong>and</strong> social consultants, <strong>and</strong> <strong>the</strong> operator under <strong>the</strong> EMP. The<br />
obligations should also require <strong>the</strong> borrower to inform <strong>the</strong> relevant agent of<br />
any environmental claim against it which is current, pending or threatened<br />
or any circumstance which could reasonably be expected to trigger<br />
environmental liability, liability for breach of social protection laws, or to<br />
affect <strong>the</strong> borrower’s compliance with environmental laws <strong>and</strong> <strong>the</strong> EMP in<br />
addition to any facts or circumstances which <strong>are</strong> reasonably likely to result<br />
in any environmental claim being commenced or threatened against it.<br />
Again, <strong>the</strong>re will be some tension between borrower <strong>and</strong> lender as to <strong>the</strong><br />
qualification of such undertakings.<br />
bîÉåíë=çÑ=ÇÉÑ~ìäí=<br />
The loan agreement will contain a general event of default for failure to<br />
comply with <strong>the</strong> undertakings in <strong>the</strong> document. A separate default should be<br />
included for failure to comply with <strong>the</strong> borrower’s undertakings relating to<br />
environmental matters which would cover <strong>the</strong> EMP, Environmental Laws<br />
<strong>and</strong>, as defined appropriate to each project, Environmental Claims <strong>and</strong><br />
Environmental Liability.<br />
fåíÉêÅêÉÇáíçê=áëëìÉë=~åÇ=Åçåíêçä=<br />
Our survey indicates that an issue for <strong>Equator</strong> <strong>Banks</strong> to consider is <strong>the</strong><br />
negotiation of intercreditor rights with <strong>the</strong> o<strong>the</strong>r lenders to ensure that<br />
<strong>Equator</strong> <strong>Banks</strong> retain a controlling vote (or at least negative control) in<br />
respect of environmental matters. Depending on <strong>the</strong> size of <strong>the</strong><br />
commitments of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> in a syndicate <strong>and</strong> <strong>the</strong> relative size that<br />
<strong>the</strong> commercial bank tranche bears to o<strong>the</strong>r tranches of <strong>the</strong> overall financing<br />
package, <strong>Equator</strong> <strong>Banks</strong> may find <strong>the</strong>mselves out-voted on intercreditor<br />
voting if a block of non-<strong>Equator</strong> <strong>Banks</strong> or o<strong>the</strong>r financial institutions hold<br />
<strong>the</strong> requisite voting entitlement when action on an environmental issue is<br />
being decided.<br />
We <strong>are</strong> aw<strong>are</strong> from our survey that some <strong>Equator</strong> <strong>Banks</strong> have favoured <strong>the</strong><br />
use of special weighted voting rights on any action to amend, vary or grant<br />
consents or enforce any provision of <strong>the</strong> loan documentation relating to<br />
Environmental Matters (as defined), although this suggestion did not meet<br />
with universal acceptance. The use of such rights is justified on <strong>the</strong> basis<br />
that <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> face a greater risk to reputation if <strong>the</strong>y <strong>are</strong> not seen<br />
ON= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
iç~å=ÇçÅìãÉåí~íáçå=áëëìÉë=EÅçåíáåìÉÇF<br />
to be taking action to enforce environmental requirements that have been<br />
agreed to by <strong>the</strong> borrower. We do not expect that syndicate members who<br />
<strong>are</strong> non-<strong>Equator</strong> <strong>Banks</strong> or o<strong>the</strong>r co-financiers or borrowers will accept this<br />
argument. However, it may be that a similar result could eventually be<br />
