conference title environmental and social risk management. financing metal mining projects – the...

Conference title

Environmental and Social Risk management.

Financing Metal Mining Projects – The Equator Principles

David Glenister

Sustainability Specialist SGS

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Metal Mining & Sustainability

The mining and metals industry faces a broad range of challenges in producing the essential materials for today's society

Among others issues, Environmental and social risks management are key factors for grant access to finance from Development or private international Financial institutions

The Equator Principles guidelines have an impact on mining & metals project finance from the perpective of sponsors and borrowers in terms of their environmental and social contractual obligations.

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The dialogue on the inter-relationship of financing, mining and sustainability has four objectives:

1. to support a better understanding amongst the finance community of issues raised by the mining industry’s uneven performance with respect to sustainable development as they relate to financial and reputational risk and shareholder value;

2. to examine what role, if any, the financial community could play to enhance themining industry’s performance (e.g. guidelines, standards, or similar criteria);

3. to examine mechanisms (reporting, rating, certification, monitoring) suitable to improve overall industry performance, thereby reducing risk exposure for the financial community at large; and

4. to move toward a broader consensus on the evaluation of sustainability specific risk factors in mining finance, and their application.

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The causal link between sustainability and financial performance is tenuous and most likely reflects the quality of a mine’s management.

The mineral and financial sectors are realizing that reputational risk carries with it economic risk and on-going mining accidents have both reputational and financial risk elements.

Hard-to-manage risks:Legal RisksMarket & Political RisksForce Majeur

Manageable RisksTechnical & Operational RiskEnvironmental & Social RiskEconomical Risk

Type of risks;

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SOURCES OF RISK

>Natural peril, disaster> Earthquake, fire

explosion> Force majeur

> Price, currency, interest rates fluctuation

> Inconvertibility of currency>Disable currency transfer>Change in law and legal

system> Political instability violence>Riot, strike, civil commotion> Terrorism, war

>Handling/operation>Construction> Faulty design, materials,

workmanship>Reliability of feasibility study> Project performance> Supplier performance>Contractor performance>Defects > Alterations/betterments

> Labor and working conditions> Pollution >Health, safety and security

(community, employee)> Land acquisition and

involuntary resettlement> Biodiversity conservation &

sustainable natural resource management

>Contractor insolvency> Breach of contract

LEGAL/FINANCIAL

OTHER

MARKET/POLITICAL

TECHNICAL/OPERATIONAL SOCIAL/ENVIRONMENTAL

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The mining industry had embraced principles for sustainable development and environmental best practices to properly address those risks by developing several voluntary codes of conduct such as;

International Cyanide Management Code

International council for mining & metals’s sustainable development framework

Mineral Policy Center’s Guidelines on Responsible Mining

World Bank’s 2003 Extractive Industries Review

IFC’s Environmental H&S sector guideline for Mining

THE VALUE OF STANDARDS AND AGREEMENTS, AUDITSAND INDEPENDENT VERIFICATION

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Equator Principles – The Project Finance Benchmark

A voluntary framework for banks to manage environmental and social risks in project finance

Based on IFC’s Performance Standards and WBG Environmental, Health and Safety Guidelines

First announced in June 2003 with ten banks. Re-launched as EP2 in July 2006, in line with the new IFC E&S Performance Standards

Currently more than 65 financial institutions “EPFIs” arranging around 90% of global project finance

All projects undergo categorization and social and environmental review

Standards, codes, and agreements are useful to the lending community. However, these need to be specific, with measurable performance factors, actionable, responsible and timely.

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Over 70 financial institutions have adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects around the world. – 90 % Project Financing

Once adopted by banks and other financial institutions, the Equator Principles commit the adoptee not to finance projects that fail to follow the processes defined by the Principles.


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The principles apply to all new project financings globally with total project capital costs of US$10 million or more, and across all industry sectors.

the Principles also apply to all project financings covering expansion or upgrade of an existing facility where changes in scale or scope may create significant environmental and/or social impacts, or significantly change the nature or degree of an existing impact.


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Equator Principle – Ten Principles

Principle 1: Review and Categorization

Principle 2: Social and Environmental Assessment (Process)

Principle 3: Applicable Social and Environmental Standards High-income OECD countries vs. Emerging Markets

Principle 4: Action Plan and Management System

Principle 5: Consultation and Disclosure

Principle 7: Grievance Mechanism

Principle 8: Independent Review

Principle 9: Covenants

Principle 10: EPFI Implementation Reporting

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The Equator Principles can bee seen closely mirror the International Finance Corporation (IFC) Performance Standards on Social and Environmental Sustainability,:

Performance Standard 1: Social and Environmental Assessment and Management System

Performance Standard 2: Labor and Working Conditions

Performance Standard 3: Pollution Prevention and Abatement

Performance Standard 4: Community Health, Safety and Security

Performance Standard 5: Land Acquisition and Involuntary Resettlement

Performance Standard 6:Bio-diversity Conservation and Sustainable Natural Resource Management

Performance Standard 7: Indigenous Peles

Performance Standard 8: Cultural Heritage

Equator Principles – The Project Finance E&S Benchmark

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The Criteria

Categorization of projects, based on International Finance Cooperation (IFC’s) environmental and social screening criteria, to reflect the magnitude of prospective impacts and risks Category to:

Category A – Projects with potential significant adverse social or environmental impacts that diverse, irreversible or unprecedented;

Category B – Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and

Category C – Projects with minimal or no social or environmental impacts.

