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 | Sustainable development | |
 The Equator Principles – assessing and managing social and environmental risks in project finance
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Within just a few months, these principles became a standard for project finance when 60 major international financial institutions confirmed their adoption.
By guaranteeing its compliance with the Equator Principles in its project finance activities, Calyon will only finance those projects that comply with a set of social and environmental requirements based on IFC policies and rules.
Within the EP framework, Calyon has formalised its procedures for analysing social and environmental risks. This helps specify the conditions under which a given project can be financed.
Under these procedures a project is assigned to one of three categories (A, B or C) based on its location (proximity to ecologically-important areas) and potential impact on the environment and the local social fabric. For instance, social impacts are deemed important when they affect vulnerable ethnic minorities or involve the forced displacement and relocation of populations. Environmental impacts are deemed critical if they result, for instance, in irreversible consequences for the natural habitat. The A category covers projects with the highest risk and the C category those with the lowest risk.
This categorisation, together with the estimated ability of the sponsors to manage a project's social and environmental impacts, is used to determine the specific requirements of each of the banks vis-à-vis the borrowers, in terms of their recourse to consultants, additional studies, imposed actions (environmental management plans, palliative measures, public consultations, etc.) and the legal obligations included in the loans' contractual documents. The requirements imposed on sponsors are highest for those projects that fall into the A category.
"Failure to comply with the loans' contractual obligations can trigger a default and the request for early repayment, but this is only used as a final recourse. If the sponsors encounter problems in meeting the original commitments, we seek to correct the situation, thanks to our regular and detailed monitoring of the project's progress and ongoing dialogue with the sponsors and oblige the borrower to comply with the defined social and environmental requirements and to take steps to remedy any shortcomings", explains Eric Cochard, Head of Sustainable Development at Calyon.
These principles apply to all project finance arrangements with a total worth of USD 10 million or more.
In 2005 and 2006, the Equator Principle Financial Institutions (EPFIs) revised the Equator Principles in accordance with changes in International Financial Corporation (IFC) standards. Calyon played an active role in rewriting these new principles, which are known as EP2 and came into force on 6 July 2006.
Consulted by the EPFIs, clients and non-governmental organisations (NGOs) were also involved in this process.
EP2 is a further development of the original principles defined in 2003 with a broader scope of application and imposing greater transparency on financial institutions. In particular EP2 requires:- strengthening the social aspects of the principles with regard to working conditions (non-discrimination, union freedom, etc.);
- extending their scope of application to project finance advisory activities and to changes made to existing projects that have significant environmental and social impacts;
- relaxing their application in countries where local statutes impose significant environmental and social obligations (in particular in OECD countries);
- obliging financial institutions to publish an annual report on their application of the principles.
These new provisions have been favourably welcomed by the stakeholders involved.
Calyon's business line takes a practical and responsive approach | |
Each institution that has adopted the EP Charter has put in place its own organisation to monitor compliance with these principles.
Calyon's EP programme stresses the development of a true "sustainable development" culture by making Project Finance sales and operating staff accountable and integrating EP analysis into the lending process.
Calyon's dedicated EP system takes the following pragmatic approach.
- On a routine basis, the Project Finance teams carry out all analysis relating to EP compliance by completing rating grids, performing due diligence, contacting outside sponsors and consultants, negotiating the terms and conditions for loans, etc.
- The document that support the EP analysis become an integral part of the loan documentation, and no credit application is passed on for approval if EP documents are missing. The Risks department approves, or not, all EP ratings, a system encouraging the critical assessment of the rating grids.
- For all projects in the A category, or at the request of Project Finance, the EP Committee is asked to give a prior opinion and recommendation.
- In addition, the EP Committee meets four times a year to validate the EP ratings after a review by the Industry and Sector Research (EIS) unit, paying particular attention to category-A applications and those considered "sensitive".
A Paris-based Coordination Unit is responsible for putting this organisation in place, defining rating grids and systems, training staff, drafting procedures, providing support for sensitive applications, organising a network of EP correspondents within each of the seven Project Finance units and preparing and recording the deliberations of EP Committee meetings. This Coordination Unit is also Calyon's representative to the group of Equator Banks, the IFC and NGOs.