achieved by <strong>the</strong> use of a step-down process applying a progressively<br />
reducing percentage of lenders whose decision is required to take <strong>the</strong><br />
relevant action such that ultimately <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> could act alone if <strong>the</strong><br />
majority is not prep<strong>are</strong>d to act after an agreed period. A more acceptable<br />
solution may be to allow <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> to exercise negative control<br />
over <strong>the</strong> relevant decision by providing that <strong>the</strong> lender consent level is set<br />
sufficiently high, say 80 per cent of outst<strong>and</strong>ing commitments or<br />
participations, to include at least one of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>, <strong>the</strong>reby at least<br />
ensuring that <strong>the</strong> environmental requirements negotiated at <strong>the</strong> outset of <strong>the</strong><br />
financing cannot be avoided by a majority that does not include <strong>the</strong> <strong>Equator</strong><br />
<strong>Banks</strong>.<br />
póåÇáÅ~íáçå=áëëìÉë=<br />
A common component of primary syndication is conduct of roadshows by<br />
<strong>the</strong> lead arrangers <strong>and</strong> representatives of <strong>the</strong> borrower. This is an<br />
opportunity for <strong>Equator</strong> <strong>Banks</strong> who <strong>are</strong> considering participating in <strong>the</strong><br />
financing to put questions to <strong>the</strong> lead arrangers <strong>and</strong> <strong>the</strong> borrower about <strong>the</strong><br />
social <strong>and</strong> environmental impacts of <strong>the</strong> project. Given <strong>the</strong> growing<br />
importance of compliance with <strong>the</strong> Principles, lead arrangers may choose to<br />
market this as a selling point to potential participants. Participant banks <strong>are</strong><br />
generally permitted to request that <strong>the</strong> reports produced by <strong>the</strong> arranger’s<br />
technical adviser be provided to <strong>the</strong>m <strong>and</strong> should avail <strong>the</strong>mselves of <strong>the</strong><br />
opportunity to review this material. Lead arrangers should (<strong>and</strong> in our<br />
experience often do) make <strong>the</strong> point to sponsors that rigorous compliance<br />
with <strong>the</strong> Principles will aid syndication (keeping <strong>the</strong> door open to <strong>Equator</strong><br />
<strong>Banks</strong> that form <strong>the</strong> significant majority of project financiers).<br />
As for secondary syndication, <strong>Equator</strong> <strong>Banks</strong> who <strong>are</strong> considering<br />
participating can mitigate risk to <strong>the</strong>ir reputation by dem<strong>and</strong>ing copies of<br />
<strong>the</strong> technical adviser reports (even if <strong>the</strong>re is no opportunity to discuss <strong>the</strong>se<br />
with <strong>the</strong> technical advisers) <strong>and</strong> having <strong>the</strong>ir internal environmental experts<br />
review <strong>the</strong>se toge<strong>the</strong>r with <strong>the</strong> information memor<strong>and</strong>um. <strong>Equator</strong> <strong>Banks</strong><br />
should also request discussions with <strong>the</strong> Environment Bank to ascertain: (i)<br />
whe<strong>the</strong>r <strong>the</strong> environment-related provisions in <strong>the</strong> loan documentation <strong>are</strong><br />
being properly monitored; <strong>and</strong> (ii) <strong>the</strong> borrower's compliance with <strong>the</strong><br />
same.<br />
OO= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜÉêÉ=åÉñí=Ñçê=íÜÉ=bèì~íçê=<br />
