The Equator Principles – CSR in practice?

The Equator Principles are a set of principles adopted by many leading banks to ensure that they provide finance only to projects that are developed in an environmentally and socially responsible manner. The Equator Principles use a screening process to classify projects into Category A, B or C (high, medium or low) environmental or social risk.

What projects do the Equator Principles apply to?

The Principles apply to projects anywhere in the world, across any industry sector, if the capital cost of the project exceeds US$50 million or more. Given that this relates to the total capital cost, as opposed to the loan value, and given the current weakness of the US dollar, this is likely to catch the majority of newly built hotels and leisure facilities.

Which Banks have adopted them and what is their impact?

The vast majority of lending Banks in the sector have adopted the Principles, including RBS, Barclays, HBOS, CIBC, HSBC and Calyon to name but a few. Both RBS and Calyon for example publicly state that compliance with the Equator Principles is a factor that must be taken into account at the formal credit committee process.

What do the Equator Principles require?

Banks adopting the Equator Principles are expected to develop their own policies and procedures to implement the principles and to provide loans for projects only if they have been assessed against, and comply with, the Principles. However, the general process is as follows:

Stage 1 – Screening:

As explained above, if the capital cost is US $50 million or more, the Bank should categorize the project according to its likely social and environmental impacts. If the Bank judges that the project is unlikely to give rise to any significant impact, Category C projects, it is unlikely to require any further action. On the other hand, if it considers there are likely significant impacts, the Bank will require the borrower to prepare an Environmental Assessment.

Stage 2 – Environmental Assessments

If an Environmental Assessment is required, this must address a list of environmental and social issues, including sustainability, use of renewable resources, waste minimisation, efficient use of resources and energy. It must also address compliance with applicable laws and with applicable minimum standards under the World Bank and International Finance Corporation's ("IFC's") guidelines. As appropriate, this may mean taking into account specific World Bank or IFC guidelines, such as the IFC's guidelines for tourism and hospitality developments and the World Bank's Pollution Prevention and Abatement Handbook on Tourism and Hospitality Development.

If the project is in a low or medium-income country (as defined by the World Bank), the Environmental Assessment will also have address compliance with, or justify deviations from, applicable IFC safeguard policies. These provide guidance on issues such as natural habitats, indigenous peoples, involuntary resettlement and cultural sites.

Stage 3 – Environmental Management Plan

If the project is considered to present a risk of more significant impacts, the Bank will require the borrower to prepare and Environmental Management Plan (the "Plan") setting out an appropriate approach to monitoring, mitigation and risk management drawn on the conclusions of the Environmental Assessment.

Consultation and Review

If the project is considered to present more significant risks, the Bank will require the borrower to have consulted "in a structured and culturally appropriate way" with affected groups and local NGOs during the planning stage, including in respect of the Environmental Assessment. Category "A" projects also require independent expert review.

What is the Bank required to do?

The Bank is obliged under the Equator Principles to:

• ensure that the borrower covenants in accordance with the requirements of the Principles (see below)
• appoint an independent environmental expert to provide additional monitoring and reporting services, where necessary
• if a borrower is not complying with its environmental and social covenants, such that its debt financing would be in default, engage the borrower in its effort to seek solutions to bring it back into compliance with its covenants.

Assuming the Bank can satisfy itself on compliance, what is the project developer required to do under the Equator Principles?

The Principles require the borrower to covenant:

• to comply with the Plan in the construction and operation of the project
• to report regularly to the Bank on compliance with the Plan
• where applicable, to comply with an agreed decommissioning plan.

Covenants like these, but referable to legal compliance are quite normal to see in loan documentation. However, the Equator Principles may require a much broader range of issues to be considered than many developers or their consultants are used to working with.

Implications for Banks

Where applicable, the Bank should from now on include specific reference to the Equator Principles when negotiating financing term sheets. Banks adopting and applying the Equator Principles ought to be able to better assess, mitigate, document and monitor the credit risk and reputational risk associated with financing projects. There have, however, been accusations that the Banks have been failing to implement the Equator Principles in good faith, and if this continues, it will have a negative impact on the reputation of the Bank concerned.