The parties involved in Calyon's EP initiatives | |
The network of local correspondents and the Coordination Unit are made up of operating staff from the Project Finance business line who, on a part-time basis, implement the Equator Principles and act as the link to business managers and the control and validation bodies presented below. They verify that there is a first level of consistency in the implementation of the EP approach, and provide appropriate support as necessary to the business managers, in accordance with the difficulty of the situations encountered. This model has been specifically developed by Calyon to reconcile the requirements for rigour, responsiveness and pragmatism in implementing the EP procedure.
Industry and Sector Research (EIS), a unit of Crédit Agricole S.A., Calyon's owner, comprises senior engineers specialised by sector serving the needs of all Crédit Agricole entities as well as its Executive Management team by applying their skills and knowledge to complex technical and environmental issues. EIS provides professional, independent opinions and analysis.
As part of Calyon's EP procedures, EIS is regularly called upon to analyse and express its opinion on the projects that are the most sensitive in terms of their implications for sustainable development.
"Sustainable development is already taken into account by manufacturers in their industrial processes, and will be increasingly so in the future," stresses Alain Cazalé, the head of EIS, "and the experience acquired by our senior analysts in carrying out their assignments in the field is proving indispensable to our project analysis".
To speed the feedback process, Calyon also conducts a social and environmental assessment of all the projects in its portfolio with the assistance of EIS analysts. Within the context of Calyon's EP approach, this effort is viewed as an audit of projects' EP ratings. In 2007, 126 projects had been assessed and assigned to one of the three categories. For the year, EIS recommended that the EP Committee change the category of only 11 of the 126 projects, recommending that five be given a more restrictive rating and one a less restrictive rating.
The Equator Principles Committee ensures the monitoring and implementation of the Equator Principles.
Calyon's EP Committee was set up in 2006 as the governance body responsible for monitoring compliance with the rules and spirit of the Equator Principles. The Coordination Unit calls frequent meetings of this multidisciplinary EP Committee, which supervises the application of the Equator Principles and monitors the proper functioning of the procedures designed to assess and manage social and environmental risks. Its prerogatives include:
- validating project categories;
- the right to examine immediately all projects rated A or deemed sensitive. Prior to Credit Committee meetings, it issues a recommendation that may include conditions it would like to have included in the structuring of the project;
- being consulted on all essential aspects of the implementation of the Equator Principles and validating the information that will be made public.
The EP Committee is chaired by the head of Compliance at Calyon and its five voting members (who may send representatives) are the:
- Committee chairman,
- head of the Project & Natural Resources business line,
- head of Risk Management and Control Division (DGCR),
- head of Crédit Agricole S.A.'s Sustainable Development Task Force,
- head of Crédit Agricole S.A.'s Industry and Sector Research unit.The Central Legal department is also represented on the EP Committee.
The EP Committee also issued recommendations concerning category-A projects and a few category-B projects placed on special watch. These recommendations were taken into account by the Credit Committee and included in the opinions and minutes of risk analysis bodies.
"The Committee has a steering function. Its role is not to replace operating personnel whose awareness of the Equator Principles is considerable," adds Jean Cédelle, the head of Compliance. "As an information crossroads, the Committee enables Calyon to adapt its already highly structured system as necessary".
Recent achievements and changes | |
Since adopting the Equator Principles, Calyon has launched a vast in-house training programme designed to explain the principles and the stakes involved, and to familiarise attendees with the social and environmental risk assessment resources available at Calyon.
A specific Equator Principles training programme was drawn up with the help of Sustainable Finance, a firm of outside consultants, and has been followed by some 150 employees of the Project Finance division and others such as the Sustainable Development unit, Legal and Compliance departments, the Risks department and the Industry and Sector Research unit. This training programme has also served as a basis for preparing the many EP awareness-raising sessions held within the group and has been attended by several hundred people.
Number of projects rated
In 2007, the EP Committee has approved the categorisation of 126 projects, breaking them down as follows:
Total projects | A projects | B projects | C projects |
126 | 3 | 111 | 12 |
100% | 2% | 88% | 10% |
In 2007, the ratings of 5 projects was postponed.
Management of the most sensitive projects
New directives released in 2006 stipulate that credit approval for A-rated projects must come from an authorisation level higher than would be normally required if, all other things being equal, they were not rated A.
This new requirement strengthens our reputation-risk management procedures for the projects deemed to be the most sensitive.
Towards Equator Principles governance
As one of the 60 Equator Principle Financial Institutions (EPFIs), Calyon currently favours organising a formal association of the 40 EPFIs. Such an organisation would ensure better coordination between EPFIs, greater harmony in their communications and actions and more effective monitoring of the application of sustainable development principles.
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