mêáåÅáéäÉë\=<br />
_ÉóçåÇ=éêçàÉÅí=Ñáå~åÅÉ\=<br />
The most obvious limitation is that <strong>the</strong> Principles only apply to project<br />
finance. There <strong>are</strong> good reasons for applying <strong>the</strong> Principles to project<br />
finance as detailed due diligence is carried out on <strong>the</strong> proposed project <strong>and</strong><br />
covenants can be tailored to performance relevant to social <strong>and</strong><br />
environmental st<strong>and</strong>ards. Clearly, o<strong>the</strong>r financial structures, such as equity<br />
financing of offshore projects, general corporate lending <strong>and</strong> project bonds<br />
(whe<strong>the</strong>r or not wrapped by monoline insurers) <strong>are</strong> widely used to fund<br />
developments with significant social <strong>and</strong> environmental impacts. Many of<br />
<strong>the</strong>se developments, of course, will be subject to o<strong>the</strong>r environmental<br />
impact assessment requirements, even if not subject to <strong>the</strong> Principles.<br />
Several <strong>Equator</strong> <strong>Banks</strong> extend <strong>the</strong> application of <strong>the</strong> Principles to <strong>are</strong>as of<br />
banking o<strong>the</strong>r than project finance, by adopting an ‘<strong>Equator</strong>-Lite’ approach<br />
to o<strong>the</strong>r forms of lending or sometimes by applying policies more stringent<br />
than <strong>the</strong> Principles to some <strong>are</strong>as of <strong>the</strong>ir activities.<br />
dççÇÄóÉ=íç=íÜÉ=ARMã=íÜêÉëÜçäÇ\=<br />
The $50m threshold was originally a concession made to some initially<br />
reluctant banks to encourage <strong>the</strong>m to adopt <strong>the</strong> Principles.<br />
The threshold is said to be particularly damaging in developing countries<br />
<strong>where</strong> <strong>the</strong> capital costs of quite significant projects may be less than $50m<br />
<strong>and</strong> local laws may not require stringent environmental <strong>and</strong> social impact<br />
assessment. Ano<strong>the</strong>r issue is <strong>the</strong> possibility of ‘salami-slicing’ projects so<br />
that each part of <strong>the</strong> project falls below <strong>the</strong> $50m threshold. For many<br />
banks, however, this clearly is impractical <strong>and</strong> simply does not make<br />
financial sense. It is doubtful whe<strong>the</strong>r many of <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> would<br />
have any interest in subdividing projects to come below this threshold<br />
value, although that is not to say that we have evidence that it is not done.<br />
In fact, our survey showed that <strong>the</strong> threshold is being quietly ab<strong>and</strong>oned by<br />
a number of <strong>Equator</strong> <strong>Banks</strong>.<br />
fc`=êÉîáÉï=<br />
The scope of <strong>the</strong> Principles is about to undergo a major overhaul. The IFC<br />
has recently embarked on an integrated review of its Safeguard Policies,<br />
Policy on Disclosure of Information <strong>and</strong> Environmental, Health & Safety<br />
(EHS) Guidelines. The review involves a comprehensive update of <strong>the</strong><br />
IFC’s policies <strong>and</strong> guidelines, subsequent to stakeholder consultation <strong>and</strong><br />
expert guidance. The revised policies <strong>are</strong> scheduled to be presented to <strong>the</strong><br />
IFC’s management <strong>and</strong> Board for approval in early 2005 5 .<br />
5 See www.ifc.org/ifcext/policyreview.nsf<br />
OP= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
tÜÉêÉ=åÉñí=Ñçê=íÜÉ=bèì~íçê=mêáåÅáéäÉë\=EÅçåíáåìÉÇF=<br />
There was general concern among <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>, not only about <strong>the</strong><br />
