THE ROLE OF FINANCIAL INSTITUTIONS TO SUSTAINABLE DEVELOPMENT IN ETHIOPIA

 

 

 

 

 

 

 

 

 

KOKEB GIZAW

(kokebg@yahoo.com)

 

 

 

 

 

 

 

 

 

February 2007

Addis Ababa


TABLE OF CONTENTS

 

        Acknowledgment

 

        Acronym

 

        Abstract

 

1.

Introduction ……………………………………………………..

6

1.2.

Statement of the problem ……………………………

7

1.3.

Objective of the study ………………………………

7

1.4.

Importance of the study ……………………………...

7

1.5.

Scope and limitation of the study …………………..

7

1.6.

Methodology …………………………………………...

8

1.7.

Structure of the paper ………………………………...

8

2.

What are financial institutions? ……………………………...

9

3.

The role of financial institutions ……………………………...

10

4.

Finance and sustainable development …………………...

11

5.

Equator Principles – the way forward ……………………...

14

5.1.

What are Equator Principles? ………………………..

14

5.2.

History of Equator Principles ………………………….

17

5.3.

How do the Equator Principles function? …………

21

5.4.

What benefits are there for concerned parties? ..

22

5.5.

Experience of Equator Banks ………………………..

24

5.6.

What do stakeholders have to say? ……………….

28

5.7.

Updates made in the Equator Principles ………….

30

6.

Project financing in Ethiopia …………………………………

32

6.1.

Experience of selected banks ……………………….

33

6.2.

Procedures followed in project financing ………...

35

7.

Conclusion ………………………………………………………

39

8.

Recommendation ……………………………………………..

41

 

Annexes

 

 

Reference

 

 

 

 

 

 

 

 

 

 

ACKNOWLEDGMENT

 

 

I am grateful to all the people who have helped me obtain information.  Thank you all!


 

 

ACRONYMS

 

 

CBE

Commercial Bank of Ethiopia

CEO

Chief Executive Officer

CIBC

Canadian Imperial Bank of Commerce

DBB

Development Bank of Ethiopia

EA

Environmental Assessment

EIA

Environmental Impact Assessment

EMP

Environmental Management Plan

EP

Equator Principle

FDRE

Federal Democratic Republic of Ethiopia

IFC

International Financial Corporation

NBE

National Bank of Ethiopia

NGO

Non Governmental Organization

USA

United states of America

WB

World Bank

 


 

 

 

 

 

 

ABSTRACT

 

 

The financial industry has a pivotal role in channeling capital flows. In the developed world it is becoming a wide practice of financial institutions to incorporate the issues of sustainability by the projects they finance. This paper focuses on the role financial institutions play in the sustainability by taking in to consideration the projects they finance. It looks at the concept of sustainability and the experience of banks in the developed world. It also looks at the current practice in Ethiopia and the problems at hand along with suggested solutions.

 


 

 

 

1. INTRODUCTION

 

People pose for a while to think the relationship financial institutions –especially banks – have with the environment. As it is a relatively new concept, it is not surprising if they say that it is not for financial institutions to be concerned about the environment as it has its own protector – the environmentalist. But having a concern regarding the environment does not necessarily indicate that one is an environmentalist.

 

The relationship banks have with the environment is a recent phenomena and it might take time to analyze why one should be concerned. But ignoring the fact that there is something going on does not hinder the consequences from happening. The wise thing to do is to open oneself and look around to see what is going on. It does not require one to be an expert in the technical aspects involved to see the role it can play by its part.

 

The word sustainability is used in almost every sector because it is understood that the development of one sector in the expense of the other can not be whole. Thus that is why one should carefully analyze what probable relationship might there be with a problem in another sector. In this regard, It is only enough to understand that environmental risks also bring along business risks.

 

This paper is about the role that financial institutions play in the sustainability of the projects they finance.

 


 

1.2. STATEMENT OF THE PROBLEM

 

Financial institutions take part in financing projects that might have adverse effect to the environment. But how significant is the involvement of financial institutions in minimizing the risks involved?

 

1.3. OBJECTIVE OF THE STUDY

 

The general objective is to assess the significance of financial institutions’ involvement in minimizing the risks that occur as a result of project financing.

 

The specific objectives are:

  • To review the literature in this area.
  • To assess the experience of other countries.
  • To assess the experience of project financing in Ethiopia.
  • To have a look at the attitudes of banks in Ethiopia.

 

1.4. IMPORTANCE OF THE STUDY

 

  • To know the significance of the involvement of financial institutions in Ethiopia towards environmental issues.
  • To enable the appropriate body to take proper measures and
  • To initiate scholars conduct further research in this area.

 

1.5. SCOPE AND LIMITATION OF THE STUDY

This study focuses on banks and it does not include other financial institutions. It has views taken from five selected banks – two state owned and three private banks – that operate in Ethiopia.

 

 

 

 

1.6. METHODOLOGY

 

Both secondary and primary data are used in this study. Primary data is used to obtain information from financial institutions and relevant authorities. Secondary data like books and other resources from the internet are also consulted.

 

1.7. STRUCTURE OF THE PAPER

 

The paper is classified into eight small units. The first unit is introduction that deals with the statement of the problem, the objective of the study the importance, scope and methodology. Sections two up to four deal with financial institutions and development in general. Section five is about Equator Principles and related issues. Section six is about the case of Ethiopia followed by conclusion and recommendation.
2. WHAT ARE FINANCIAL INSTITUTIONS?

 

The historical development of money tells us that barter system followed by ordinary money commodities like skins, animals, metals, etc. were used as a means of exchange. With the elapse of time and advancement of human civilization, however, not only has the commodity money changed in form but it has given for the emergence of metallic money which in turn put the hall mark for the foundation of today’s paper and credit money. (United, 2004)

 

The financial sector, as is commonly understood, can be considered under two headings: the formal market and the informal market. The main institutions subsumed under the formal financial market sector are banks and insurance companies. However, we can also think of those enterprises known as microfinance institutions and cooperatives.

 

What we call informal market consists of local financial services operating on the basis of locally accepted customs or agreements. The people mainly involved in this sector are private loaners. This informal market serves as the main source of loans, particularly in rural areas of those countries where banking services have not proliferated.

 

The financial sector is said to be formal if it is runs according to a set of rules and regulations, operates on the basis of consistent and visible interest rates across the board or has a predictable profit margin. On the other hand, a securities market is the type that operates on the basis of supply and demand. (Neway et al., 2006)

 

 

3. THE ROLE OF FINANCIAL INSTITUTIONS

 

One of the formal financial institutions is microfinance institutions.   Microfinance is the supply of financial service to the poor, who are considered unbankable by the conventional financial institutions. (Degefe et.al, 2005) The second formal financial sectors are insurance companies. The fundamental role of insurance companies is to provide coverage for possible risks.

 

In the debate of finance and development in Ethiopia, Neway Gebre Ab stated that the main function of a bank is to accumulate money in the form of savings entrusted to it by various individuals. This is also shared by other authors - matching savers and investors (Todaro et. al, 2006). The bank collects savings at the individual, family or company levels then loans out the savings so collected to people interested in borrowing money. In effect, the bank serves as an intermediary between those who save and those who borrow money. Their role, in short is, bringing together the savers and the borrowers. (Neway et al., 2006)

 

Other roles of banks include providing payment services as it is inconvenient, inefficient and risky to carry around enough cash and generate and distribute information (Todaro et. al 2006). In these regards it has been said that financial markets represent the ‘brain’ of the economic system.

 

According to Neway Gebre Ab, an investor normally has two sources of financing, particularly if the investor is a big one. One source is the securities market from where the investor could secure the money needed for investment, while banks serve the second source. In Ethiopia, treasury bills remain to be the only security market (www.nbe.gov.et). Thus this leads us to concentrate on banks while considering investment in the country. (Neway et. al, 2006)

 

Efficient banking and other financial services are available in Ethiopia. While the National Bank of Ethiopia (NBE) serves as the Central Bank, Commercial Banking functions are performed by one state owned commercial bank and by a number of newly emerging private commercial banks (Neway et. al, 2006). The commercial banks offer savings and checking accounts, extend short-term loans, deal with offering exchange transactions, provide mail and cable money transfer services, participate in equity investments, provide guarantee services and perform all other commercial banking activities.

 

There are also specialized banks: the Development Bank of Ethiopia (DBE) and the Construction and Business Bank (CBB). DBE extends short, medium and long – term loans for viable development projects, including industrial and agricultural projects. It also provides other banking services, such as checking and saving accounts to its clients. (Neway et. al, 2006)

 

4. FINANCE AND SUSTAINABLE DEVELOPMENT

 

It is common knowledge that development is the result of a unified and coordinated interaction of many inputs. This was stated in the forum of finance and development by Ato Leikun Berhanu. It is difficult to think of healthy human organs and a healthy person without blood and its healthy circulation throughout the human body. It is also extremely hard to think of any meaningful socioeconomic development and poverty reduction without finance and its healthy flow throughout an economy. Viewed from this angle, it is clear that finance is a key instrument for development. Finance can indeed be viewed as the blood of an economy. (Neway et. al, 2006)

 

Furthermore, he noted that the effectiveness of finance as a tool for accelerated economic development depends upon its effective utilization (Neway et. al, 2006). Thus, mobilizing financial resources required for development is an important task. But the role of finance as a tool for development lies in its effective utilization. He mentioned that, to ensure effective utilization of financial resources it is important among other things to aim efforts in the directions of maintaining price stability, ensuring viability of projects and building capacity in the entire spectrum of project formulation, analysis, implementation and monitoring.

