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  • 1. Equator Principles Roundtable Equator Principles and Project Finance  Standards for Sustainability:  The Challenges and Opportunities Sarah Murfitt, Principal Consultant Environmental Resources Management 2nd December 2010Delivering sustainable solutions in a more competitive world
  • 2. Environmental Resources Management (ERM) • A leading global provider of environmental, health and safety, risk and  social consulting services • 137 offices in 39 countries and approx. 3,300 staff • Gross revenues of US$695 million (fiscal year ending 31 March 2009) • Five broad practice areas: • Sustainability and Climate Change • Impact Assessment and Planning • Performance, Assurance and Risk Management • Transaction Services • Contaminated Site Management • Website: www.erm.comDelivering sustainable solutions in a more competitive world
  • 3. What is Project Finance? • Project finance is a specific type of financial transaction in which  lenders rely solely on the revenues generated by a “project” as  the source of repayment and security for the loan (aka Revenue  Based Finance)  • Financial institutions involved in Project Finance recognise that  social and environmental risks may affect the ability of the  project to generate revenues • In 2003 the Equator Principles (or EPs) were  launched to manage these risks for private  sector financial institutionsDelivering sustainable solutions in a more competitive world
  • 4. Equator Principles: Evolution Environmental Pollution Bank Environmental WorldBank Assessment Pollution Abatement World Bank World Assessment Abatement World Bank OP4.01 4.01 updated ten Sourcebook Handbook updatedten OP Sourcebook Handbook Environmental 1991 1998 Safeguard Environmental 1991 1998 Safeguard Assessment Policies Assessment Policies 1979 1998 1979 Safeguard Policies 1979-1998 1998 Safeguard Policies 1979-1998 IFC General IFC adopted IFC IFC General IFC adopted IFC andIndustry Industry Safeguard Performance and Safeguard Performance Sector EHS Policies Standards Sector EHS Policies Standards Guidelines 1998 2006 Guidelines 1998 2006 2007+ 2007+ Equator Equator Equator Equator Principles Principles II Principles Principles II 2003 2006 2003 2006 1979 1991 1999 2003 2006Delivering sustainable solutions in a more competitive world
  • 5. Equator Principles • “Voluntary framework“ to reduce the environmental and social risks of  Project Finance • Established in June 2003 by four banks, updated in July 2006 (Equator  Principles II)… now over 65 banks have adopted! • Some basic rules: • Project must fully comply with local environmental and social laws, • Conform to policies and guidelines of the IFC,  • Banks commit to annual reporting on compliance and independent  monitoring, • Applies to new developments (>$10m USD) or significant extensions • Some exemptions for projects in high‐income OECD countries (as defined by  the World Bank Development Indicators Database).  • Website: www.equator‐principles.comDelivering sustainable solutions in a more competitive world
  • 6. Importance of Project Finance Standards • Lenders: • Tool to manage the environmental and social risks and therefore credit risk  and reputational risk • Working closely with developers to improve project sustainability and  establishing a ‘social license to operate’ • Developers: • A condition of finance from many international banks, development banks  and Export Credit Agencies • Direct implications for the way you do business, specifically: - Activities and processes need to align with standards e.g. ESIA, ESMP - Costs of meeting the standards need to be considered early on - Management of EPC contractors  - Monitoring and reportingDelivering sustainable solutions in a more competitive world
  • 7. Equator Principles in Israel • In June 2009, the Banks Supervisor in the Central Bank published a Draft  Notice stating: "A bank must know that identifying and assessing environmental risk is part  of the due diligence process of risk assessment. A bank must therefore  include an assessment of environmental risk as part of its overall risk  management, including procedures for identifying substantial risk when  granting credit and integrating risk assessment in quarterly credit quality  assessments."  • Israels banks were expected to apply environmental risk management  standards when granting credit, based on Equator Principles Financial  Institutions. Israeli banks were given until July 2010 to approve a plan and  timetable for adopting them, but this is still pending.Delivering sustainable solutions in a more competitive world
  • 8. What are we currently doing? • ERM provides a range of services related to Project Finance: • E&S due diligence for Project Lenders • ESIA/ESMP for Project proponents  • Lenders Environmental and Social Advisor reviewing the Project ESIA,  ESMP, management system and loan covenants  • EHS management systems for Projects on behalf of Project proponents  • Training on EP and IFC PSs • Monitoring implementation of ESMP and compliance with loan  covenants Delivering sustainable solutions in a more competitive world
  • 9. Environmental and Social Impact Assessment (ESIA) • ESIA – a process for identifying, assessing and developing measures to minimise  or mitigate significant impacts resulting from the project. Stakeholder Consultation Identify and Assess the Impacts Describe Implement Scope the the the ESIA Baseline Findings Predict Evaluate Mitigate/Enhance - Design and Decision-MakingDelivering sustainable solutions in a more competitive world
  • 10. Impacts of ESIA on Project Timing Project operational Project finance secured Local permit approvals Project approval ESIA Scoped Ongoing Project finance EP assessment project appraisal ‘application’ bottleneck Feasibility studies Environment & social impact assessment 2-4 years 1-2 years OngoingDelivering sustainable solutions in a more competitive world
