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banks agree new loan guidelines

July 2003

Ten banks from leading financial centres have agreed voluntary guidelines for assessing social and environmental risks when financing development projects.

The banks, which are based in seven countries, will apply the ‘Equator Principles’ to project finance for all industry sectors throughout the world.

Their commitment has the potential to make a significant impact, as last year they collectively underwrote $14.5billion (£8.7bn) of project loans, or a third of the global project loan syndication market.

By adopting the principles, each bank undertakes to lend money only to projects whose sponsors can demonstrate ‘their ability and willingness to comply with comprehensive processes aimed at ensuring that projects are developed in a socially responsible manner and according to sound environmental management practices.’ This will apply to all projects with a capital cost of at least $50m – 97 per cent of the market.

The banks, which recoup their investment from revenues earned by dams, power plants and other big projects once these are built, will use a common screening process to decide whether a project has high, medium or low social and environmental risks. They will use assessment methods developed by the International Finance Corporation, the largest multilateral source of finance for private sector projects in developing countries.

For medium to high-risk projects, the borrower will have to carry out an assessment of any social and environmental impacts identified by the banks, such as whether local villages need to be moved. Borrowers will have to consult with the interested parties and prepare a management plan to mitigate and monitor the risks. The banks will use independent monitors and will ask for covenants requiring borrowers to comply with the management plans. If the covenants are breached, they may declare the loans in default.

Chris Bray, head of the environmental risk management unit at Barclays Bank, which has adopted the principles, said: ‘I don’t envisage a sudden massive drop-off in the number of project finance deals as a result of this agreement, but it will mean that such deals will be done differently and there will be a far more structured approach to making sure that environmental and social issues are taken into account.’

Citigroup, the biggest lender in this market with $1.9billion in some 35 projects, according to the data provider Dealogic, said it was confident ‘more and more banks active in project finance [would] adopt the principles’. The second-biggest bank in the market, in terms of amount lent, is Royal Bank of Scotland.

Although some of the banks already comply with the principles in part, they will now have to put internal policies and processes in place. A coalition of 100 NGOs, among them Friends of the Earth and WWF, welcomed the principles as a ‘helpful springboard’, but stressed the need for banks to be transparent.




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