 

The word sustainability was first coined during the 1992 Earth Summit in Rio de Janeiro, Brazil. It generally refers to ‘meeting the needs of the present generation without compromising the needs of future generations (Todaro et. al, 2006). Since then, it has been incorporated in the activities all sectors. According to Jeucken, The role of banks in contributing toward sustainable development is, potentially enormous, because of their intermediary role in an economy. And their influence has impact on the pace and direction of economic growth. (Jeucken, 2001)

 

Marcel Jeucken, senior economist at Rabobank Group (The Netherlands) and director of Sustainability in Finance, stated that the banking sector has responded far more slowly than other sectors to the new challenges that sustainability presents. He discussed that bankers generally consider themselves to be in a relatively environmentally friendly industry (in terms of emissions and pollution). However, given their potential exposure to risk, they have been surprisingly slow to examine the environmental performance of their clients. (Jeucken, 2001)

 

Research, dating back to 1990, concluded that banks were not interested in their own environmental situation or that of their clients. This situation is now changing and banks are gaining pace to revise their role and interest in this respect (Jeucken, 2001). He pointed out that banks could be held directly responsible for the environmental pollution of clients and obliged to pay remediation costs. Some banks even went bankrupt under this scheme. Due to these developments, American banks became the first to consider their environmental policies, particularly with regard to credit risks.

 

Jeucken cited that North American banks seem to be more eager to use the World Bank guidelines than European banks. By contrast, only European banks explicitly state sectors or activities that they will not finance. (Jeucken, 2001) According to him, such exclusion of sectors or activities is for banks still a delicate subject. In many cases exclusion by one bank simply means a project is financed by another bank, whereas were the bank with an active interest in the environment to be involved, it could exercise some influence over the environmental consequences.

 

So, how do these banks address the problem they faced? The following section looks at the steps that are followed.


5. EQUATOR PRINCIPLES – The Way Forward

5.1. What are the Equator Principles?

 

Just a few years ago, it would have been hard-pressed to find a banker and an environmental activist in the same room -- much less agreeing on issues vital to the security and sustainability of our globe. This was marked by Charles O. Prince in his article ‘balancing economic growth and environmental – social responsibility’. Today, he said you will find both – People, profitability and the planet have been linked by capital (Prince, www.equator-principle.com)

 

Paul & Charles stated that the Equator Principles (EP) provide a voluntary framework for assessing environmental and social issues in project financing. Based on International Finance Corporation (IFC) guidelines and World Bank (WB) safeguards, they are applied by banks and financial institutions when deciding whether to provide finance to projects costing $50m or more (Watchman et. al, 2006). This amount now is reduced to $ 10 million.

 

According to Robinson, the EPs are essentially a set of categorization, assessment and management standards designed to identify and address any potential environmental and social risks that a proposed project may present (Robinson, 2005). Neithorpe discusses that the first means of mitigating this risk is to adopt a set of guidelines that are well-respected and reasonably neutral. The International Finance Corporation (IFC)/World Bank rules are the nearest thing to a common standard, although arguably not the strongest standards (Neithorpe, 2003).

 

What is the relationship between the IFC safeguard policies and the World Bank and IFC guidelines? Ravindran discusses that the safeguard policies generally represent an approach to critical issues that cut across industry sectors, such as the protection of natural habitats or the physical or economic displacement of people (resettlement), where it is important to apply a consistent set of environmental and social principles. The guidelines, on the other hand, are sector-specific environmental standards that are applicable to the processes, technology, and issues that apply in specific industries, and represent good practice within that sector. As such, the policies and guidelines are mutually supportive of each other (Ravindran, 2003).

 

Smith & Plit discuss that the principles are, in part, the financial services sector's response to a growing demand that it recognize the role that it can, and should, play in achieving sustainable development. Although the financial services sector has traditionally seen itself as a clean sector, financing decisions tend to determine what projects obtain funding to proceed and affect development choices (Smith et. al, 2003). According to them, the other motivation behind these principles is risk reduction, which in turn has direct bottom line implications. Environmental and social issues can no longer be regarded as soft issues as the image of lender liability grows.

 

For Watchman & July, the EPs are, without doubt, a huge step forward for responsible banking (Watchman et. al, 2006). As per for them, the Equator banks undertake “only to provide loans directly to projects”, which have been categorized and screened appropriately, with a comprehensive Environmental Impact Assessment (EIA) report necessary for those deemed particularly complex or risky.

What does adopting the Equator Principles mean?  This does not mean financial institutions need to sign an agreement to apply EPs. Each institution adopting the Equator Principles individually declares that it has or will put in place internal policies and processes that are consistent with the Equator Principles (www.equator-principles.com).

 

When were the principles came in to practice? The next section looks at the historical background of Equator Principles.


5.2. History of Equator Principles

 

In the spring of 2002, an executive responsible for risk management at a major international bank approached Peter Woicke, IFC’s executive vice-president, reports Suellen Lazarus. This senior banker recognized the growing pressure on his bank and its clients on environmental and social issues, and had been impressed with the approach that IFC developed to manage environmental and social risk in particular (Lazarus, January 2004).


He felt that his bank needed a method for evaluating environmental and social issues in the projects that it financed, but could not do it alone. Too often when he asked questions about environmental or social issues in individual projects, the answers were not good enough. And his staff always noted that if they did not finance the project, it would be done by the competition next door, and the bank would unnecessarily lose the business. This banking executive had concluded that a common approach was needed among the banks, and he suggested that IFC convene a meeting with a small group of banks to explore whether others shared his concerns.

 

War stories were shared, and the banks found greater commonality than they expected in facing these issues. Not fully knowing the consequences of investments was no longer good enough. The banks agreed that they must have their own opinion on environmental and social risk management in the projects they are financing. Each bank had its own reasons for coming to this position: some felt public pressure; others were concerned about reputation risk, while others were positioned as leaders in sustainable investment. Shareholder expectations, financial loss, the need to attract talented young staff to their organizations, and increased client receptiveness to engaging on these issues were all important considerations. The banks wanted to be associated only with responsible development.


According to Lazarus, tt was agreed that there was a need to consider leveling the playing field among the banks on environmental and social issues. Environmental “shopping” by clients, whereby clients might exert pressure to negotiate their preferred standards, was not acceptable. Consistent rules were required for environmental compliance. It was time for action. Four banks made presentations that day in
London – ABN Amro, Barclays, Citigroup and WestLB. These banks formed a core working group, with help from IFC, and were given the task of considering common standards and rules for engagement, particularly in the oil and gas industry.


In the report of Lazarus, the four banks went off and did their homework. While talking with colleagues responsible for oil and gas financing in their institutions, they quickly concluded that any approach could not cover only this one industry. It would be seen as unfair treatment within their institutions – and by their oil and gas clients – when there were also complicated issues in other industries, including power, mining, infrastructure and agribusiness.


The working group began to consider applicable environmental and social standards to guide their effort. They quickly concluded that it would take far too long and be too cumbersome to develop their own standards. And, if one bank created its own standards, it would be difficult for the other banks to follow it. After all, these banks are competitors. So they began to search for neutral standards that they could take off the shelf.

 

Lazarus discussed about the second meeting of the bankers that was held in February 2003, again in London, this time hosted by Citigroup. A few banks dropped out of the process, but more came to participate. But again, nine banks and IFC attended. After some discussion, the banks concluded that they broadly supported the principles, but needed to consult internally, with clients and with civil society, to see how they would be received.


Over the next few months, client consultations and meetings with the NGO community were held in the
US and Europe. Throughout the process, the banks received strong support for the principles, and consensus continued to build. Meanwhile, as feedback came in and discussion among the banks continued, the principles evolved accordingly.

In May 2003, a third meeting of the bank group was held at WestLB’s headquarters in
Germany. To reflect the fact that this was a global initiative it was labeled the Equator Principles by the originating banks. The banks wanted this to be a global initiative, not just a northern hemisphere one and the equator seemed to represent that balance perfectly.


At that meeting, IFC carefully explained its categorization process and its environmental and social policies and procedures. IFC also committed to provide training to the banks, should they adopt the Equator Principles. This training was an important consideration for the banks since they would each need to develop their own implementation plan (Lazarus, January, 2004).

 

According to Lazarus, in June 2003, ten international banks announced a commitment to environmental and social leadership that surprised many in the financial community (Lazarus, March 2004). Watchman also mentioned that the number of banks which have adopted the Equator Principles (known as Equator Banks) has increased from 10 in June 2003, when the Equator Principles were founded, to almost 40 at the beginning of 2006 (Watchman, 2006) and currently, the principles are adopted by 45 banks all over the world (out of which one is an African bank) (www. equator-principles.com).

 

Watchman further stated that the principles have been adopted by financial institutions responsible for over 80 per cent of global project finance but, given the practice of syndication of major project loans, the market penetration of the principles is much deeper. These financial institutions operate in over 100 countries. As a result, the Equator Principles have become the project finance industry standard for addressing environmental and social issues in project financing globally (Watchman, 2006). (Refer to the Annex for the list of banks who adopted EPs)

 

The IFC completed the review and updating process undertaken to replace their existing Safeguard Policies when its Board of Directors approved new "Performance Standards" on February 21, 2006 which become effective 6 July 2006. Because the original Equator Principles were based on IFC's environmental and social Safeguard Policies, it was necessary to revise the Equator Principles in order to reflect, and be consistent with, these changes (www.equator-principles.com).