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For Category A and B projects, the borrower must conduct a social and environmental assessment to determine the associated risks of the project and prepare an action plan which addresses the relevant findings and propose the mitigations measures, corrective actions and monitoring to properly managed them.

Furhtermore, the must maintain and establish a social and environmental management system that addresses the management of the action plan

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Borrower must covenant to:

Comply with all host country social and environmental laws, regulations and permits in all material respects

Compy with the action plan during the construction and operation of the project

Provide periodic reports to the Financial institution representation of compliance with Action plan and host country environmental and social regulation

Decommission the facilities where applicable in accordance with an agreed decommisioning plan

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Equator Principles Work-Flow

Lender Borrower

EP1) Project categorization EP2) E&S assessment

EP3) Applicable E&S Standards

EP4) Action Plan and mangement system

EP 5) Consultation disclosure

EP6) Grievance MechanismEP7) Independent Review

EP8) CoventantsEP9) Independent monitoring

EP10) Reporting

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How to manage

Once the risk are identified, On-site action is needed to manage risk

The Equator Principles itself rely on external technical expert to help EPFI and borrowers manage E&S issues relate to the project

Principle 7 : Independent Review

Principle 9 : Independent Monitoring and Reporting

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Independent Third Party can Help?

Many EPFI has set procedures to involve independent third parties on these activities

It clearly improve the way they partner with:

Clients Governments Civil society and NGOs

On-site assessments and monitoring also improve transparency and accountability of EPFI efforts on implementing EP and IFC performance standards

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Case Study – Northern Peru Corporation

Business Challenge: Review a resettlement process against the Equator Principles as part of Northern

Peru Copper Corp’s development plan for a mine in Peru.

Approach checked whether the local Peruvian contractor was completing the resettlement in

line with best practice and proposed ways to close the gaps.

In so doing, the Auditor reviewed resettlement documents and social management plans and met stakeholders to determine the extent of process application. The Auditor also liaised with the community to review their involvement in the resettlement process and the degree to which it was consistent with plans.

Benefits & Value

Auditor identified breaches of the Equator Principles requirements that could jeopardize the NPC’s prospects of World Bank financing.

Auditor also provided actionable recommendations to improve community relations and resettlement process management.

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Case Study – Pt Agincourt Resources

Business Challenge:

Undertake an environmental impact assessment to Equator Principles to ensure PT Agincourt Resources attained local AMDAL approval and could commence construction on a Gold and Silver Mine in Indonesia.

Approach

The Third Party Firm collected information required to meet the government and company’s requirements; from air quality to socio-economic data. Simultaneously the Third Party also had to follow strict processes set out by AMDAL relating to public engagement.

The Third Party submitted Terms of Reference for the project which were reviewed and approved by the relevant authorities. This was followed by submission of the AMDAL itself and accompanying environmental monitoring and management plans.

Benefits & Value

AMDAL approval was granted in early 2008 and the project is on schedule according to plans.

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On Site Assessment

On site assessment is used predominantly on the basis of confirming:-

that the Project Operator and/or EPC contractor(s) are aware of the need for certain socio-economic and/or EH&S related issues to be addressed within the project,

that these requirements are factored into the project development and execution process,

that the project design, planning, approval processes, project management and implementation parameters are in line with EP / IFC criteria, and,

that the desired outcome is likely to be achieved in respect of the project’s environmental and socio-economic probity, if implemented effectively.

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Equator PrinciplesAssessment Objectives;

To assess and report on - in the context of statutory obligations, and any other applicable discretionary corporate social and environmental obligations - whether the Project is in accord with the Equator Principles requirements and associated IFC Performance Standards identified.

To identify any areas where inconsistencies exist between the Equator Principles, action plan or loan terms and conditions requirements and current performance or where some re-examination or strengthening of current management performance might be warranted.

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Equator PrinciplesBenefits;

Standardize E&S lender requirements; Equator Principles bring a level of social and environmental

evaluation, transparency and discipline to projects which might otherwise be absent.

Promote responsible investments development: The banks are secure in the knowledge that their

investments are being used to support ethical and sustainable work and that the project conforms to the required standards. Open new market.

Provide effective project finance risk management; Protect Project Return of Investment Reduce cost overruns and delays Protect Financial Institutions from the environmental and

social liabilities of the project.

Preserves Financial Institutions reputation

Provides access to capital From international EPFI or Multilaterals

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Any Questions?

David Glenister,

SGS United Kingdom LtdSGS House217-221 London RoadCamberleySurreyGU15 3EYUnited Kingdom

Tel: +44 (0) 7889 939814 [email protected]