  • 11. Key Challenges • Navigating the guidance and keeping abreast of updates  • Aligning with national regulatory frameworks • Division of responsibilities with third parties  (e.g. local and national governments, and contractors and suppliers) • Considering project finance standards early • Requirements for social assessment and stakeholder engagement • Determining scope of the assessment – e.g. associated facilities,  transboundary and cumulative impacts • Developing robust, workable environmental and social  management systemsDelivering sustainable solutions in a more competitive world
  • 12. Key Opportunities • Responsible project development: more effective risk  management and improved project outcomes • Reduced project delays and associated cost • Lower reputational risks and protection  of shareholder value • Overall, streamlined/more efficient  development and investment decisionsDelivering sustainable solutions in a more competitive world
  • 13. Who are our clients? • Financial: • EPFIs (over 65 Banks, 50% of which are ERM clients)  • Multi‐ and Bi‐Laterals (IFC, EBRD), Export Credit Agencies • Trade: • Sponsors and developers  • Other advisors – technical, legal, insurance • Sectors: • O&G, Power, Metals & Mining, Infrastructure & Transport,  Manufacturing.Delivering sustainable solutions in a more competitive world
  • 14. Case Studies: Financial Project: Framework contract to provide independent Environmental and Social consultancy services for EBRD Date: 2010 - ongoing Location: EBRD countries What we did: ERM has just been appointed to a multi-year contract to provide lenders advisory and due diligence services to the European Bank for Reconstruction and Development.Delivering sustainable solutions in a more competitive world
  • 15. Case Studies: Oil and Gas Project: Nabucco Gas Pipeline International, Environment and Social Due Diligence Services Lenders: EBRD, IFC and EIB Date: 2010 (ongoing). What we did: This proposed pipeline project is planned to serve as a gas bridge from Asia to Europe linking Eastern Turkey to Austria via Bulgaria, Romania and Hungary. When completed the pipeline will be some 3,300 km in length, with construction due to start in 2011 and first gas in 2014. ERM’s role in this high profile project is to act as Independent Environmental and Social Advisor to the group of financial institutions (currently comprising EBRD, EIB and IFC, as well as various Export Credit Agencies) that are considering contributing financing for the project. Our role will be to ensure that project standards are applied consistently across the five Nabucco transit countries and that the expectations of the Lenders Group are fully complied with.Delivering sustainable solutions in a more competitive world
  • 16. Case Studies: Timber Salvage Project: Lake Volta Timber Salvage Project Borrower: Clark Sustainable Resource Lead advisor: Developments (CSRD) Date: 2007-2008 Location: Ghana What we did: ERM was commissioned by CSRD to prepare an ESIA to fully comply with all Ghanaian EIA Regulations, IFC Performance Standards and World Bank Safeguard Policies, as well as any other directly relevant policies of the IFC and World Bank. Key issues examined in the ESIA include: water quality, fisheries, risks to the population of manatees (a rare aquatic mammal), and fishing livelihoods. ERM prepared the ESIA to international standards as part of project financing, and supported CSRD through the permitting process with the Ghanaian EPA.Delivering sustainable solutions in a more competitive world
  • 17. Case Studies: Mining and Metals Project: Kandinsky Client: United Company RUSAL Date & Location: 2008, Russia, Ukraine, Kazakhstan, Caribbean, Africa, S America, Deal Size: Europe Transaction type: $30 billion (Initial Public Offering) What we did: ERM visited 44 facilities including bauxite mines, alumina refineries and aluminium smelters in 11 countries operated by the world’s largest aluminium company. ERM produced reports in English and Russian with details of material liabilities associated with environmental, health and safety and social issues. How we In spite of the tight time constraints and logistical issues, ERM was added value: able to visit all sites over a 4-week period and assimilate the findings into summary report for UC RUSAL and their advisors within 1 month.Delivering sustainable solutions in a more competitive world
  • 18. Case Studies: Oil and Gas Project: Project Finance - Oil Refinery, Egyptian Refining Company Date & Location: 2006 – present, Egypt Project Value: $3.7 billion What we did: ERM is currently advising a consortium of lenders on the financing of a downstream oil and gas Project in Egypt. An assessment of the Sponsor’s commitment to the Equator Principles and IFC Performance Standards has been completed. ERM reviewed the ESIA and other project documentation. Specific issues relating to the cumulative environmental impacts of the asset and resettlement of communities have been thoroughly reviewed. ERM has also assisted in the wording of the lending covenant to monitor compliance during the construction and operation of the asset and will commence monitoring activities once financial close is reached.Delivering sustainable solutions in a more competitive world
  • 19. Case Studies: Oil and Gas Project: Brass LNG Due Diligence to Equator Principles for lender banks Date: 2007 Location: Nigeria What we did: ERM undertook a social and environmental due diligence of the ESHIA for the Brass River LNG plant and associated off shore facilities to the Equator principles and the 9 IFC performance standards. This work included reviewing the ESIAs and associated management plans to ensure they complied with international lender requirements.Delivering sustainable solutions in a more competitive world
  • 20. Contact Details: Sarah Murfitt Laura Street Principal Consultant Consultant ERM ERM 2nd Floor, Exchequer Court Eaton House, Wallbrook Court St Mary Axe North Hinksey Lane London, EC3A 8AA Oxford, OX2 0QS  Telephone: +44 20 3206 5200 Telephone: +44 1865 384 800 Direct Line: +44 20 3206 5362 Direct Line: + 44 1865 384 904 sarah.murfitt@erm.com laura.street@erm.com www.erm.com www.erm.comDelivering sustainable solutions in a more competitive world