 

 

5.3. How Do the Equator Principles Function?

 

Project finance is “a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure. In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility’s output, such as the electricity sold by a power plant. The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the project’s assets.” (Basel, 2005)

 

In adopting the Equator Principles, a bank agrees to apply guidelines based on International Finance Corporation policies for assessing projects’ environmental and social impacts. These principles apply to all project financings, in all sectors, globally where the size of the deal exceeds $10 million (www.equator-principles.com)

 

As the Equator banks move from adoption to implementation, a change process is occurring within each of the financial institutions. For banks that adopt these principles, the first step is to evaluate what activities and staff are affected and how the new procedures will be incorporated into their operations. An Equator manager within a bank is often identified or recruited, and, in some cases, a full sustainability department has been created. Credit procedures are rewritten and decisions are made as to what credit committee will be responsible for overseeing environmental and social issues. Staffs are trained and guidance must be provided to staff in offices throughout the world. Internal audit procedures are adapted to monitor compliance with these new policies (Lazarus, 2003)

Lazarus further explains that in applying the Equator Principles to an individual project, the starting point for a bank is screening the level of environmental and social risk in the project and assigning a risk categorization (Lazarus, March 2004). Watchman further explains that, the Equator Principles require the Equator Banks to categorize projects according to social and environmental impacts, Category A being the most vulnerable and Category C the least vulnerable, and to screen projects according to a number of social and environmental criteria (Watchman, 2006).

According to Robinson, for all proposed Category A and B projects, the borrower must complete an Environmental Impact Assessment (EIA) that satisfactorily addresses key environmental and social issues identified during the categorization process (Robinson, 2005). Sikhakhane and Neithorpe clearly put that, category C projects do not require an Environmental Impact Assessment (EIA) from the borrower. They also mentioned that all category A projects, and appropriate Bs, would also require an Environmental Management Plan (EMP), and evidence of a serious consultative effort with affected groups (Neithorpe, 2003), (Sikhakhane, 2003).

5.4. What Benefits Are There For Concerned Parties?

 

Adopting the Equator Principles makes sound business sense for the banks involved. "Banks face both credit and reputation risk when they finance development around the world," says Citigroup's global head of project finance, Chris Beale. "If sponsors adopt and follow EP for sensitive projects," he says, "they might well enjoy a faster implementation period, with the end result being that the project starts generating a revenue stream earlier, avoiding the specter of costly interruptions, delays and retrenchments." The belief is, he says, that "Equator will lead to more secure investments on the part of our customers and safer loans on the part of the banks” (Glasgow, 2003)

 

It is also stated that the advantages of project sponsors having a broad group of lenders adopt the Equator Principles include commonality of approach among lenders. This is explained to save sponsors the burden of producing different environmental assessments for different financial institutions and also from trying to meet different standards among lenders. It also helps in implementing transactions more quickly by getting it right the first time. Having more certainty in project implementation and a more secure, long-term investment are also argued to be the benefits for project sponsors (www.equator-principles.com)

 

Some of the advantages stated for the financial institutions that adopt the principles include using common terminology in assessing environmental and social issues and using a common framework for implementation and documentation. Furthermore, it is also useful in having more certainty in closing project financings and also having a safer project loan that enable them gain reputational advantages. It has also been mentioned that Equator Banks have not seen any decline in business because of adopting EPs over the past three years (www.equator-principles.com)

 

Lazarus asks if banks are turning down deals as a result of adopting Equator. The answer, of course, is yes, they are. And they surely will not disclose the names of the deals they turned down. Most strikingly, the Equator Principles have fostered cooperation amongst banks that are otherwise competitors and are not accustomed to sharing unless in the context of a deal. Having agreed to provide a level playing field on environmental and social standards, the banks are actively working together to promote best practice in implementation of the principles (Lazarus, 2003).

 

But what does the banks who adopted the Equator Principles experience? What did they go through this time? In the next section we will look at the experiences of some of the banks involved.

 

5.5. Experience of Equator Banks

 

The IFC is working closely with the banks to interpret the principles. "IFC policies and procedures are very specific to the IFC, so it takes a lot of work to implement them for some banks," says Suellen Lazarus, a senior advisor at the Washington-based institution (Lazarus, 2004). Following are the experience of some of the banks who adopted the Equator Principles.

Canadian Imperial Bank of Commerce (CIBC) – Canada

Some banks have further to go than others to reach the principle’s standards. Toronto-based CIBC, for example, felt that it was too early into implementation to be interviewed on the issue. Meanwhile, Royal Bank of Canada say that adopting the principles has simply been a process of extending existing policies that they have had in place for a number of years (www.equator-principles.com).

 

Barclays – United Kingdom

 

Chris Bray, head of the environmental risk management unit at Barclays Bank, which has adopted the principles, said: ‘I don’t envisage a sudden massive drop-off in the number of project finance deals as a result of this agreement, but it will mean that such deals will be done differently and there will be a far more structured approach to making sure that environmental and social issues are taken into account’ (Nelthrope, 2003). To be figurative, in its corporate responsibility report, Barclays reveals that it turned down two of the six high-risk project finance deals and in the overall, it chose not to participate in 25 out of a total of 68 project finance transactions (www.equator-principles.com).

 

HSBC – United Kingdom

 

The UK-based bank has adopted environment-related policies and procedures. The list includes specific guidelines on dangerous chemicals, freshwater, infrastructure and forest products. In May 2005, it became the first major private bank to put its name to the World Commission on Dams. Within the next 12 months, it plans to add an extractive industry policy to its growing catalogue of green tape. Underpinning what HSBC terms its “restricted appetite” for environmentally sensitive transactions lies its environmental risk standard. Launched in 2002, the standard is designed to minimize the environmental, credit and reputational risk associated with the bank’s investments. Most of the procedural steps are straightforward. HSBC’s due-diligence register, for example, now features environmental impact assessments and reviews by external auditors (www.equator-principles.com).

 

Credit Suisse First Boston - Switzerland

 

In an article of The Times of India, Bernd Schanzenbacher, who is responsible for environmental issues at Credit Suisse First Boston, said that by adopting the principles, the bank will lessen the risk of litigation over any damage ensuing from projects it funds. (The Times of India, June 2003). "Environmental risk is business risk, it's as simple as that," he told Swiss info. "So our ignorance of environmental risks can lead to costly litigation, but it can also lead to negative publicity and even revenue reduction." "Every economic activity has an impact on the environment, so there are no hard and fast rules on whether a project is sensitive or not," he said

 

Citigroup - USA

 

In the words of Charles Prince, Citigroup’s chairman and CEO, Citigroup is committed to balancing robust economic growth and environmental and social responsibility. Its  success will be measured not only by the financial results, but also by the impact it has on the communities it serves (www.equator-principles.com).He also said that, he believes the Equator Principles provide the financial services industry with a robust framework in which to do more business, not less.

 

Wright mentioned that, once environmental commitments had been made, Citigroup began integrating them into its internal operations, a process not without challenges (Wright, 2006). He further stated the main challenge was to ensure that bankers understood issues such as what an environmental impact assessment looks like and why it needs to be covenanted into loan documentation." Along the way, Citigroup has learned valuable lessons about investing in ecosystem services, discusses Wright. Citigroup considers projects promoting clean technologies and alternative energy to be much more promising.

 

 

ABN Amro – The Netherlands

 

“Protecting our assets in a traditional sense is risk management and protecting shareholder returns,” explains Andre Abadie, head of sustainable business advisory at ABN Amro (www.equator-principles.com). On the other hand, Richard Burrett, London-based head of the sustainable development business group at Dutch bank ABN Amro, says that the signatories have met to discuss a number of issues – sharing best practice (Equator Principles, 2004).

Westpac - Australia

 

Martin Hancock, chief operating officer of Australian bank Westpac and chair of the United Nations Environment Programme Finance Initiative, puts it more bluntly: “Now everybody’s looking to us to change the world. We can do our best, but there are boundaries to how much influence we can have. You have to look at all the other parties involved in the project life cycle and also the banks that are not part of Equator.” As with his Equator peers, he insists that primary responsibility for social and environmental issues should remain with the operating company concerned. For that reason, the Equator banks have consistently declined demands by civil society groups to introduce a formal complaints procedure (www.equator-principles.com).

 

Japanese Banks

 

According to Fujii, Japanese banks are very slow to take interest and are absent from the scene where the world's major financial institutions are taking the initiative in establishing environment-friendly standards for project finance for developing countries (Fujii, 2003). Currently, there are three Japanese banks that adopted the Equator Principles.

 

This section dealt with the experience of banks who adopted the Equator Principles. It has been mentioned previously that other stakeholders like the community should be consulted. The next section will have a look at the opinions and critics held so far. 

 

5.6. What do Stakeholders have to Say?

 

In the late 1990s, an oil pipeline project in Ecuador failed to meet the environmental safeguards and guidelines of the International Finance Corporation (IFC), the World Bank’s private sector arm. Then, when the US Export Import Bank and the World Bank both refused to finance China’s controversial Three Gorges Dam, private banks, unhampered by public scrutiny, stepped in and filled the gap (Kyte, 2005). As a result, non-governmental organizations (NGOs) started to target private financial institutions as the ultimate source of environmentally unfriendly projects. One way of responding to NGOs concerns was adopting the Equator Principles. According to an article in a journal – Ethical Performance – it was stated that a coalition of 100 NGOs welcomed the principles as a ‘helpful springboard’. (www.equator-principles.com)

 

According to the NGOs, banks are expected to reject projects which contribute to global climate change. However, as per the reports of Hawser, the Equator banks stress the need to educate and advise borrowers and providing them with finance to develop their sustainability capabilities (Hawser, 2005).

