The global trend of establishing environmental and social standards for project financing and institutional investments continues to gain momentum. For example, the Equator Principles, originally adopted in 2003, provide a voluntary framework for financial institutions to assess environmental and social issues in project financing. The principles, which are based on the International Finance Corporation's environmental and social standards, have been adopted by over 40 financial institutions active in the project finance market. The principles are intended to ensure that projects financed by Equator banks are developed in a manner that is socially responsible and reflects sound environmental management practices. As the Equator banks collectively represent some 80 percent of global project finance, the principles are generally regarded as the industry standard for assessing environmental and social issues in project financing. The principles were recently revised by the Equator banks to incorporate the International Finance Corporation's new environmental and social standards, which took effect on April 30, 2006 (www.ifc.org). The revised principles were re-adopted by the Equator banks on April 30, 2006 and will take effect on July 1, 2006 (www.equator-principles.com). Key changes include:
To date, the principles have been applied to projects with total capital costs of $50 million or more. The revised principles will now apply to all new project financings with total capital costs of $10 million or more. While the revised principles are not intended to apply retroactively, they will now apply to project financings covering expansions or upgrades of existing projects where changes in project scale or scope create significant additional environmental and/or social impacts or significantly change the nature or degree of an existing impact.
The revised principles explicitly confirm an Equator bank's right to exercise appropriate remedies if the borrower does not comply with its social and environmental covenants.
Equator banks will now commit to periodic public reporting on the implementation of the revised principles (e.g., at a minimum, number of transactions screened and categorization accorded to each transaction).
The revised principles have also been updated to reflect the International Finance Corporation's increased focus on social issues and long-term sustainability including:
New requirement to address climate change by quantifying and monitoring significant greenhouse gas emissions;
Increased assessment of social issues (including labour, health and safety);
In addition to the existing requirement for a corrective action plan to manage impacts and risks, borrowers must now also establish a social and environmental management system to ensure that corrective actions are completed;
For certain projects, new requirements for greater disclosure to, and consultation with, affected communities as well as an independent expert review of such consultations; and
The timeframe for community consultations has been extended to include the construction and operation of a project, and the Equator banks must be satisfied that the borrower has established grievance procedures to address community concerns.
Also, at the end of April 2006, the UN Secretary-General announced voluntary Principles for Responsible Investment, which were signed by an international group of large institutional investors representing more than $2 trillion in assets (www.unipri.org). The goal of these new principles is to help institutional investors integrate consideration of environmental, social and governance ("ESG") issues into investment decision-making and ownership practices. The new principles include commitments to seek disclosure on ESG issues by the entities in which the institutional investors invest and to report on the institutional investors' implementation of the new principles. By signing the Principles for Responsible Investment, these institutional investors publicly commit to adopt and implement the new principles, where consistent with the investor's fiduciary responsibilities.
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