Erm presentation

Delivering sustainable solutions in a more competitive world

Equator Principles Roundtable

Equator Principles and Project Finance Standards for Sustainability:

The Challenges and Opportunities

Sarah Murfitt, Principal ConsultantEnvironmental Resources Management2nd December 2010


Environmental Resources Management (ERM)

• A leading global provider of environmental, health and safety, risk and social consulting services

• 137 offices in 39 countries and approx. 3,300 staff

• Gross revenues of US$695 million (fiscal year ending 31 March 2009)

• Five broad practice areas:

• Sustainability and Climate Change

• Impact Assessment and Planning

• Performance, Assurance and Risk Management

• Transaction Services

• Contaminated Site Management

• Website: www.erm.com


What is Project Finance?

• Project finance is a specific type of financial transaction in which lenders rely solely on the revenues generated by a “project” as the source of repayment and security for the loan (aka Revenue Based Finance)

• Financial institutions involved in Project Finance recognise that social and environmental risks may affect the ability of the project to generate revenues

• In 2003 the Equator Principles (or EPs) were launched to manage these risks for private sector financial institutions


Equator Principles: EvolutionWorld Bank

OP 4.01 Environmental Assessment

1979

World BankOP 4.01

Environmental Assessment

1979

Environmental Assessment Sourcebook

1991

Environmental Assessment Sourcebook

1991

Equator Principles

2003

Equator Principles

2003

IFC General and Industry Sector EHS Guidelines

2007+

IFC General and Industry Sector EHS Guidelines

2007+

1979 1991 1999

IFC Performance

Standards2006

IFC Performance

Standards2006

Equator Principles II

2006

Equator Principles II

2006

2003 2006

World Bankupdated tenSafeguard Policies

1998

World Bankupdated tenSafeguard Policies

1998

IFC adoptedSafeguard Policies

1998

IFC adoptedSafeguard Policies

1998

Pollution Abatement Handbook

1998

Pollution Abatement Handbook

1998

Safeguard Policies 1979-1998Safeguard Policies 1979-1998


Equator Principles• “Voluntary framework“ to reduce the environmental and social risks of

Project Finance

• Established in June 2003 by four banks, updated in July 2006 (Equator Principles II)… now over 65 banks have adopted!

• Some basic rules:• Project must fully comply with local environmental and social laws,• Conform to policies and guidelines of the IFC, • Banks commit to annual reporting on compliance and independent monitoring,

• Applies to new developments (>$10m USD) or significant extensions

• Some exemptions for projects in high‐income OECD countries (as defined by the World Bank Development Indicators Database).

• Website: www.equator‐principles.com


Importance of Project Finance Standards• Lenders:

• Tool to manage the environmental and social risks and therefore credit risk and reputational risk

•Working closely with developers to improve project sustainability and establishing a ‘social license to operate’

• Developers:

• A condition of finance from many international banks, development banks and Export Credit Agencies

•Direct implications for the way you do business, specifically:- Activities and processes need to align with standards e.g. ESIA, ESMP- Costs of meeting the standards need to be considered early on- Management of EPC contractors - Monitoring and reporting


Equator Principles in Israel• In June 2009, the Banks Supervisor in the Central Bank published a Draft

Notice stating:

"A bank must know that identifying and assessing environmental risk is part of the due diligence process of risk assessment. A bank must therefore include an assessment of environmental risk as part of its overall risk management, including procedures for identifying substantial risk when granting credit and integrating risk assessment in quarterly credit quality assessments."

• Israel's banks were expected to apply environmental risk management standards when granting credit, based on Equator Principles Financial Institutions. Israeli banks were given until July 2010 to approve a plan and timetable for adopting them, but this is still pending.


What are we currently doing?

• ERM provides a range of services related to Project Finance:

• E&S due diligence for Project Lenders

• ESIA/ESMP for Project proponents

• Lenders' Environmental and Social Advisor reviewing the Project ESIA, ESMP, management system and loan covenants

• EHS management systems for Projects on behalf of Project proponents

• Training on EP and IFC PSs

• Monitoring implementation of ESMP and compliance with loan covenants


Environmental and Social Impact Assessment (ESIA)

• ESIA – a process for identifying, assessing and developing measures to minimise or mitigate significant impacts resulting from the project.

Scopethe ESIA

Describethe

Baseline

Implement the

Findings

Identify and Assess the Impacts

Predict Evaluate Mitigate/Enhance

-

Stakeholder Consultation

Design and Decision-Making


Impacts of ESIA on Project Timing

Project finance secured

Project finance securedLocal permit

approvalsLocal permit approvals Project

approvalProject

approval

Ongoing project

appraisal

Ongoing project

appraisalProject finance

‘application’Project finance

‘application’

Feasibility studies

Feasibility studies

Project operational

Project operational

Environment & social impact assessment

Environment & social impact assessment

OngoingOngoing1-2 years1-2 years2-4 years2-4 years

ESIA Scoped EP assessment

bottleneck


Key Challenges

• Navigating the guidance and keeping abreastof updates

• Aligning with national regulatory frameworks

• Division of responsibilities with third parties (e.g. local and national governments, and contractors and suppliers)

• Considering project finance standards early

• Requirements for social assessment and stakeholder engagement

• Determining scope of the assessment – e.g. associated facilities, transboundary and cumulative impacts

• Developing robust, workable environmental and social management systems


Key Opportunities

• Responsible project development: more effective risk management and improved project outcomes

• Reduced project delays and associated cost

• Lower reputational risks and protection of shareholder value

• Overall, streamlined/more efficient development and investment decisions


Who are our clients?