review process within <strong>the</strong> IFC, but also at <strong>the</strong> lack of information provided<br />
to <strong>the</strong>m to assess <strong>the</strong> merits of <strong>the</strong> proposed reforms.<br />
The revised policies will, when finalised, probably require <strong>the</strong> revision of<br />
<strong>the</strong> Principles <strong>and</strong> financial institutions expressed <strong>the</strong> need for <strong>the</strong>ir own<br />
consultation process with <strong>the</strong>ir stakeholders on <strong>the</strong> revised Principles before<br />
<strong>the</strong> new Principles <strong>are</strong> implemented.<br />
It is quite possible that <strong>the</strong> IFC review will cause a schism among <strong>the</strong><br />
<strong>Equator</strong> <strong>Banks</strong>. While some <strong>Equator</strong> <strong>Banks</strong> may accept <strong>the</strong> new<br />
performance st<strong>and</strong>ards, particularly if <strong>the</strong> IFC takes on board <strong>the</strong> views of<br />
<strong>the</strong> <strong>Equator</strong> <strong>Banks</strong>’ lobby, o<strong>the</strong>r <strong>Equator</strong> <strong>Banks</strong> may seek to draw <strong>the</strong> line at<br />
<strong>the</strong> IFC Safeguard Policies as <strong>the</strong>y existed at <strong>the</strong> date on which <strong>the</strong> bank<br />
adopted <strong>the</strong> Principles. The differences <strong>and</strong> difficulties that arose in<br />
negotiating <strong>and</strong> drafting <strong>the</strong> Principles in 2003 no doubt will re-emerge<br />
unless consensus amongst <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> is obtained to <strong>the</strong> proposed<br />
changes to policy. Avoidance of schism is a challenge that <strong>the</strong> <strong>Equator</strong><br />
<strong>Banks</strong> have faced since 2003 but it will become more daunting as <strong>the</strong>y go<br />
forward.<br />
OQ= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
oÉÅçããÉåÇ~íáçåë=Ñçê=bèì~íçê=_~åâë<br />
_Éëí=áåÇìëíêó=éê~ÅíáÅÉ=êÉÅçããÉåÇ~íáçåë=<br />
• Continue to collaborate on developing best practice in implementing<br />
<strong>the</strong> Principles. The development of best practice could be improved<br />
fur<strong>the</strong>r by:<br />
• sharing precedents, knowhow, systems, structures <strong>and</strong> materials<br />
(subject to client confidentiality);<br />
• setting up a working group of leading <strong>Equator</strong> <strong>Banks</strong>, project<br />
sponsors <strong>and</strong> professional advisers, to review policy, produce a<br />
best practice manual <strong>and</strong> to sh<strong>are</strong> knowhow;<br />
• developing panels of external experts in <strong>the</strong> fields which <strong>the</strong><br />
Principles require <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> to address;<br />
• consulting with NGOs, sponsors <strong>and</strong> o<strong>the</strong>r stakeholders with a<br />
view to working towards consistent implementation of <strong>the</strong><br />
Principles by developing consensus on <strong>the</strong> interpretation of <strong>the</strong><br />
Principles <strong>and</strong> on <strong>the</strong> exercise of any discretion in implementing<br />
<strong>the</strong>m; <strong>and</strong><br />
• making use of <strong>the</strong> expertise <strong>and</strong> experience of <strong>the</strong> ECAs <strong>and</strong><br />
Multilateral Lending Agencies (MLAs) on social <strong>and</strong><br />
environmental issues.<br />
• Develop greater aw<strong>are</strong>ness of <strong>the</strong> Principles among staff <strong>and</strong> advisers.<br />
