Equator Principles Introduction

1
Equator Principles Introduction

• Professor Doug Cerf
• Donald Bren Graduate School of Environmental
  Science and Management
• Environmental Risk Management (ESM 286)
• Winter 2008

2
Industry wide approach to risk management

• Mission of Equator Principles A benchmark for
  the financial industry to manage social and
  environmental issues in project financing
• Broad environmental risk management at the
  consortium level via lender policy.
• Creating a standard

3

• 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 facilitys 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 projects cash flow and
  on the collateral value of the projects 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.

4
Players

• Company sponsoring the project
• Consumers, end users of the projects output
• Project financers
• Host government
• Society in the region of the project
• Suppliers
• NGOs

5
Equator Principles

• A new voluntary framework to guide project
  financing decisions
• Endorsed in 2003 by ten leading banks
• 57 institutions involved as of 2008
• Non government organizations (NGO) wanted
  financers of large projects to take legal and
  moral responsibility for the social and
  environmental impact on local communities and
  host nations caused by the projects that they
  financed
• Analogy institutional investors that are
  evaluating investments based climate risk
• Additional information http//www.equator-princi
  ples.com/principles.shtml

6
Case Questions

• What problems are banks trying to solve by
  adopting the Equator Principles? How do banks
  contribute to this problem? Will the Principles
  solve the problem?
• Why are the NGOs criticizing the Equator
  Principles? Is their criticism valid?
• What should the Equator banks do now?
• marketing (encouraging other banks and ECAs to
  adopt the principles),
• implementation (develop policies and procedures),
  or
• damage control (respond to the NGO criticism)?

7
Case Questions

• If you were a banker would you adopt the Equator
  principles?
• How will history judge the actions taken by the
  Equator bankers? Will the Equator Principles be
  seen as a bold step towards achieving sustainable
  development, a negligible step with long term
  impact, or simply a public relations stunt?