• Financial:

• EPFIs (over 65 Banks, 50% of which are ERM clients)

• Multi‐ and Bi‐Laterals (IFC, EBRD), Export Credit Agencies

• Trade:

• Sponsors and developers

• Other advisors – technical, legal, insurance

• Sectors:

• O&G, Power, Metals & Mining, Infrastructure & Transport, Manufacturing.


Case Studies: Financial

ERM has just been appointed to a multi-year contract to provide lenders advisory and due diligence services to the European Bank for Reconstruction and Development.

2010 - ongoingEBRD countries

Framework contract to provide independent Environmental and Social consultancy services for EBRD

What we did:

Date:Location:

Project:


Case Studies: Oil and Gas

This proposed pipeline project is planned to serve as a gas bridge from Asia to Europe linking Eastern Turkey to Austria via Bulgaria, Romania and Hungary. When completed the pipeline will be some 3,300 km in length, with construction due to start in 2011 and first gas in 2014. ERM’srole in this high profile project is to act as Independent Environmental and Social Advisor to the group of financial institutions (currently comprising EBRD, EIB and IFC, as well as various Export Credit Agencies) that are considering contributing financing for the project. Our role will be to ensure that project standards are applied consistently across the five Nabucco transit countries and that the expectations of the Lenders Group are fully complied with.

2010 (ongoing).

Nabucco Gas Pipeline International, Environment and Social Due Diligence Services EBRD, IFC and EIB

What we did:

Date:

Project:

Lenders:


Case Studies: Timber Salvage

ERM was commissioned by CSRD to prepare an ESIA to fully comply with all Ghanaian EIA Regulations, IFC Performance Standards and World Bank Safeguard Policies, as well as any other directly relevant policies of the IFC and World Bank. Key issuesexamined in the ESIA include: water quality, fisheries, risks to the population of manatees (a rare aquatic mammal), and fishing livelihoods. ERM prepared the ESIA to international standards aspart of project financing, and supported CSRD through the permitting process with the Ghanaian EPA.

2007-2008

Ghana

Lake Volta Timber Salvage Project Clark Sustainable Resource Developments (CSRD)

What we did:

Date:Location:

Project:Borrower:

Lead advisor:


Case Studies: Mining and Metals

In spite of the tight time constraints and logistical issues, ERM was able to visit all sites over a 4-week period and assimilate the findings into summary report for UC RUSAL and their advisors within 1 month.

ERM visited 44 facilities including bauxite mines, alumina refineries and aluminium smelters in 11 countries operated by the world’s largest aluminium company. ERM produced reports in English and Russian with details of material liabilities associated with environmental, health and safety and social issues.

2008, Russia, Ukraine, Kazakhstan, Caribbean, Africa, S America, Europe

$30 billion (Initial Public Offering)

KandinskyUnited Company RUSAL

How we added value:

What we did:

Date & Location:

Deal Size:

Transaction type:

Project:Client:



ERM is currently advising a consortium of lenders on the financing of a downstream oil and gas Project in Egypt. An assessment of the Sponsor’s commitment to the Equator Principles and IFC Performance Standards has been completed. ERM reviewed the ESIA and other project documentation. Specific issues relating to the cumulative environmental impacts of the asset and resettlement of communities have been thoroughly reviewed. ERM has also assisted in the wording of the lending covenant to monitor compliance during the construction and operation of the asset and will commence monitoring activities once financial close is reached.

2006 – present, Egypt$3.7 billion

Project Finance - Oil Refinery, Egyptian Refining Company

What we did:

Date & Location:Project Value:

Project:



ERM undertook a social and environmental due diligence of the ESHIA for the Brass River LNG plant and associated off shore facilities to the Equator principles and the 9 IFC performance standards. This work included reviewing the ESIAs and associated management plans to ensure they complied with international lender requirements.

2007Nigeria

Brass LNG Due Diligence to Equator Principles for lender banks

What we did:

Date:Location:

Project:


Contact Details:

Sarah Murfitt Laura StreetPrincipal Consultant ConsultantERM ERM2nd Floor, Exchequer Court Eaton House, Wallbrook CourtSt Mary Axe North Hinksey LaneLondon, EC3A 8AA Oxford, OX2 0QS

Telephone: +44 20 3206 5200 Telephone: +44 1865 384 800Direct Line: +44 20 3206 5362 Direct Line: + 44 1865 384 [email protected] [email protected] www.erm.com

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