Background of SMBC's adoption of the Equator Principles

Large-scale development projects may have significant impacts on social and environmental issues and the financial institutions, which financially support projects, are internationally required to assess carefully the impacts on the environment and local communities prior to financing. Financial institutions often encounter social and environmental issues that are both complex and challenging, particularly with respect to projects in the emerging markets.

SMBC, as a member of Sumitomo Mitsui Financial Group (SMFG), assigns a high management priority to environmental issues. Our Group Environmental Policy sets out SMFG’s basic action guidelines. The policy’s basic concepts are that recognizing the importance of realizing a sustainable society, SMFG is making continuous efforts to harmonize environmental preservation and corporate activities, in order to support the economy and contribute to the general well-being of society as a whole.

In line with this policy, SMBC has adopted the Equator Principles in December 2005 and has established the Environment Analysis Department (EAD) within the International Banking Unit in January 2006 in order to ensure that the projects we finance are developed in a manner that is socially and environmentally responsible and in order to fulfill SMBC's corporate social responsibility (CSR) and to provide high quality financial services all over the world.

We are confident that the adoption of and the compliance with the Equator Principles provide significant benefits to ourselves and various stakeholders such as our borrowers and local communities.

The Equator Principles

The Equator Principles are a set of guidelines developed by private financial institutions for managing social and environmental issues related to project financing. Project finance is a method of the funding in which the lender looks primarily to the cashflows generated by a project as the source of repayment, and it is different from corporate finance in which the lender looks mainly to the creditability or securities of the borrower.

The Equator Principles apply to all project finance transactions with total project costs of US$10 million or more, regardless of the country and the sector. The Equator Principles are based on the social and environmental policies and guidelines of International Finance Corporation (IFC), the private sector arm of the World Bank. These policies and guidelines cover variety of issues such as social and environmental impact assessment process, pollution prevention and abatement, considerations to local communities and natural resources.

The financial institutions that adopt the Equator Principles are required to establish their own internal social and environmental guidelines and procedures in accordance with the Equator Principles, and to conduct social and environmental risk assessment.

In June 2009, SMBC has joined the Equator Principles’ Scope Review Working Group which considers other banking products and services to be included in the Principles in addition to project finance, and Outreach Working Group which encourages development of the Equator Principles in developing countries. Together with other Equator Principles financial institutions, SMBC makes efforts to improve the content of the Equator Principles, and to reach out to financial institutions in developing countries, particularly in Asia, for sustainable development.

As of the end of September 2009, 67 financial institutions have adopted the Equator Principles. For detail, please visit the Equator Principles’ official website at http://www.equator-principles.com

SMBC's approach to the Equator Principles

Establishment of the Internal Procedures

Since its establishment in January 2006, the EAD has made its efforts to establish its own internal procedures and has completed the Procedures for Social and Environmental Risk Assessment for Project Finance (Procedures). The Procedures set the internal policy and procedures for social and environmental risk assessment in accordance with the Equator Principles, and the EAD has started their implementation in June 2006.

Risk Assessment Process

EAD is responsible for SMBC's overall operations in relation to social and environmental risk assessment for the project financing all over the world. Under the Procedures, the risk assessment process is summarized as follows:

1. Screening

When considering an involvement to a project that is subject to the Procedures, the lending branch will submit a Screening Form to EAD. The Screening Form is a checklist to understand the potential social and environmental impacts of the project. Based on the Screening Form and the related information, EAD categorizes the project to one of the following:

Category	Definition
Category A	Projects with potential significant adverse social or environmental impacts that are 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
Category C	Projects with minimal or no social or environmental impacts

2. Environmental Review

For all category A and B projects, EAD conducts environmental review. Environmental review is to confirm that the project meets the requirements for social and environmental considerations stated in the Procedures. EAD reviews all the related information of the project and, when appropriate, conducts site visits. EAD refers the sector checklists prepared by itself to complete the Environmental Review Sheet. The Environmental Review Sheet is forwarded to the Credit Department for their considerations of the credit approval.

3. Environmental Monitoring

For category A and B projects, social and environmental covenants are included in the financing documents in accordance with the Procedures. The lending branch and EAD monitor the client’s compliance with these covenants to ensure ongoing considerations to social and environmental issues.

Training and Ongoing Improvement

EAD has been conducting internal training to help related officers understand the established social and environmental procedures. Since EAD was established, over 400 officers including senior management, front officers, credit officers, audit officers and CSR officers have attended the training. To improve our capability on an ongoing basis, EAD issues EAD Newsletters on a monthly basis to provide related information such as sector checklists and projects with social and environmental impacts. In addition, EAD is trying to improve and share its professional knowledge by attending seminars and holding internal sessions.

Our Screening Experience

In the first half of fiscal year 2009 (from April 2009 to September 2009), EAD has conducted the screening as follows (non project finance transactions included):

By category

Category	Projects
Category A	2
Category B	17
Category C	5
Total	24

By sector

Sector	Projects
PFI / PPP	10
Power	5
Oil & Gas	4
Infrastructure	3
Mining / Steel	1
Petrochemical	1
Total	24

By region

Region	Projects
Europe / Middle East / Africa	17
Asia & Pacific	6
Americas	1
Total	24

What we have done so far

Activities	What we have done
Establishment of internal social and environmental risk assessment process	Complete the Procedures for Social and Environmental Risk Assessment for Project Finance Incorporate the revised Equator Principles into the Procedures
Incorporation of social and environmental risk assessment into the business	Start the social and environmental risk assessments Apply the Equator Principles to non project finance transactions Conduct site visits in the environmental review and monitoring process
Training and ongoing improvement	Conduct training for related officers Improve professional knowledge by attending external environmental seminars and holding internal sessions. Provide updated and related information through monthly newsletter
Encouragement of understanding of the Equator Principles	Speak at CSR or environmental seminars and conferences on the Equator Principles Introduce the Equator Principles and SMBC’s experiences to financial institutions all over the world

Going forward

To keep updating our social and environmental risk assessment operation by incorporating international best practices
To enhance awareness of social and environmental risk assessment with continued training for all related officers
To enhance awareness of social and environmental considerations among project stakeholders including financial institutions and borrowers through SMBC’s active participation in improving the content of the Equator Principles, and in encouraging development of the Equator Principles in developing countries by working together with other Equator Principles financial institutions.

SMBC will contribute to the sustainable society through considerations of the social and environmental impacts of the projects for which SMBC is a party.