Conference title

1
Conference title

• Environmental and Social Risk management.
• Financing Metal Mining Projects The Equator
  Principles
• David Glenister
• Sustainability Specialist SGS

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Metal Mining Sustainability

• The mining and metals industry faces a broad
  range of challenges in producing the essential
  materials for today's society
• Among others issues, Environmental and social
  risks management are key factors for grant access
  to finance from Development or private
  international Financial institutions
• The Equator Principles guidelines have an impact
  on mining metals project finance from the
  perpective of sponsors and borrowers in terms of
  their environmental and social contractual
  obligations.

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Metal Mining Sustainability

• The dialogue on the inter-relationship of
  financing, mining and sustainability has four
  objectives
• to support a better understanding amongst the
  finance community of issues raised by the mining
  industrys uneven performance with respect to
  sustainable development as they relate to
  financial and reputational risk and shareholder
  value
• to examine what role, if any, the financial
  community could play to enhance themining
  industrys performance (e.g. guidelines,
  standards, or similar criteria)
• to examine mechanisms (reporting, rating,
  certification, monitoring) suitable to improve
  overall industry performance, thereby reducing
  risk exposure for the financial community at
  large and
• to move toward a broader consensus on the
  evaluation of sustainability specific risk
  factors in mining finance, and their application.

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Metal Mining Sustainability

• The causal link between sustainability and
  financial performance is tenuous and most likely
  reflects the quality of a mines management.
• The mineral and financial sectors are realizing
  that reputational risk carries with it economic
  risk and on-going mining accidents have both
  reputational and financial risk elements.

• Hard-to-manage risks
• Legal Risks
• Market Political Risks
• Force Majeur
• Manageable Risks
• Technical Operational Risk
• Environmental Social Risk
• Economical Risk

Type of risks
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SOURCES OF RISK
MARKET/POLITICAL
LEGAL/FINANCIAL

• Price, currency, interest rates fluctuation
• Inconvertibility of currency
• Disable currency transfer
• Change in law and legal system
• Political instability violence
• Riot, strike, civil commotion
• Terrorism, war

• Contractor insolvency
• Breach of contract

OTHER

• Natural peril, disaster
• Earthquake, fire explosion
• Force majeur

TECHNICAL/OPERATIONAL
SOCIAL/ENVIRONMENTAL

• Handling/operation
• Construction
• Faulty design, materials, workmanship
• Reliability of feasibility study
• Project performance
• Supplier performance
• Contractor performance
• Defects
• Alterations/betterments

• Labor and working conditions
• Pollution
• Health, safety and security (community, employee)
• Land acquisition and involuntary resettlement
• Biodiversity conservation sustainable natural
  resource management

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THE VALUE OF STANDARDS AND AGREEMENTS, AUDITSAND
INDEPENDENT VERIFICATION

• The mining industry had embraced principles for
  sustainable development and environmental best
  practices to properly address those risks by
  developing several voluntary codes of conduct
  such as
• International Cyanide Management Code
• International council for mining metalss
  sustainable development framework
• Mineral Policy Centers Guidelines on Responsible
  Mining
• World Banks 2003 Extractive Industries Review
• IFCs Environmental HS sector guideline for
  Mining

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Equator Principles The Project Finance Benchmark
Standards, codes, and agreements are useful to
the lending community. However, these need to be
specific, with measurable performance factors,
actionable, responsible and timely.

• A voluntary framework for banks to manage
  environmental and social risks in project finance
• Based on IFCs Performance Standards and WBG
  Environmental, Health and Safety Guidelines
• First announced in June 2003 with ten banks.
  Re-launched as EP2 in July 2006, in line with the
  new IFC ES Performance Standards
• Currently more than 65 financial institutions
  EPFIs arranging around 90 of global project
  finance
• All projects undergo categorization and social
  and environmental review

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Equator Principles The Project Finance Benchmark

• Over 70 financial institutions have adopted the
  Equator Principles, which have become the de
  facto standard for banks and investors on how to
  assess major development projects around the
  world. 90 Project Financing
• Once adopted by banks and other financial
  institutions, the Equator Principles commit the
  adoptee not to finance projects that fail to
  follow the processes defined by the Principles.

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Equator Principles The Project Finance Benchmark

• The principles apply to all new project
  financings globally with total project capital
  costs of US10 million or more, and across all
  industry sectors.
• the Principles also apply 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.

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Equator Principle Ten Principles

• Principle 1 Review and Categorization
• Principle 2 Social and Environmental Assessment
  (Process)
• Principle 3 Applicable Social and Environmental
  Standards
• High-income OECD countries vs. Emerging Markets
• Principle 4 Action Plan and Management System
• Principle 5 Consultation and Disclosure
• Principle 7 Grievance Mechanism
• Principle 8 Independent Review
• Principle 9 Covenants
• Principle 10 EPFI Implementation Reporting

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Equator Principles The Project Finance ES
Benchmark

• The Equator Principles can bee seen closely
  mirror the International
• Finance Corporation (IFC) Performance Standards
  on Social and
• Environmental Sustainability,
• Performance Standard 1 Social and Environmental
  Assessment and 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 6Bio-diversity Conservation
  and Sustainable Natural Resource Management
• Performance Standard 7 Indigenous Peles
• Performance Standard 8 Cultural Heritage

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The Criteria

• Categorization of projects, based on
  International Finance
• Cooperation (IFCs) environmental and social
  screening
• criteria, to reflect the magnitude of prospective
  impacts and
• risks Category to
• Category A Projects with potential significant
  adverse social or environmental impacts that
  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.