 

Another area of argument concerns the implementation of the EPs and how this should be measured, as well as what should be reported. According to Watchman, NGOs complain about a lack of transparency and accountability in respect of the application of the Equator Principles (Watchman, 2006). Kyte also states that without a standardized method of reporting or any independent auditing/compliance mechanism in the Principles, “banks are not obliged to any disclosure or record-taking on implementation. As a result, it’s not possible to see how one signatory bank compares with another regarding sustainability, or how one bank’s sustainability performance compares from one year to the next (Kyte, 2005). In addition, Watchman mentions that banks are bound by strict rules of confidentiality which prevent them from disclosing information about their clients’ projects (Watchman, 2006)

 

According to Smith & Plit, another potential weakness pointed was that the principles only apply to projects with a total capital cost of $50m or more. But there has been a change of figures in the limit recently to $10m. They argue that perhaps one of the Equator Principles' greatest weaknesses is that the scope is limited to project finance (Smith et. al, 2003).

 

According to Watchman, the way forward for business, NGOs and civil society is to use what has been achieved so far as a platform to build greater understanding of what each can deliver and what may be sacrificed to enable further progress to be achieved (Watchman, 2006). It is after three years that the Equator Principles have been revised. The changes made and the procedures followed are discussed in the next section.


5.7. Updates Made in the Equator Principles

When deciding that the Equator Principles needed to be updated, the financial institutions that adopted EPs committed themselves early on to listening and learning from a broad range of interested stakeholders (including clients, NGOs and Official Agencies) on their varied experiences over the past three years. During this comment process, comments received from these stakeholders were obviously diverse, but have greatly improved the final draft (www.equator-principle.com).

 

It is believed that the newly revised Equator Principles are a significant step forward in terms of integrating social and environmental impacts assessment and management of these impacts into project financings. Various comments were received that included reporting issue that was raised by NGOs and concerns related to the rights of indigenous people.

 

The revised Equator Principles have now incorporated, and are fully consistent with, IFC's environmental and social "Performance Standards" ensuring that there is one, consistent standard for private sector project financing. The new Principles include much stronger and clearer requirements for both the financial institutions and also for borrowers. Some of the refinements to the Equator Principles include:

*      Lowering of the threshold from USD 50 million to USD 10 million.

*      Inclusion of project finance advisory mandates in the new Principles, and existing projects with significant environmental and social impacts in the new scope section.

*      Clearer requirements for projects in low and medium-income countries.

*      Stronger consultation requirements.

*      New covenant requirement for compliance with all applicable local, state and host-country laws, regulations and permits pertaining to environmental and social matters, and

*      A new Principle requiring that Equator Principle Financial Institutions report publicly at least annually on their EP implementation.

According to Lazarus, the movement towards globally recognized environmental and social standards that the Equator Principles have set in motion will result in better project outcomes and reduced costs, while above all promoting sustainability. From a simple but bold initiative, she also noted that it is an impressive outcome (Lazarus, 2003).

 

What have been discussed so far are the experiences and the practices in the developed world. But, what is the practice in Ethiopia? Is sustainability well integrated with the functions of banks? The following section answers this and states the current situation in Ethiopia.

 

 


6. PROJECT FINANCING IN ETHIOPIA

In 2004/05 alone, a total of 2,872 investment projects involving capital outlay of Birr 36.5 billion were approved, the highest number in a single year since 1992/93. This is an indicator that investment is growing in Ethiopia.

Table 1: Number and investment capital of Total Approved projects

Investment capital (in millions of birr)

Fiscal Year

Total Projects

No . of Projects

Investment Capital

1992/93

545

3,983.00

1993/94

526

3,421.00

1994/95

693

5,338.00

1995/96

908

6,490.00

1996/97

795

6,722.00

1997/98

898

9,939.00

1998/99

713

10,060.00

1999/00

624

14,127.00

2000/01

687

8,856.00

2001/02

801

9,190.20

2002/03

1,217

13,437.86

2003/04

2,225

21,220.00

2004/05

2,872

36,464.26

Average Annual

1,035

11,367.00

Cumulative

13,504

149,247.30

Source: National Bank of Ethiopia (www.nbe.gov.et)

Table 2 shows the percentage of loans advanced by state owned and private banks. Recently opened banks such as Oromia Cooperative Bank and Lion Bank are not included as the figure is up to the year 2004/05. As it is clearly seen from the table, Private Banks together granted Birr 4.7 billion or 49.4 percent of the total fresh loans disbursed during the year, while their share was about 57 percent during the preceding year. 

 

Table 2: Percentage Share of Loans and Advances by Lender Banks

 

 

No.

 

Name of Banks

2003/04

2004/05

Disbursed

Collected

O/S

Disbursed

Collected

O/S

        A

B

C

D

E

F

1.

Commercial Bank of  Ethiopia

36.8

44.6

66.4

42.1

44.1

56.4

2.

Development Bank of   Ethiopia

4.7

4.3

11.2

2.3

1.8

14.3

3.

Construction & Business Bank

1.6

1.9

2.3

6.2

5.3

3.1

4.

Awash International Bank

10.5

10.7

4.1

11.1

10.1

5.2

5.

Dashen Bank

15.1

10.7

6.3

12.5

10.5

7.6

6.

Bank of Abyssinia

3.5

4.4

3.5

4.5

4.8

4.2

7.

Wegagen Bank

19.1

13.7

2.3

13.6

14.5

3.4

8.

United Bank

3.5

4.7

1.1

3.6

3.7

1.8

9.

Nib International Bank

5.1

5

2.7

4

5.2

3.9

 

T o t a l

100

100

100

100

100

100

Source: National Bank of Ethiopia (www.nbe.gov.et)

 

Due to the confidentiality nature of the information, specific data of projects financed by individual banks could not be obtained. But as the above figures reveal, the number of project investment is increasing through time.

 

6.1. EXPERIENCE OF SELECTED BANKS IN ETHIOPIA

 

Of all the banks that currently exist in the country, only Development Bank of Ethiopia (DBE) puts EIA as a requirement to finance projects. It is the major financial institution that focuses on project financing. The bank follows this procedure to minimize the social, environmental and further the business/profitability cost involved. As a responsible corporate citizen, it believes it has to contribute its share in protecting the environment and further avoid the risks and damages that follow irresponsible investment.

 

The information obtained from other banks – both state owned and private – reveals that they do not require EIA in the projects they finance. However, they take their own measures in identifying and mitigating environmental treats detected. But this raises a question of whether they are able to properly address the problems by their own as there might definitely be cases that require professional expertise.

 

Next to Development Bank of Ethiopia, only one other bank is in the process to incorporate EIA requirement in its credit policy. The reason for doing so is to promote healthy investment, minimize environmental risk that also results in business risk and in general it is to discharge the social responsibility of the bank.

 

Some customers complain by the additional requirement of EIA to obtain financing and do not think that it is relevant. But this is not something to be compromised for the bank. According to EPA, there is a need of sufficient supply of professionals in the area and this should be one aspect that should be worked on.

 

Why not all the banks involve EIA requirement in their project financing? What is the scenario of the process of project financing? As the case differs from country to country it is required to look at the procedures followed by the particular country.

 

 

 

 

 

 

6.2. PROCEDURES FOLLOWED IN PROJECT FINANCING

 

It is put in the constitution (Article 42) that any citizen has the right to improved living standards, to sustainable development and a right to be consulted with respect to policies and projects affecting their community. In Article 44, it is also stated that all persons have a right to a clean and healthy environment. Article 92 has also put clearly that government and citizens have the duty to protect the environment (Proclamation of the Constitution of FDRE).

 

Further to the constitution, there are also laws in relation to environmental protection organs, environmental impact assessment and environmental pollution control.

 

One of the problems faced by the Environmental Protection Authority is lack of coordination by sector organizations that hinders the efficient implementation of Environmental Impact Assessment to relevant projects.

 

When an investor needs to have an investment permit s/he goes to the investment authority. But before being issued a permit s/he was requested to present an authorization from EPA for its implementation. And it is after that the investor will be issued an investment permit. However, this is not the practice that is followed currently.

 

When an investor requires a permit s/he is no more asked to present an authorization from EPA for its implementation. It is after the permit issuance that the list is sent to the authority. Then it will be the task of the authority to follow up the case of the investor.

 

According to Ato Solomon, Head of Impact Assessment in EPA, [p 2] the environmental impact assessment proclamation 299/2002 has made it mandatory that development projects or public instruments (policies, programs, plans) have to be subjected to EA scrutiny. It means that EA is a legal requirement. The proclamation has also defined the jurisdictions of Federal and Regional environmental agencies and responsibilities of the proponent. It has also contained several provisions including incentives, punitive measures, and the minimum requirements for EA report to consist. [Solomon, 2003] However, currently, this proclamation is overruled by the newly amended investment proclamation 373/2003.

 

As per the current practice, the authority then contacts the investor and request to conduct EIA as the need arises. According to the Authority, this is not the case most of the time. The ideal entry point for the proper implementation of EIA was while the investor started nothing (at the conception phase). This was the best entry point to conduct EIA. But if the investor is not asked to present authorization at permit issuance – there is no guarantee that proper actions are taken to protect the environment. 

 

This is because the investor is not asked any EIA report while obtaining land, and might directly go to operation. And there is no guarantee that all investors require financing from a bank. Furthermore, approaching the investor during financing is not that much feasible as there is only one financial institution that requires this prerequisite. Even if it approaches him/her, it might be too late to save the harm done or it might increase mitigation costs. And in a situation where not all financial institutions put operational EIA requirements, it is difficult to be sure of saving the harm done. The following data obtained form EPA might help see the scenario easily.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Source: EPA (Solomon, 2003)

 

The number of projects approved by Ethiopian Investment Authority and those that has been sent for review has shown big disparity. Such discrepancy occurred as a result of most of the projects are approved without due consideration for environment. This can be drawn from only considering the investment permit given to foreign investors against the number of EA report submitted to EPA for review. The findings in the above chart display how investment interests surpass concerns for environmental protection. [Solomon, 2003]

 

All in all, in this system where there is no clear responsibility and accountability of the parties involved, it is difficult to blame a specific sector for not complying to the existing rules.