• Develop greater aw<strong>are</strong>ness among NGOs <strong>and</strong> stakeholders of <strong>the</strong><br />
project finance market <strong>and</strong> <strong>the</strong> drivers <strong>and</strong> mechanics associated with<br />
funding major projects, <strong>and</strong> explain <strong>the</strong> role of banks from arranging to<br />
syndication in <strong>the</strong> life cycle of a project.<br />
• Subject to client confidentiality, disclose in <strong>the</strong> bank’s annual corporate<br />
<strong>and</strong> social responsibility report <strong>the</strong> number of Principles projects<br />
actively considered in <strong>the</strong> course of <strong>the</strong> year (both as lead arranger <strong>and</strong><br />
as a syndicate member); <strong>the</strong> number of projects in each sector<br />
considered; <strong>the</strong> number of projects in each category considered; <strong>the</strong><br />
number of applications by sponsors accepted (whe<strong>the</strong>r modified or not<br />
as a result of <strong>the</strong> application of <strong>the</strong> Principles) <strong>and</strong> rejected; <strong>and</strong> <strong>the</strong><br />
occasions on which, <strong>and</strong> reasons why, <strong>the</strong> bank has chosen to deviate<br />
from strict application of <strong>the</strong> IFC Safeguard Policies.<br />
OR= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
oÉÅçããÉåÇ~íáçåë=Ñçê=bèì~íçê=_~åâë=EÅçåíáåìÉÇF=<br />
• Adopt a conservative approach to <strong>the</strong> categorisation of a project with<br />
project sponsors <strong>and</strong> <strong>the</strong> sponsors’ legal, financial <strong>and</strong> technical<br />
advisers -<strong>where</strong> <strong>the</strong>re is any doubt about which category a project falls<br />
into, apply a presumption which reflects <strong>the</strong> precautionary principle<br />
that <strong>the</strong> project falls into <strong>the</strong> higher or more onerous category.<br />
• Rely on <strong>the</strong> bank’s internal screening process <strong>and</strong> <strong>the</strong> advice of its legal<br />
<strong>and</strong> technical experts to assess <strong>the</strong> appropriate category of an <strong>Equator</strong><br />
Principles project ra<strong>the</strong>r than relying upon a categorisation adopted by<br />
sponsors or o<strong>the</strong>rs.<br />
• When acting as arranging banks or as financial advisers, enter into<br />
dialogue with sponsors on Principles issues as early as possible in <strong>the</strong><br />
project cycle, in particular <strong>where</strong> syndication to <strong>Equator</strong> <strong>Banks</strong> (or<br />
o<strong>the</strong>r banks) is likely.<br />
• Encourage sponsors to be as transp<strong>are</strong>nt as practicable about <strong>the</strong>ir<br />
projects <strong>and</strong> particularly in respect of EMPs.<br />
• Consider lowering or abolishing <strong>the</strong> $50m threshold.<br />
• Not to delegate <strong>the</strong> role of Environment Bank to a non-<strong>Equator</strong> Bank,<br />
except in exceptional circumstances.<br />
• If possible, ensure that <strong>the</strong> Environment Bank has experience of<br />
funding projects of <strong>the</strong> type in question <strong>and</strong> of <strong>the</strong> application of <strong>the</strong><br />
Principles to such projects.<br />
• Arrange for a sample of Principles projects to be audited externally to<br />
identify any shortcomings in or possible improvement to<br />
implementation of <strong>the</strong> Principles.<br />
• Appoint external advisers to review <strong>the</strong> rules, policy <strong>and</strong> procedures<br />
that underpin <strong>the</strong> Principles, following <strong>the</strong> example of JBIC.<br />