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Equator Principles The Project Finance ES
Benchmark

• For Category A and B projects, the borrower must
  conduct a social and environmental assessment to
  determine the associated risks of the project and
  prepare an action plan which addresses the
  relevant findings and propose the mitigations
  measures, corrective actions and monitoring to
  properly managed them.
• Furhtermore, the must maintain and establish a
  social and environmental management system that
  addresses the management of the action plan

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Equator Principles The Project Finance ES
Benchmark

• Borrower must covenant to
• Comply with all host country social and
  environmental laws, regulations and permits in
  all material respects
• Compy with the action plan during the
  construction and operation of the project
• Provide periodic reports to the Financial
  institution representation of compliance with
  Action plan and host country environmental and
  social regulation
• Decommission the facilities where applicable in
  accordance with an agreed decommisioning plan

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Equator Principles Work-Flow
Lender
Borrower
EP2) ES assessment
EP1) Project categorization
EP3) Applicable ES Standards
EP4) Action Plan and mangement system
EP 5) Consultation disclosure
EP7) Independent Review
EP6) Grievance Mechanism
EP8) Coventants
EP9) Independent monitoring
EP10) Reporting
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How to manage

• Once the risk are identified, On-site action is
  needed to manage risk
• The Equator Principles itself rely on external
  technical expert to help EPFI and borrowers
  manage ES issues relate to the project
• Principle 7 Independent Review
• Principle 9 Independent Monitoring and
  Reporting

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Independent Third Party can Help?

• Many EPFI has set procedures to involve
  independent third parties on these activities
• It clearly improve the way they partner with
• Clients
• Governments
• Civil society and NGOs
• On-site assessments and monitoring also improve
  transparency and accountability of EPFI efforts
  on implementing EP and IFC performance standards

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Case Study Northern Peru Corporation

• Business Challenge
• Review a resettlement process against the Equator
  Principles as part of Northern Peru Copper Corps
  development plan for a mine in Peru.
• Approach
• checked whether the local Peruvian contractor was
  completing the resettlement in line with best
  practice and proposed ways to close the gaps.
• In so doing, the Auditor reviewed resettlement
  documents and social management plans and met
  stakeholders to determine the extent of process
  application. The Auditor also liaised with the
  community to review their involvement in the
  resettlement process and the degree to which it
  was consistent with plans.
• Benefits Value
• Auditor identified breaches of the Equator
  Principles requirements that could jeopardize the
  NPCs prospects of World Bank financing.
• Auditor also provided actionable recommendations
  to improve community relations and resettlement
  process management.

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Case Study Pt Agincourt Resources

• Business Challenge
• Undertake an environmental impact assessment to
  Equator Principles to ensure PT Agincourt
  Resources attained local AMDAL approval and could
  commence construction on a Gold and Silver Mine
  in Indonesia.
• Approach
• The Third Party Firm collected information
  required to meet the government and companys
  requirements from air quality to socio-economic
  data. Simultaneously the Third Party also had to
  follow strict processes set out by AMDAL relating
  to public engagement.
• The Third Party submitted Terms of Reference for
  the project which were reviewed and approved by
  the relevant authorities. This was followed by
  submission of the AMDAL itself and accompanying
  environmental monitoring and management plans.
•   Benefits Value
• AMDAL approval was granted in early 2008 and the
  project is on schedule according to plans.

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On Site Assessment

• On site assessment is used predominantly on the
  basis of confirming-
• that the Project Operator and/or EPC
  contractor(s) are aware of the need for certain
  socio-economic and/or EHS related issues to be
  addressed within the project,
• that these requirements are factored into the
  project development and execution process,
• that the project design, planning, approval
  processes, project management and implementation
  parameters are in line with EP / IFC criteria,
  and,
• that the desired outcome is likely to be achieved
  in respect of the projects environmental and
  socio-economic probity, if implemented
  effectively.

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Equator PrinciplesAssessment Objectives

• To assess and report on - in the context of
  statutory obligations, and any other applicable
  discretionary corporate social and environmental
  obligations - whether the Project is in accord
  with the Equator Principles requirements and
  associated IFC Performance Standards identified.
• To identify any areas where inconsistencies exist
  between the Equator Principles, action plan or
  loan terms and conditions requirements and
  current performance or where some re-examination
  or strengthening of current management
  performance might be warranted.

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Equator PrinciplesBenefits

• Standardize ES lender requirements
• Equator Principles bring a level of social and
  environmental evaluation, transparency and
  discipline to projects which might otherwise be
  absent.
• Promote responsible investments development
• The banks are secure in the knowledge that their
  investments are being used to support ethical and
  sustainable work and that the project conforms to
  the required standards. Open new market.
• Provide effective project finance risk
  management
• Protect Project Return of Investment
• Reduce cost overruns and delays
• Protect Financial Institutions from the
  environmental and social liabilities of the
  project.
• Preserves Financial Institutions reputation
• Provides access to capital
• From international EPFI or Multilaterals

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Any Questions?
David Glenister, SGS United Kingdom Ltd SGS
House 217-221 London Road Camberley Surrey GU15
3EY United Kingdom Tel [phone]
david.glenister_at_sgs.com