Who and where are the Equator Banks? - IILJ

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= tÜó=Ü~îÉ=íÜÉ=bèì~íçê=_~åâë=~ÇçéíÉÇ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\= EÅçåíáåìÉÇF= _ìëáåÉëë=~ë=ìëì~ä= Some Equator Banks signed up because they thought that they had nothing to lose, because their pre-existing lending practices already satisfied (or nearly satisfied) the requirements of the Principles in that they had wellestablished in-house risk assessment capability and had adopted those principles, standards and policies to assess the social and environmental impacts of projects. mäÉ~ëáåÖ=ÄáÖ=ÅÜÉÉëÉë= It was made clear to us during our survey that, for a number of Equator Banks, adopting the Principles was a top-down initiative being driven hard by their chairmen, chief executives and senior bankers. In one case, we were told that it would be a career-limiting move for anyone at the bank to fail to appreciate the importance the bank, the chairman, the chief executive and the global head of project finance attached to the Principles. mêÉëëìêÉ=Ñêçã=ëí~âÉÜçäÇÉêë=~åÇ=kdlë= Unsurprisingly, many banks see the Principles as a way of demonstrating their sensitivity to widespread public concern over environmental and human rights issues. Many shareholders now reference these issues in making investment decisions, a trend which is most visible in the ‘ethical funds’ but is not confined to them. Similarly, the feeling that the bank is a socially responsible business may influence employee satisfaction and retention. The banking sector has also come under sustained pressure from environmental and human rights NGOs which see sponsor funding by banks as the oxygen of allegedly unsustainable projects. There are even NGOs which focus specifically on banking activities (of which BankTrack is perhaps the best-known). mêçíÉÅíáçå=çÑ=ã~êâÉí=ëÜ~êÉ= Some Equator Banks have adopted the Principles in order to protect or increase their market share. This is based on the assumption that, in future, an increasing number of mature sponsors will choose an Equator Bank because the reputation and rigour of a leading Equator Bank may reduce political risk and protect projects against the possibility of expropriation by the host country as a result of non-compliance with its laws. Our survey suggested that there might be a trend among major sponsors to prefer Equator Banks for these reasons. There is, however, no hard evidence as yet that, in general, a virtuous circle of better social and environmental assessment of projects and better risk assessment in lending decisions is being formed between Equator Banks and major sponsors. S= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë= cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
= tÜó=Ü~îÉ=íÜÉ=bèì~íçê=_~åâë=~ÇçéíÉÇ=íÜÉ=bèì~íçê=mêáåÅáéäÉë\= EÅçåíáåìÉÇF= iÉîÉä=éä~óáåÖ=ÑáÉäÇ= A number of sponsors have recognised an advantage in creating a level playing field for social and environmental assessment of projects in providing a wider syndication market. Equally, it is widely recognised that the levelling of the playing field may raise standards generally and squeeze out of the market those players not applying such rigorous standards of assessment. There is also a moral basis for what may ultimately result in a uniformity of approach. In response to the survey, one very senior banker said that he felt that environmental due diligence was not a ground upon which any bank should be competing with other banks. qÜÉ=åÉï=áåÇìëíêó=ëí~åÇ~êÇ= Most of the Equator Banks endorse the view that the Principles, to quote the Principles website, ‘have become the project finance industry standard for addressing environmental and social issues in project financing globally’ 2 . Opinion on this point outside the circle of Equator Banks is mixed. While some non-Equator banks recognised the Principles as ‘the only game in town’, others (and, indeed, most Equator Banks) were sceptical whether sponsors would see any virtue in subjecting their projects to a more robust and expensive assessment process, although they recognised that there were pressures on sponsors to do so from stakeholders and governmental bodies. pìëí~áå~ÄäÉ=ÇÉîÉäçéãÉåí= Although the IFC sees the adoption of the Principles by private sector banks as representing a major advance, few Equator Banks took the view that the Principles in themselves marked a new chapter in sustainable development, but rather merely another step on the road towards its attainment. cáå~åÅá~ä=êáëâ=ê~íáåÖ= Under the Basel II Framework agreement, as incorporated under the forthcoming EU Capital Requirements Directive, internationally active banks have to satisfy minimum capital requirements against credit risks and operational risks. However, the amount of capital reserved can be reduced if the bank can demonstrate to its banking supervisor that the internal risk assessment and management procedures employed by it are adequate to address those risks. Where banks have insufficiently developed internal risk assessment procedures to fully satisfy the entry criteria to qualify for the Internal Ratings Based (IRB) approach to credit risk, they will be obliged to follow a supervisory category for risk weighting for specialised lending such as project finance. The supervisory categories are based upon certain slotting criteria that rate the exposure of a project finance transaction to various grades of risk (such as political and legal environment, including 2 See www.equator-principles.com. T= bèì~íçê=mêáåÅáéäÉë=pìêîÉó=OMMR=Ó=pìãã~êó=oÉéçêíW=m~êí=f=Ó=qÜÉ=_~åâë= cêÉëÜÑáÉäÇë=_êìÅâÜ~ìë=aÉêáåÖÉêI=cÉÄêì~êó=OMMR=
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Who and where are the Equator Banks? - IILJ

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