 

7. CONCLUSION

 

Financial institutions play an important role in one’s economy and the healthy and smooth function of the sector contributes to the sustainable development of the country. In relation to sustainability, the concern of banks is regarding the projects they finance in which they play their role in promoting healthy investments.

 

In developed countries, the involvement and concern of banks in sustainable project financing is in the increase. So far there are 45 banks in 16 countries that function over 100 countries that adopt the Equator Principles – the project finance industry standard for addressing environmental and social issues in project financing globally. These principles first put to function in June 2003, and now have been revised by accommodating the opinions of the community, NGOs and other stakeholders and put to use in June 2006.

 

When we see the experience of our country, the concept is not practiced much. As the strengths of policies and laws regarding this issue differs from country to country, one need to look at the procedures followed case by case. In Ethiopia, there is only one bank that puts EIA report as a requirement in its project financing while the other banks take their own measures in their financing.

 

The problem is not only regarding the financial institutions, but also there is difficulty regarding the communication of the different sectors involved. By the current practice there is no concrete entry point to find the investor and address the issue properly. In this situation, it is difficult to expect financial institutions play a significant role in addressing the problem involved.


8. RECOMMENDATION

 

What needs to be done?

 

*      There should be a smooth and coherent system among the different sectors in Ethiopia in order to have a good entry point.

*      There should be a strong legal procedure that govern and address all the concerned parties appropriately.

*      Development of qualified professionals should be planned and implemented so that there will be an efficient and fast response for the assistance requested by the banks/the project proponent.

*      Discussion of the matter with different sectors of the economy, the community and other stakeholders that are affected by the project should be made.

*      There should be proper reporting regarding the project status to create a transparent and accountable system.

 

 

The above conditions should be fulfilled in order to have a financial sector that works in a good system and play a crucial role for the sustainability of the country’s development.


 

 

 

 

 

 

 

 

 

ANNEXES


ANNEX ONE: Banks That have Adopted the Equator Principles

Australia

Westpac Banking Corporation

 

ANZ

 

Belgium

Dexia Group

 

Fortis

 

KBC Bank N.V.

 

Brazil

Banco Bradesco

 

Banco do Brasil

 

Banco Itaú

 

Unibanco

 

Canada

BMO Financial Group

 

Canadian Imperial Bank of Commerce

 

Manulife

 

Royal Bank of Canada

 

Scotiabank

 

France

Calyon Corporate and Investment Bank

 

Denmark

Eksport Kredit Fonden

 

Germany

Dresdner Bank

 

HypoVereinsbank

 

WestLB AG

 

Italy

Banca Intesa

 

Sanpaolo IMI

 

Japan

Mizuho Corporate Bank, Ltd.

 

SMBC

 

The Bank of Tokyo-Mitsubishi, Ltd.

 

The Netherlands

ABN AMRO Bank NV

 

FMO

 

ING Group

 

Rabobank Group

 

Portugal

Banco Espírito Santo Group

 

Millennium bcp

 

South Africa

Nedbank Group

 

Spain

BBVA S.A.

 

Caja Navarra

 

Switzerland

Credit Suisse Group

 

United Kingdom

Barclays plc

 

HBOS

 

HSBC Group

 

Standard Chartered Bank

 

The Royal Bank of Scotland

 

United States

Bank of America

 

Citigroup Inc.

 

E+Co

 

JPMorgan Chase

 

Wachovia

 

Wells Fargo

 

Annex Two

 

July 2006

 

The "Equator Principles"

 

A financial industry benchmark for determining,

assessing and managing social & environmental risk in

project financing

 

www.equator-principles.com

 

PREAMBLE

 

Project financing, a method of funding in which the lender looks primarily to the revenues generated by a single project both as the source of repayment and as security for the exposure, plays an important role in financing development throughout the world.1[1] Project financiers may encounter social and environmental issues that are both complex and challenging, particularly with respect to projects in the emerging markets.

 

The Equator Principles Financial Institutions (EPFIs) have consequently adopted these Principles in order to ensure that the projects we finance are developed in a manner that is socially responsible and reflect sound environmental management practices. By doing so, negative impacts on project-affected ecosystems and communities should be avoided where possible, and if these impacts are unavoidable, they should be reduced, mitigated and/or compensated for appropriately. We believe that adoption of and adherence to these Principles offers significant benefits to ourselves, our borrowers and local stakeholders through our borrowers’ engagement with locally affected communities. We therefore recognise that our role as financiers affords us opportunities to promote responsible environmental stewardship and socially responsible development. As such, EPFIs will consider reviewing these Principles from time-to-time based on implementation experience, and in order to reflect ongoing learning and emerging good practice.

 

These Principles are intended to serve as a common baseline and framework for the implementation by each EPFI of its own internal social and environmental policies, procedures and standards related to its project financing activities. We will not provide loans to projects where the borrower will not or is unable to comply with our respective social and environmental policies and procedures that implement the Equator Principles.

 

 

 

 

 

July 2006

 

SCOPE

 

The Principles apply to all new project financings globally with total project capital costs of US$10 million or more, and across all industry sectors. In addition, while the Principles are not intended to be applied retroactively, we will apply them to all project financings covering expansion or upgrade of an existing facility where changes in scale or scope may create significant environmental and/or social impacts, or significantly change the nature or degree of an existing impact.

 

The Principles also extend to project finance advisory activities. In these cases, EPFIs commit to make the client aware of the content, application and benefits of applying the Principles to the anticipated project, and request that the client communicate to the EPFI its intention to adhere to the requirements of the Principles when subsequently seeking financing.

 

STATEMENT OF PRINCIPLES

 

EPFIs will only provide loans to projects that conform to Principles 1-9 below:

 

Principle 1: Review and Categorisation

When a project is proposed for financing, the EPFI will, as part of its internal social and environmental review and due diligence, categorise such project based on the magnitude of its potential impacts and risks in accordance with the environmental and social screening criteria of the International Finance Corporation (IFC) (Exhibit I).

 

Principle 2: Social and Environmental Assessment

For each project assessed as being either Category A or Category B, the borrower has conducted a Social and Environmental Assessment (“Assessment”) process[2] to address, as appropriate and to the EPFI’s satisfaction, the relevant social and environmental impacts and risks of the proposed project (which may include, if relevant, the illustrative list of issues as found in Exhibit II). The Assessment should also propose mitigation and management measures relevant and appropriate to the nature and scale of the proposed project.

 

Principle 3: Applicable Social and Environmental Standards

For projects located in non-OECD countries, and those located in OECD countries not designated as High-Income, as defined by the World Bank Development Indicators Database, the Assessment will refer to the then applicable IFC Performance Standards (Exhibit III) and the then applicable Industry Specific EHS Guidelines (“EHS Guidelines”) (Exhibit IV). The Assessment will establish to a participating EPFI’s satisfaction the project's overall compliance with, or justified deviation from, the respective Performance Standards and EHS Guidelines.

 

The regulatory, permitting and public comment process requirements in High-Income OECD Countries, as defined by the World Bank Development Indicators Database, generally meet or exceed the requirements of the IFC Performance Standards (Exhibit III) and EHS Guidelines (Exhibit IV). Consequently, to avoid duplication and streamline EPFI's review of

 

 

July 2006

 

these projects, successful completion of an Assessment (or its equivalent) process under and in compliance with local or national law in High-Income OECD Countries is considered to be an acceptable substitute for the IFC Performance Standards, EHS Guidelines and further requirements as detailed in Principles 4, 5 and 6 below. For these projects, however, the EPFI still categorizes and reviews the project in accordance with Principles 1 and 2 above.

 

The Assessment process in both cases should address compliance with relevant host country laws, regulations and permits that pertain to social and environmental matters.

 

Principle 4: Action Plan and Management System

For all Category A and Category B projects located in non-OECD countries, and those located in OECD countries not designated as High-Income, as defined by the World Bank Development Indicators Database, the borrower has prepared an Action Plan (AP)[3] which addresses the relevant findings, and draws on the conclusions of the Assessment. The AP will describe and prioritise the actions needed to implement mitigation measures, corrective actions and monitoring measures necessary to manage the impacts and risks identified in the Assessment. Borrowers will build on, maintain or establish a Social and Environmental Management System that addresses the management of these impacts, risks, and corrective actions required to comply with applicable host country social and environmental laws and regulations, and requirements of the applicable Performance Standards and EHS Guidelines, as defined in the AP.

 

For projects located in High-Income OECD countries, EPFIs may require development of an Action Plan based on relevant permitting and regulatory requirements, and as defined by host-country law.

 

Principle 5: Consultation and Disclosure

For all Category A and, as appropriate, Category B projects located in non-OECD countries, and those located in OECD countries not designated as High-Income, as defined by the World Bank Development Indicators Database, the government, borrower or third party expert has consulted with project affected communities in a structured and culturally appropriate manner.[4] For projects with significant adverse impacts on affected communities, the process will ensure their free, prior and informed consultation and facilitate their informed participation as a means to establish, to the satisfaction of the EPFI, whether a project has adequately incorporated affected communities’ concerns.[5]

 

 

 

 

July 2006

 

In order to accomplish this, the Assessment documentation and AP, or non-technical summaries thereof, will be made available to the public by the borrower for a reasonable minimum period in the relevant local language and in a culturally appropriate manner. The borrower will take account of and document the process and results of the consultation, including any actions agreed resulting from the consultation. For projects with adverse social or environmental impacts, disclosure should occur early in the Assessment process and in any event before the project construction commences, and on an ongoing basis.