• Continue <strong>and</strong> develop dialogue with stakeholders <strong>and</strong> NGOs <strong>and</strong><br />
encourage sponsors to do so.<br />
qÉÅÜåáÅ~ä=êÉÅçããÉåÇ~íáçåë=<br />
• Require a borrower to warrant that all social <strong>and</strong> environmental reports<br />
of which it is aw<strong>are</strong> were disclosed to <strong>the</strong> borrower’s technical<br />
advisers.<br />
• Require a borrower to warrant that all relevant social <strong>and</strong><br />
environmental reports have been disclosed by it <strong>and</strong> its technical<br />
advisers to <strong>the</strong> participating banks <strong>and</strong> <strong>the</strong>ir technical advisers.<br />
OS= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
oÉÅçããÉåÇ~íáçåë=Ñçê=bèì~íçê=_~åâë=EÅçåíáåìÉÇF=<br />
• Agree st<strong>and</strong>ard terms <strong>and</strong> conditions with consultants <strong>and</strong> o<strong>the</strong>r<br />
professional advisers.<br />
• Review information h<strong>and</strong>ling procedures to ensure that reports from a<br />
borrower required by EMP <strong>are</strong> monitored adequately on a periodic<br />
basis.<br />
• Review loan documentation to:<br />
• ensure that <strong>the</strong>re is no mismatch between <strong>the</strong> requirements to<br />
report on environmental issues under an EMP <strong>and</strong>/or <strong>the</strong> loan<br />
agreement <strong>and</strong> <strong>the</strong> bank’s ability to take action against <strong>the</strong><br />
borrower to rectify that breach;<br />
• avoid <strong>the</strong> bank receiving information of an environmental issue but<br />
being powerless to act under <strong>the</strong> loan agreement in order to ensure<br />
it is rectified (to minimise <strong>the</strong> bank’s liability for environmental<br />
breaches of which <strong>the</strong>y had knowledge);<br />
• ensure that <strong>the</strong> <strong>Equator</strong> <strong>Banks</strong> have an appropriate degree of<br />
negative control over decision making for amendments or waivers<br />
or consents to be given for <strong>the</strong> environmental aspects of <strong>the</strong><br />
project;<br />
• ensure appropriate representations <strong>and</strong> warranties <strong>are</strong> given for<br />
environmental <strong>and</strong> social matters;<br />
• ensure appropriate covenants relating to compliance with<br />
environmental laws as well as lender environmental <strong>and</strong> social<br />
policies <strong>and</strong> guidelines <strong>are</strong> given; <strong>and</strong><br />
• ensure <strong>the</strong>re is a separate event of default if <strong>the</strong>re is a failure to<br />
comply in any material respect with environmental laws <strong>and</strong><br />
environmental <strong>and</strong> social policies <strong>and</strong> guidelines after a reasonable<br />
cure period has expired.<br />
• Review <strong>the</strong> legal liability of <strong>the</strong> bank <strong>and</strong> its officers:<br />
• for disclosure of confidential information;<br />
• for non-disclosure of social <strong>and</strong> environmental information to<br />
regulatory agencies; <strong>and</strong><br />
• <strong>where</strong> failure to take enforcement action as provided for in <strong>the</strong> loan<br />
documentation concerning known pollution or <strong>the</strong> likelihood of<br />
pollution occurring results in pollution occurring or continuing.<br />
• Consider encouraging sponsors to appoint independent panels to assess<br />
<strong>and</strong> monitor projects, having regard to <strong>the</strong> scale, complexity <strong>and</strong>/or<br />
impact of <strong>the</strong> project.<br />
OT= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë=<br />
cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
