THE Equator Principles (EPs) is growing in importance in the global banking arena as financiers realise that minimising environmental and social risks will contribute towards business sustainability.
The EPs are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing.
They are applicable to all new project financings globally with total project capital costs of US$10mil or more across all industry sectors.
Banks who have adopted the EPs are committed to not providing loans to projects where the borrower will not or is unable to comply with their respective social and environmental policies and procedures.
The Principles, launched in June 2003, were developed by four private sector banks – Citi, ABN Amro, Barclays plc and WestLB AG.
Sustainable Finance Ltd (a wholly owned subsidiary of PricewaterhouseCoopers LLP) director Andre Abadie says the principles are important especially for a project finance bank.
“Most Equator Principle-adopting banks have recognised the value of undertaking enhanced environmental and social due diligence and have adopted similar approaches to other parts of their business.
“One of the Japanese adopters claims that adopting and applying the EPs was a key contributing factor to their ascension to the top of the project finance league tables,” he says.
It is interesting to note that out of the 68 financial institutions that have adopted the Equator Principles globally, no South-East Asian bank has adopted these principles although three Japanese and a Chinese bank have.
Abadie opines that it may be a case of limited applicability (the principles apply to projects above US$10mil), limited exposure (the SEA banks don’t get involved in large scale projects with international project developers or banks where the Principles are typically applied) or limited awareness of the issues (few significant environmental and social risks in the projects financed by SEA banks).
Nonetheless, one quarter of all Equator banks are domiciled in the emerging markets, and more than half actively finance projects in emerging markets.
“We have seen an uptake of the principles by nine Latin American institutions and seven Middle East and African banks,” Abadie said.
Pricewaterhouse Coopers Malaysia global Islamic finance leader Mohammad Faiz Azmi says the adoption of sustainability principles such as the EPs, may be one step towards showing that even bankers care about the environment they live in.
“The principles were first mooted and drawn up by industry players and we are convinced that as Malaysian banks develop and grow, they will see the compelling case to adopt principles such as the Equator.
“As our banks go regional and compete on project financing jobs, they will be up against or may be leading a consortium of established household names which have adopted the principles.
“Adopting the principles will put our banks on an even keel as the international banks,” he adds.
Abadie believes banks will adopt the Principles when they realise that environmental and social issues are relevant to their business, be it through experience or external pressure.
“There are no challenges to adoption as such. It is a simple process and the implementation of Equator does not require major overhauling of processes or approaches.
“Given that banks already undertake a significant amount of due diligence before lending to a project, applying the principles to projects can be easily integrated into existing approaches,” he said.
Association of Banks in Malaysia executive director Chuah Mei Lin says there is no argument against banks adopting the EPs where applicable from a social and environmental responsibility viewpoint.
“However, the principles acknowledge that applicability must be guided by circumstances, particularly the size of the project financing itself and cannot be made compulsory.
“There are obviously cost implications to both the bank and its customer in adopting the EPs.
“These however must be weighed against critical factors such as climate change, water and forestry conservation and healthcare, and it is conceded that sustainability must rank ahead of profitability when push comes to shove,” she adds.
Chuah points out that appreciation of the principles not only by Malaysian banks but also Malaysian enterprises will be a first step towards its adoption.
The budget allocation of a RM1.5bil fund to provide soft loans to companies that supply or utilise green technology is a laudable start.
Another form of encouragement can be incentives such as lower than market interest rates for bank customers who adopt the EPs and priority in certain sectors of lending for banks which adopt EPs when lending.
“Bodies which can assist in the relevant environmental assessments and reports to be completed must also be established.
“One of the challenges may be the time needed to build expertise in the area of environmental studies and a talent pool for assessing environmental risks involved in certain aspects of project financing,” Chuah says.
She opines that presently, most banks tend to focus on clear commercial factors in appraising a loan application based on laws and regulations.
“Decisions to lend or not often come under scrutiny since access to financing is an issue easily blown out of context.
“Banks may be hard pressed if allegations that they are not supporting a particular industry were raised when in fact they had valid environmental impact concerns,” she says.
HSBC Bank Malaysia Bhd chief risk officer Paul Norton says the decision to adopt the Principles was a natural step for HSBC as it believes in being responsible to its stakeholders in every country that it operates in.
“Our records have shown that adopting the principles has not negatively affected our business or profitability. On the contrary it has helped us to better understand and manage our risks,” he says, adding that HSBC adopted the Principles in 2003.
The Principles also helped HSBC to develop specific risk sector policies that cover high-risk sectors such as forestry, energy, mining, chemicals, defence and water infrastructure.
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