 

Principle 6: Grievance Mechanism

For all Category A and, as appropriate, Category B projects located in non-OECD countries, and those located in OECD countries not designated as High-Income, as defined by the World Bank Development Indicators Database, to ensure that consultation, disclosure and community engagement continues throughout construction and operation of the project, the borrower will, scaled to the risks and adverse impacts of the project, establish a grievance mechanism as part of the management system. This will allow the borrower to receive and facilitate resolution of concerns and grievances about the project’s social and environmental performance raised by individuals or groups from among project-affected communities. The borrower will inform the affected communities about the mechanism in the course of its community engagement process and ensure that the mechanism addresses concerns promptly and transparently, in a culturally appropriate manner, and is readily accessible to all segments of the affected communities.

 

Principle 7: Independent Review

For all Category A projects and, as appropriate, for Category B projects, an independent social or environmental expert not directly associated with the borrower will review the Assessment, AP and consultation process documentation in order to assist EPFI's due diligence, and assess Equator Principles compliance.

 

Principle 8: Covenants

An important strength of the Principles is the incorporation of covenants linked to compliance. For Category A and B projects, the borrower will covenant in financing documentation:

 

a) to comply with all relevant host country social and environmental laws, regulations and

permits in all material respects;

 

b) to comply with the AP (where applicable) during the construction and operation of the

project in all material respects;

 

c) to provide periodic reports in a format agreed with EPFIs (with the frequency of these reports proportionate to the severity of impacts, or as required by law, but not less than annually), prepared by in-house staff or third party experts, that i) document compliance with the AP (where applicable), and ii) provide representation of compliance with relevant local, state and host country social and environmental laws, regulations and permits; and

 

d) to decommission the facilities, where applicable and appropriate, in accordance with an

agreed decommissioning plan.

 

Where a borrower is not in compliance with its social and environmental covenants, EPFIs will work with the borrower to bring it back into compliance to the extent feasible, and if the borrower fails to re-establish compliance within an agreed grace period, EPFIs reserve the right to exercise remedies, as they consider appropriate.

July 2006

 

Principle 9: Independent Monitoring and Reporting

To ensure ongoing monitoring and reporting over the life of the loan, EPFIs will, for all Category A projects, and as appropriate, for Category B projects, require appointment of an independent environmental and/or social expert, or require that the borrower retain qualified and experienced external experts to verify its monitoring information which would be shared with EPFIs.

 

Principle 10: EPFI Reporting

Each EPFI adopting the Equator Principles commits to report publicly at least annually about its Equator Principles implementation processes and experience, taking into account appropriate confidentiality considerations.[6]

 

DISCLAIMER

 

The adopting EPFIs view these Principles as a financial industry benchmark for developing individual, internal social and environmental policies, procedures and practices. As with all internal policies, these Principles do not create any rights in, or liability to, any person, public or private. Institutions are adopting and implementing these Principles voluntarily and independently, without reliance on or recourse to IFC or the World Bank.


 

 

July 2006

 

Exhibit I: Categorisation of projects

 

As part of their review of a project’s expected social and environmental impacts, EPFIs use a system of social and environmental categorisation, based on IFC’s environmental and social screening criteria, to reflect the magnitude of impacts understood as a result of assessment.

 

These categories are:

 

_ Category A – Projects with potential significant adverse social or environmental impacts that are diverse, irreversible or unprecedented;

_ Category B – Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and

_ Category C – Projects with minimal or no social or environmental impacts.

 


 

July 2006

 

Exhibit II:

 

Illustrative list of potential social and environmental issues to be addressed in the

Social and Environmental Assessment documentation

 

In the context of the business of the project, the Assessment documentation will address, where applicable, the following issues:

a) assessment of the baseline social and environmental conditions

b) consideration of feasible environmentally and socially preferable alternatives

c) requirements under host country laws and regulations, applicable international treaties

and agreements

d) protection of human rights and community health, safety and security (including risks,

impacts and management of project’s use of security personnel)

e) protection of cultural property and heritage

f) protection and conservation of biodiversity, including endangered species and sensitive

ecosystems in modified, natural and critical habitats, and identification of legally

protected areas

g) sustainable management and use of renewable natural resources (including sustainable

resource management through appropriate independent certification systems)

h) use and management of dangerous substances

i) major hazards assessment and management

j) labour issues (including the four core labour standards), and occupational health and

safety

k) fire prevention and life safety

l) socio-economic impacts

m) land acquisition and involuntary resettlement

n) impacts on affected communities, and disadvantaged or vulnerable groups

o) impacts on indigenous peoples, and their unique cultural systems and values

p) cumulative impacts of existing projects, the proposed project, and anticipated future

projects

q) consultation and participation of affected parties in the design, review and

implementation of the project

r) efficient production, delivery and use of energy

s) pollution prevention and waste minimisation, pollution controls (liquid effluents and air

emissions) and solid and chemical waste management

Note: The above list is for illustrative purposes only. The Social and Environmental

Assessment process of each project may or may not identify all issues noted above, or be

relevant to every project.

 


 

July 2006

 

Exhibit III: IFC Performance Standards on Social and Environmental Sustainability

 

As of April 30, 2006, the following list of IFC Performance Standards were applicable:

 

_ Performance Standard 1: Social & Environmental Assessment &

Management System

_ Performance Standard 2: Labor and Working Conditions

_ Performance Standard 3: Pollution Prevention and Abatement

_ Performance Standard 4: Community Health, Safety and Security

_ Performance Standard 5: Land Acquisition and Involuntary Resettlement

_ Performance Standard 6: Biodiversity Conservation and

Sustainable Natural Resource Management

_ Performance Standard 7: Indigenous Peoples

_ Performance Standard 8: Cultural Heritage

Note: The IFC has developed a set of Guidance Notes to accompany each Performance

Standard. While not formally adopting the Guidance Notes, EPFIs or borrowers may use the

Guidance Notes as useful points of reference when seeking further guidance on or

interpretation of the Performance Standards. The IFC Performance Standards, Guidance

Notes and Industry Sector EHS Guidelines can be found at www.ifc.org/enviro


 

July 2006

 

Exhibit IV: Industry-Specific Environmental, Health and Safety (EHS) Guidelines

 

EPFIs will utilise the appropriate environmental, health and safety (EHS) guidelines used by IFC which are now in place, and as may be amended from time-to-time.

 

IFC is using two complementary sets of EHS Guidelines available at the IFC website (www.ifc.org/enviro). These sets consist of all the environmental guidelines contained in Part III of the World Bank’s Pollution Prevention and Abatement Handbook (PPAH) which went into official use on July 1, 1998 and a series of environmental, health and safety guidelines published on the IFC website between 1991 and 2003. Ultimately new guidelines, incorporating the concepts of cleaner production and environmental management systems, will be written to replace this series of industry sector, PPAH and IFC guidelines.

 

Where no sector specific guideline exists for a particular project then the PPAH’s General Environmental Guidelines and the IFC Occupational Health and Safety Guidelines (2003) are applied, with modifications as necessary to suit the project.*

 

The table below lists both the World Bank Guidelines and the IFC Guidelines as of March 1,

2006.

 

Industry Specific EHS Guidelines:

 

World Bank Guidelines (PPAH) IFC Guidelines


1. Aluminum Manufacturing 1. Airports

2. Base Metal and Iron Ore Mining 2. Ceramic Tile Manufacturing

3. Breweries 3. Construction Materials Plants

4. Cement Manufacturing 4. Electric Power Transmission and

Distribution

5. Chlor-Alkali Plants 5. Fish Processing

6. Coal Mining and Production 6. Food and Beverage Processing

7. Coke Manufacturing 7. Forestry Operations: Logging

8. Copper Smelting 8. Gas Terminal Systems

9. Dairy Industry 9. Geothermal Projects

10. Dye Manufacturing 10. Hazardous Materials Management

11. Electronics Manufacturing 11. Health Care

12. Electroplating Industry 12. Life & Fire Safety

13. Foundries 13. Occupational Health and Safety

14. Fruit and Vegetable Processing 14. Office Buildings

15. General Environmental Guidelines 15. Offshore Oil & Gas

16. Glass Manufacturing 16. Polychlorinated Biphenyls (PCBs)

17. Industrial Estates 17. Pesticide Handling and Application

18. Iron and Steel Manufacturing 18. Plantations

19. Lead and Zinc Smelting 19. Port and Harbor Facilities

20. Meat Processing and Rendering 20. Rail Transit Systems

21. Mini Steel Mills 21. Roads and Highways

22. Mixed Fertilizer Plants 22. Telecommunications

23. Monitoring 23. Tourism and Hospitality Development

24. Nickel Smelting and Refining 24. Waste Management Facilities

25. Nitrogenous Fertilizer Plants 25. Wastewater Reuse

26. Oil and Gas Development (Onshore) 26. Wildland Management

27. Pesticides Formulation 27. Wind Energy Conversion Systems

28. Pesticides Manufacturing 28. Wood Products Industries

29. Petrochemicals Manufacturing

30. Petroleum Refining

31. Pharmaceutical Manufacturing

32. Phosphate Fertilizer Plants

33. Printing Industry

34. Pulp and Paper Mills

35. Sugar Manufacturing

36. Tanning and Leather Finishing

37. Textiles Industry

38. Thermal Power Guidelines for New

Plants

39. Thermal Power Rehabilitation of Existing

Plants

40. Vegetable Oil Processing

41. Wood Preserving Industry


 

* Exception (the following are World Bank Guidelines not contained in the PPAH and

currently in use)

Mining and Milling - Underground

Mining and Milling - Open Pit


 

Annex Three

 

4 June 2003

 

THE “EQUATOR PRINCIPLES”

AN INDUSTRY APPROACH FOR FINANCIAL INSTITUTIONS IN

DETERMINING, ASSESSING AND MANAGING

ENVIRONMENTAL & SOCIAL RISK

IN PROJECT FINANCING

 

PREAMBLE

 

Project financing plays an important role in financing development throughout the world. In providing financing, particularly in emerging markets, project financiers often encounter environmental and social policy issues. We recognize that our role as financiers affords us significant opportunities to promote responsible environmental stewardship and socially responsible development.