=<br />
AMSTERDAM<br />
Apollolaan 151<br />
1077 AR Amsterdam<br />
T + 31 20 485 7000<br />
F + 31 20 485 7001<br />
BARCELONA<br />
Mestre Nicolau 19<br />
08021 Barcelona<br />
T + 34 93 363 7400<br />
F + 34 93 419 7799<br />
BEIJING<br />
3705 China World Tower Two<br />
1 Jianguomenwai Avenue<br />
Beijing 100004<br />
T + 86 10 6505 3448<br />
F + 86 10 6505 7783<br />
BERLIN<br />
Potsdamer Platz 1<br />
10785 Berlin<br />
T + 49 30 20 28 36 00<br />
F + 49 30 20 28 37 66<br />
BRATISLAVA<br />
Laurinská 12<br />
81101 Bratislava<br />
T + 421 2 5413 1121<br />
F + 421 2 5413 1123<br />
BRUSSELS<br />
Bastion Tower<br />
Place du Champ de<br />
Mars/Marsveldplein 5<br />
1050 Brussels<br />
T + 32 2 504 7000<br />
F + 32 2 504 7200<br />
BUDAPEST<br />
Oppenheim és Társai<br />
Freshfields Bruckhaus Deringer<br />
1053 Budapest<br />
Károlyi Mihály u. 12.<br />
T + 36 1 486 22 00<br />
F + 36 1 486 22 01<br />
COLOGNE<br />
Heumarkt 14<br />
50667 Cologne<br />
T + 49 221 20 50 70<br />
F + 49 221 20 50 79 0<br />
DÜSSELDORF<br />
Feldmühleplatz 1<br />
40545 Düsseldorf<br />
T + 49 211 49 79 0<br />
F + 49 211 49 79 10 3<br />
Mailing address<br />
Postfach 10 17 43<br />
40008 Düsseldorf<br />
FRANKFURT AM MAIN<br />
Taunusanlage 11<br />
60329 Frankfurt am Main<br />
T + 49 69 27 30 80<br />
F + 49 69 23 26 64<br />
HAMBURG<br />
Alsterarkaden 27<br />
20354 Hamburg<br />
T + 49 40 36 90 60<br />
F + 49 40 36 90 61 55<br />
Mailing address<br />
Postfach 30 52 70<br />
20316 Hamburg<br />
HANOI<br />
#05-01<br />
International Centre<br />
17 Ngo Quyen Street<br />
Hanoi<br />
T + 84 4 8247 422<br />
F + 84 4 8268 300<br />
HO CHI MINH CITY<br />
#1108 Saigon Tower<br />
29 Le Duan Boulevard<br />
District 1<br />
Ho Chi Minh City<br />
T + 84 8 8226 680<br />
F + 84 8 8226 690<br />
HONG KONG<br />
11th floor<br />
Two Exchange Squ<strong>are</strong><br />
Hong Kong<br />
T + 852 2846 3400<br />
F + 852 2810 6192<br />
LONDON<br />
65 Fleet Street<br />
London EC4Y 1HS<br />
T + 44 20 7936 4000<br />
F + 44 20 7832 7001<br />
MADRID<br />
Fortuny 6<br />
28010 Madrid<br />
T + 34 91 319 1024<br />
F + 34 91 308 4636<br />
MILAN<br />
Via dei Giardini 7<br />
20121 Milan<br />
T + 39 02 625 301<br />
F + 39 02 625 30800<br />
MOSCOW<br />
Kadashevskaya nab 14/2<br />
119017 Moscow<br />
T + 7 (501 or 095) 785 3000<br />
F + 7 (501 or 095) 785 3001<br />
MUNICH<br />
Prannerstrasse 10<br />
80333 Munich<br />
T + 49 89 20 70 20<br />
F + 49 89 20 70 21 00<br />
NEW YORK<br />
Freshfields Bruckhaus<br />
Deringer LLP<br />
520 Madison Avenue<br />
34th floor<br />
New York, NY 10022<br />
T + 1 212 277 4000<br />
F + 1 212 277 4001<br />
PARIS<br />
2-4 rue Paul Cézanne<br />
75375 Paris Cedex 08<br />
T + 33 1 44 56 44 56<br />
F + 33 1 44 56 44 00<br />
ROME<br />
Piazza di Monte Citorio 115<br />
00186 Rome<br />
T + 39 06 695 331<br />
F + 39 06 695 33800<br />
SHANGHAI<br />
34th floor<br />
Jinmao Tower<br />
88 Century Boulevard<br />
Shanghai 200121<br />
T + 86 21 5049 1118<br />
F + 86 21 3878 0099<br />
SINGAPORE<br />
Freshfields Drew & Napier<br />
20 Raffles Place #18-00<br />
Ocean Towers<br />
Singapore 048620<br />
T + 65 6535 6211<br />
F + 65 6533 5007<br />
TOKYO<br />
Freshfields Law Office<br />
Freshfields Foreign Law Office<br />
Ark Mori Building 18F<br />
1-12-32 Akasaka<br />
Minato-ku<br />
Tokyo 107-6018<br />
T + 81 3 3584 8500<br />
F + 81 3 3584 8501<br />
VIENNA<br />
Seilergasse 16<br />
1010 Vienna<br />
T + 43 1 515 15 0<br />
F + 43 1 512 63 94<br />
WASHINGTON<br />
Freshfields Bruckhaus<br />
Deringer LLP<br />
701 Pennsylvania Avenue, NW<br />
Suite 600<br />
Washington, DC 20004-2692<br />
T + 1 202 777 4500<br />
F + 1 202 777 4555<br />
10942<br />
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