 

In adopting these principles, we seek to ensure that the projects we finance are developed in a manner that is socially responsible and reflect sound environmental management practices.

 

We believe that adoption of and adherence to these principles offers significant benefits to ourselves, our customers and other stakeholders. These principles will foster our ability to document and manage our risk exposures to environmental and social matters associated with the projects we finance, thereby allowing us to engage proactively with our stakeholders on environmental and social policy issues. Adherence to these principles will allow us to work with our customers in their management of environmental and social policy issues relating to their investments in the emerging markets.

 

These principles are intended to serve as a common baseline and framework for the implementation of our individual, internal environmental and social procedures and standards for our project financing activities across all industry sectors globally.

 

In adopting these principles, we undertake to review carefully all proposals for which our customers request project financing. We will not provide loans directly to projects where the borrower will not or is unable to comply with our environmental and social policies and processes.

STATEMENT OF PRINCIPLES

 

We will only provide loans directly to projects in the following

circumstances:

 

1. We have categorised the risk of a project in accordance with internal guidelines based upon the environmental and social screening criteria of the IFC as described in the attachment to these Principles (Exhibit I).

2. For all Category A and Category B projects, the borrower has completed an Environmental Assessment (EA), the preparation of which is consistent with the outcome of our categorisation process and addresses to our satisfaction key environmental and social issues identified during the categorisation process.

3. In the context of the business of the project, as applicable, the EA report has addressed:

 

a) assessment of the baseline environmental and social conditions

b) requirements under host country laws and regulations,

applicable international treaties and agreements

c) sustainable development and use of renewable natural resources

d) protection of human health, cultural properties, and biodiversity, including endangered species and sensitive ecosystems

e) use of dangerous substances

f) major hazards

g) occupational health and safety

h) fire prevention and life safety

i) socioeconomic impacts

j) land acquisition and land use

k) involuntary resettlement

l) impacts on indigenous peoples and communities

m) cumulative impacts of existing projects, the proposed project,

and anticipated future projects

n) participation of affected parties in the design, review and

implementation of the project

o) consideration of feasible environmentally and socially

preferable alternatives

p) efficient production, delivery and use of energy

q) pollution prevention and waste minimization, pollution controls

(liquid effluents and air emissions) and solid and chemical

waste management

Note: In each case, the EA will have addressed compliance with applicable host country laws, regulations and permits required by the project. Also, reference will have been made to the minimum standards applicable under the World Bank and IFC Pollution Prevention and Abatement Guidelines (Exhibit III) and, for projects located in low and middle income countries as defined by the World Bank Development Indicators Database (http://www.worldbank.org/data/countryclass/classgroups.htm), the

EA will have further taken into account the then applicable IFC

Safeguard Policies (Exhibit II). In each case, the EA will have addressed, to our satisfaction, the project’s overall compliance with (or justified deviations from) the respective above-referenced Guidelines and Safeguard Policies.

 

4. For all Category A projects, and as considered appropriate for Category B projects, the borrower or third party expert has prepared an Environmental Management Plan (EMP) which draws on the conclusions of the EA. The EMP has addressed mitigation, action plans, monitoring, management of risk and schedules.

5. For all Category A projects and, as considered appropriate for Category B projects, we are satisfied that the borrower or third party expert has consulted, in a structured and culturally appropriate way, with project affected groups, including indigenous peoples and local NGOs. The EA, or a summary thereof, has been made available to the public for a reasonable minimum period in local language and in a culturally appropriate manner. The EA and the EMP will take account of such consultations, and for Category A Projects, will be subject to independent expert review.

6. The borrower has covenanted to:

a) comply with the EMP in the construction and operation of the project

b) provide regular reports, prepared by in-house staff or third party experts, on compliance with the EMP and

c) where applicable, decommission the facilities in accordance with an agreed Decommissioning Plan.

7. As necessary, lenders have appointed an independent environmental expert to provide additional monitoring and reporting services.

8. In circumstances where a borrower is not in compliance with its environmental and social covenants, such that any debt financing would be in default, we will engage the borrower in its efforts to seek solutions to bring it back into compliance with its covenants.

9. These principles apply to projects with a total capital cost of $50 million or more.

The adopting institutions view these principles as a framework for developing individual, internal practices and policies. As with all internal policies, these principles do not create any rights in, or liability to, any person, public or private. Banks are adopting and implementing these principles voluntarily and independently, without reliance on or recourse to IFC or the World Bank.

 

EXHIBIT I: ENVIRONMENTAL AND SOCIAL SCREENING PROCESS

 

Environmental screening of each proposed project shall be undertaken to determine the appropriate extent and type of EA. Proposed projects will be classified into one of three categories, depending on the type, location, sensitivity, and scale of the project and the nature and magnitude of its potential environmental and social impacts.

 

Category A: A proposed project is classified as Category A if it is likely to have significant adverse environmental impacts that are sensitive, diverse, or unprecedented. A potential impact is considered “sensitive” if it may be irreversible (e.g., lead to loss of a major natural habitat) or affect vulnerable groups or ethnic minorities, involve involuntary displacement or resettlement, or affect significant cultural heritage sites. These impacts may affect an area broader than the sites or facilities subject to physical works. EA for a Category A project examines the project's potential negative and positive environmental impacts, compares them with those of feasible alternatives (including, the “without project” situation), and recommends any measures needed to prevent, minimize, mitigate, or compensate for adverse impacts and improve environmental performance. A full environmental assessment is required which is normally an Environmental Impact Assessment (EIA).

 

Category B: A proposed project is classified as Category B if its potential adverse environmental impacts on human populations or environmentally important areas— including wetlands, forests, grasslands, and other natural habitats—are less adverse than those of Category A projects. These impacts are site-specific; few if any of them are irreversible; and in most cases mitigatory measures can be designed more readily than for Category A projects. The scope of EA for a Category B project may vary from project to project, but it is narrower than that of Category A EA. Like Category A EA, it examines the project's potential negative and positive environmental impacts and recommends any measures needed to prevent, minimize, mitigate, or compensate for adverse impacts and improve environmental performance.

 

Category C: A proposed project is classified as Category C if it is likely to have minimal or no adverse environmental impacts. Beyond screening, no further EA action is required for a Category C project.

 

 

 

 

 

EXHIBIT II: IFC SAFEGUARD POLICIES

 

As of 4 June 2003, the following is a list of IFC Safeguard Policies:

Environmental Assessment

 

OP4.01 (October 1998)

Natural Habitats

OP4.04 (November 1998)

Pest Management

OP4.09 (November 1998)

Forestry

OP4.36 (November 1998)

Safety of Dams

OP4.37 (September 1996)

Indigenous Peoples

OD4.20 (September 1991)

Involuntary Resettlement

OP4.30 (June 1990)

Cultural Property

OPN11.03 (September 1986)

Child and Forced Labor

Policy Statement (March 1998)

International Waterways

OP 7.50 (November 1998)[7]


 

 

EXHIBIT III: WORLD BANK AND IFC SPECIFIC GUIDELINES

 

As of 4 June 2003, IFC is using two sets of guidelines for its projects.

 

1. IFC is using all the environmental guidelines contained in the World Bank Pollution Prevention and Abatement Handbook (PPAH). This Handbook went into official use on July 1, 1998.

2. IFC is also using a series of environmental, health and safety guidelines that were written by IFC staff in 1991-1993 and for which there are no parallel guidelines in the Pollution Prevention and Abatement Handbook. Ultimately new guidelines, incorporating the concepts of cleaner production and environmental management systems, will be written to replace this series of IFC guidelines. When completed these new guidelines will also be included in the Pollution Prevention and Abatement Handbook

 

Where no sector specific guideline exists for a particular project then the World Bank

General Environmental Guidelines and the IFC General Health and Safety Guideline will be applied, with modifications as necessary to suit the project.*

 

The table below lists both the World Bank Guidelines and the IFC Guidelines.

World Bank Guidelines (PPAH)

1. Aluminum Manufacturing

2. Base Metal and Iron Ore Mining

3. Breweries

4. Cement Manufacturing

5. Chlor-Alkali Plants

6. Coal Mining and Production

7. Coke Manufacturing

8. Copper Smelting

9. Dairy Industry

10. Dye Manufacturing

11. Electronics Manufacturing

12. Electroplating Industry

13. Foundries

14. Fruit and Vegetable Processing

15. General Environmental Guidelines

16. Glass Manufacturing

17. Industrial Estates

18. Iron and Steel Manufacturing

19. Lead and Zinc Smelting

20. Meat Processing and Rendering

21. Mini Steel Mills

22. Mixed Fertilizer Plants

23. Monitoring

24. Nickel Smelting and Refining

25. Nitrogenous Fertilizer Plants

26. Oil and Gas Development (Onshore)

27. Pesticides Formulation

28. Pesticides Manufacturing

29. Petrochemicals Manufacturing

30. Petroleum Refining

31. Pharmaceutical Manufacturing

32. Phosphate Fertilizer Plants

33. Printing Industry

34. Pulp and Paper Mills

35. Sugar Manufacturing

36. Tanning and Leather Finishing

37. Textiles Industry

38. Thermal Power Guidelines for New Plants

39. Thermal Power Rehabilitation of Existing Plants

40. Vegetable Oil Processing

41. Wood Preserving Industry

IFC Guidelines

1. Airports

2. Ceramic Tile Manufacturing

3. Construction Materials Plants

4. Electric Power Transmission and Distribution

5. Fish Processing

6. Food and Beverage Processing

7. Forestry Operations: Logging

8. Gas Terminal Systems

9. General Health and Safety

10. Health Care

11. Geothermal Projects

12. Hazardous Materials Management

13. Hospitals

14. Office Buildings

15. Offshore Oil & Gas

16. Polychlorinated Biphenyls (PCBs)

17. Pesticide Handling and Application

18. Plantations

19. Port and Harbor Facilities

20. Rail Transit Systems

21. Roads and Highways

22. Telecommunications

23. Tourism and Hospitality Development

24. Wildland Manage

25. Wind Energy Conversion Systems

26. Wood Products Industries

27. Waste Management Facilities

28. Wastewater Reuse

* Exception (the following are World Bank Guidelines not contained in the PPAH and

currently in use)

Mining and Milling - Underground

Mining and Milling - Open Pit


REFERENCES

 

1.

Al Gore, David Blood, For People & Planet, San Francisco Chronicle, 4 April 2006

www.equator-principles.com

2.

Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards ("Basel II"), November 2005. http://www.bis.org/publ/bcbs118.pdf

3.

Degefe Duressa & Meine Pieter Van Djik, The Microfinance Sector in Ethiopia, An Overview, Issues & Challenges in Local & Regional Development (Edited by Tegegne Gebre Egziabher & Meine Pieter Van Dijk), May 2005, Addis Ababa

4.

Federal Negarit Gazeta of the Federal Democratic Republic of Ethiopia, Proclamation No. 295/2002, A Proclamation Provided for the Establishment of Environmental Protection Organs

5.

Federal Negarit Gazeta of the Federal Democratic Republic of Ethiopia, Proclamation No. 373/2003, Investment (Amendment) Proclamation

6.

Federal Negarit Gazeta of the Federal Democratic Republic of Ethiopia, Proclamation No. 300/2002, Environmental Pollution Control Proclamation

7.

Federal Negarit Gazeta of the Federal Democratic Republic of Ethiopia, Proclamation No. 299/2002, Environmental Impact Assessment Proclamation

8.

Federal Negarit Gazeta of the Federal Democratic Republic of Ethiopia, Proclamation No. 1/1995, Proclamation of the Constitution of the Federal Democratic Republic of Ethiopia

9.

Fujii Yoshihiro, Western Banks Set Standards for Eco-friendly Lending. Japanese Banks Far Behind. NGO Keeping Close Watch, NIKKEI, Tokyo, September 5, 2003

www.equator-principles.com

10.

Glasgow Bo, A Point of Principle, Glogal Finance Magazine, July 2003

www.equator-principles.com

11.

Hawser Anita, A Matter of Principles, Global Finance Magazine, January 2005

www.equator-principles.com

12.

Jeucken Marcel, Slow Starters are Gaining Pace – The Response of Banks to Sustainability Issues, A paper based on the book ‘Sustainable Finance & Banking’ by Marcel Jeucken (November  2001) , The Netherlands

www.sustainability-in-finance.com

13.

Kyte Rachel, Principles in Question, The Banker, 07 March 2005 (P.60)

14.

Lazarus Suellen, A Matter of Principle, Project Finance Magazine, 3 March 2004

www.equator-principles.com

 

15.

Lazarus Suellen, The Equator Principles: A Milestone or Just Good PR? Global Agenda, 26 January 2004

www.equator-principles.com

16.

Lazarus,Suellen Banking on the Furure: The Equator Principles & the Project Finance Market, Washington, 2003

www.ifc.org

17.

National Bank of Ethiopia, www.nbe.gov.et

18.

Neithorpe Tom, Principled Finance? Project Finance Magazine, June 2003

www.equator-principles.com

19.

Neway Gebre Ab & Leikun Berhanu, Finance and Development in Ethiopia, Economic Focus – Bulletin of the Ethiopian Economic Association, May 2006, Addis Ababa

20.

Prince Charles O., Balancing Economic Growth & Environmental – Social Responsibility, www.equator-principles.com

21.

Ravindran Pratap, Equator Principles – Why Indian Banks Too Should be Guided by Them, THE HINDU, India, July 25, 2003

www.equator-principles.com

22.

Robinson Allens Arthur, The Equator Principles – Guidelines for Responsible Project Financing, FOCUS, August 2005

www.aar.com.au

23.

Sikhakhane Jabulani, Project Finance – Standards for Lending, Financial Mail, South Africa, July 25, 2003

www.equator-principles.com

24.

Smith Justin & Lisa Plit, Financiers Must Meet Criteria, Business Day, South Africa, July 14, 2003

www.equator-principles.com

25.

Solomon Kebede, Overview of Environmental Assessment (EA) in Ethiopia, August 2003, Addis Ababa

26.

The Equator Principle, Frequently Asked Questions, www.equator-principles.com

27.

The Equator Principles, Banks Agree New Loan Guidelines, Ethical Performance, July 2003, Vol. 5 Issue 3

www.equator-principles.com

28.

The Equator Principles, Institutions Which have Adopted the Equator Principles, www.equator-principles.com

29.

The Equator Principles, Putting Principles into Practice, Environmental Finance, June 2004

www.equator-principles.com

 

30.

The Equator Principles, The Equator Principles & Adopted by Leading Banks, The Times of India, June 5, 2003

www.equator-principles.com

31.

Todaro Michael P. & Stepehen C. Smith, Economic Development, 9th Edition, Pearson Education Limited, 2006

32.

United Bank S.C., Domestic Banking Operations Training Manual, November 2004, Addis Ababa

33.

Watchman Paul & Charles July, A New Environment – What Lies Beyond?, Legal Week, 2 February 2006

www.bs-reach.com

34.

Watchman Paul, Banks, Business & Human Rights, Butterworths Journal of International Banking & Financial Law, February 2006

35.

Wright Christopher, For Citigroup, Greening Starts With Listening, First published: April 4, 2006, www.equator-principles.com

36.

Yeomans,Matthew Taking the Earth into Account, Time Group, 9 May 2005, Vol 165 No. 19

www.equator-principles.com

 

 



[1] 1 Project finance is “a method of funding in which the lender looks primarily to the revenues generated by a single

project, both as the source of repayment and as security for the exposure. This type of financing is usually for large,

complex and expensive installations that might include, for example, power plants, chemical processing plants, mines,

transportation infrastructure, environment, and telecommunications infrastructure. Project finance may take the form of

financing of the construction of a new capital installation, or refinancing of an existing installation, with or without

improvements. In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by

the contracts for the facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPE (Special

Purpose Entity) that is not permitted to perform any function other than developing, owning, and operating the installation.

The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the

project’s assets.” Source: Basel Committee on Banking Supervision, International Convergence of Capital Measurement

and Capital Standards ("Basel II"), November 2005. http://www.bis.org/publ/bcbs118.pdf.

[2] Social and Environmental Assessment is a process that determines the social and environmental impacts and risks (including labour, health, and safety) of a proposed project in its area of influence. For the purposes of Equator Principles compliance, this will be an adequate, accurate and objective evaluation and presentation of the issues, whether prepared by the borrower, consultants or external experts. Depending on the nature and scale of the project, the assessment document may comprise a full-scale social and environmental impact assessment, a limited or focused environmental or social assessment (e.g. audit), or straight-forward application of environmental siting, pollution standards, design criteria, or construction standards. One or more specialised studies may also need to be undertaken.

 

[3] The Action Plan may range from a brief description of routine mitigation measures to a series of documents (e.g., resettlement action plan, indigenous peoples plan, emergency preparedness and response plan, decommissioning plan, etc). The level of detail and complexity of the Action Plan and the priority of the identified measures and actions will be commensurate with the project’s potential impacts and risks. Consistent with Performance Standard 1, the internal Social and Environmental Management System will incorporate the following elements: (i) Social and Environmental Assessment; (ii) management program; (iii) organizational capacity; (iv) training; (v) community engagement; (vi) monitoring; and (vii) reporting.

 

[4] Affected communities are communities of the local population within the project’s area of influence who are likely to be adversely affected by the project. Where such consultation needs to be undertaken in a structured manner, EPFIs may require the preparation of a Public Consultation and Disclosure Plan (PCDP).

 

[5] Consultation should be “free” (free of external manipulation, interference or coercion, and intimidation), “prior” (timely disclosure of information) and “informed” (relevant, understandable and accessible information), and apply to the entire project process and not to the early stages of the project alone. The borrower will tailor its consultation process to the language preferences of the affected communities, their decision-making processes, and the needs of disadvantaged or vulnerable groups. Consultation with Indigenous Peoples must conform to specific and detailed requirements as found in Performance Standard 7. Furthermore, the special rights of Indigenous Peoples as recognized by host-country legislation will need to be addressed.

 

[6] Such reporting should at a minimum include the number of transactions screened by each EPFI, including the categorization accorded to transactions (and may include a breakdown by sector or region), and information regarding implementation.

 

[7] Note: The principal requirements relate to the role of IFC as a multi-lateral agency and

notification requirements between riparian states which are generally outside the remit of

private sector operators or funders. It is referenced for the sake of completeness. The

substantive elements of good practice with respect to environmental and social aspects

therein are fully covered by OP 4.01.