Working with the Equator Principles

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Background to SMBC's adoption of the Equator Principles (SMBC)

What are the Equator Principles? (SMBC)

SMBC's approach to the Equator Principles (SMBC)

Transactions Subject to the Equator Principles (SMBC)

What we have done till now (SMBC)

Future Perspective and Focus (SMBC)

Background to SMBC's adoption of the Equator Principles (SMBC)

Large-scale development projects may have significant impacts on society and the environment; therefore, international civil society requires financial institutions to assess the environmental and social impacts of projects when providing financial support. Financial institutions often encounter environmental and social issues that are both complex and challenging, with respect to projects in both emerging countries and developed countries.

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. As the policy’s basic concept recognizes 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 adopted the Equator Principles in December 2005 and established the Environment Analysis Department (ENAD) within the International Banking Unit in January 2006, in order to not only ensure that the projects we finance are developed in a manner that is socially and environmentally responsible but to also fulfill SMBC's corporate social responsibility (CSR) and provide high quality financial services across the globe.

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

What are the Equator Principles? (SMBC)

What are the Equator Principles?

The Equator Principles are a set of guidelines developed by private financial institutions for managing environmental and social risks related to financing large-scale development projects. The Equator Principles apply to project finance* transactions, project-related corporate loans and bridge loans that are intended to be refinanced to project finance or corporate loans, regardless of the country or the sector. The Equator Principles are based on the environmental and social policies and guidelines of International Finance Corporation (IFC), the private sector arm of the World Bank. These policies and guidelines cover a variety of issues such as the environmental and social impact assessment process, pollution prevention, consideration of local communities and natural resources.

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

The Equator Principles Association is the unincorporated association of member Equator Principles Financial Institutions whose object is the management, administration, and development of the Equator Principles. As of the end of July 2018, 94 financial institutions have adopted the Equator Principles.
For details, please visit the Equator Principles’ official website at

Equator Principles

SMBC, along with other Equator Principles Financial Institutions, is striving to improve the content of the Equator Principles, and is proactively taking part in the update process that is in progress now.

Among other Equator Principles Working Groups, SMBC is a member of the following Working Groups;

  • Consistency Working Group, which works to improve the consistency of Equator Principles implementation
  • Climate Change Working Group, which works to share good practice in climate risk management practice
  • Scope Working Group, which reviews the scope of applicability of the Equator Principles as part of the EP update process

*

Project finance is a method of 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 collateral of the borrower.

SMBC published the first practical guidebook published in Japan on the Equator Principles together with the MUFG Bank and Mizuho Bank. This book explains the contents of each principle, as well as the activities of the Equator Principles Association, and other Export Credit Agencies’ frameworks on environmental and social considerations.

SMBC's approach to the Equator Principles (SMBC)

Establishment of Internal Procedures

Since its establishment in January 2006, ENAD has made efforts to establish its own internal procedures and has completed the Procedures for Environmental and Social Risk Assessment (the “Procedures”). The Procedures set the internal policy and procedures for environmental and social risk assessment in accordance with the Equator Principles, and ENAD started their implementation in June 2006. And the Procedures have been revised as required, such as revision in line with the update to Equator Principles III.

Risk Assessment Structure and Process

ENAD is responsible for SMBC's overall operations in relation to environmental and social risk assessment for transactions subject to the Equator Principles all over the world. The risk assessment process is summarized as follows:

1.Environmental Screening

When considering financing for large-scale development project related loans that are subject to the Procedures, the lending branch will submit the Environmental Screening Form to ENAD. The Environmental Screening Form is a checklist to understand the potential environmental and social impacts of the project. Based on the Environmental Screening Form and related information, ENAD categorizes the project as one of the following:

Category

Definition

Category A

Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented

Category B

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

Category C

Projects with minimal or no adverse environmental and social risks and/or impacts

2.Environmental Review

ENAD confirms that projects meet the requirements of the Equator Principles by Category and if needed, conducts site visits.

In addition, ,ENAD prepares an Environmental Review Sheet based on our original sector checklists for all category A projects and category B projects that have been determined to have special needs.

The Environmental Screening Form and the Environmental Review Sheet which reflect the results of the environmental and social risk assessments, are shared with the Credit Department and this information becomes an important factor in the credit approval process.

3.Environmental Monitoring

Based on the result of environmental screening and environmental review, covenants to be observed by the client with respect to the environmental and social considerations are included in the financing documents. The lending branch and ENAD monitor the client’s compliance with these covenants to ensure ongoing consideration of environmental and social issues.

Environmental Monitoring

Training and Dissemination of Information

ENAD has been conducting internal training such as group training in our overseas offices, online training and seminars by external consultants to help related officers understand the established environmental and social procedures. Since ENAD was established, over 2,000 officers and employees including senior management, employees from front, credit, audit, and CSR departments have attended the training. In addition, to improve our capability on an ongoing basis, ENAD issues newsletters and reports sharing the latest trends on the global environment and noteworthy environmental and social risks.

Transactions Subject to the Equator Principles (SMBC)

Transactions subject to the Equator Principles (EP III) in 2017 are explained here.

  • 1) Total number of Project Finance transactions (by Category)
  • 2) Total number of Project Related Corporate Loans (by Category)
  • 3) Total number of Project Finance Advisory Services

1.Project Finance Transactions

The table below shows a breakdown of the 54 transactions closed in 2017.

Total Number of projects by Category
Category A
Category B
Category C
5
43
6
Breakdown of Projects by Category
Sector
Category A
Category B
Category C
Mining
0
0
0
Infrastructure
0
4
3
Oil & Gas
3
7
0
Power
2
31
1
Others
0
1
2
Region
Category A
Category B
Category C
Americas
2
11
4
Europe/Middle East/Africa
1
10
0
Asia & Pacific
2
22
2
Country classification
Category A
Category B
Category C
Designated Country
1
31
6
Non-Designated Country
4
12
0
Independent Review
Category A
Category B
Implemented
5
37
Not implemented
0
6

2. Project Related Corporate Loans

The table below shows a breakdown of the 7 transactions closed in 2017.

 
Total Number of projects by Category
Category A
Category B
Category C
1
5
1
Breakdown of Projects by Category
Sector
Category A
Category B
Category C
Mining
0
0
0
Infrastructure
0
0
0
Oil & Gas
1
3
0
Power
0
1
0
Others
0
1
1
Region
Category A
Category B
Category C
Americas
1
1
0
Europe/Middle East/Africa
0
2
0
Asia & Pacific
0
2
1
Country classification
Category A
Category B
Category C
Designated Country
1
1
0
Non-Designated Country
0
4
1
Independent Review
Category A
Category B
 
Implemented
1
1
Not Implemented
0
4

3.Finance Advisory Transactions

The table below shows a breakdown of the 27 adivisory transactions mandated in 2017.

 
Total Number of Projects by Sector
27
Breakdown of Projects by Sector
Sector
Mining
2
Infrastructure
5
Oil & Gas
7
Power
12
Others
1
Region
Americas
11
Europe/Middle East/Africa
6
Asia & Pacific
10

What we have done till now (SMBC)

Activities
What we have done till now
Establishment of internal environmental
and social risk assessment process
  • Developed the Procedures for Environmental and Social Risk Assessment
  • Incorporated the revised Equator Principles into the Procedures
  • Prepared the sector checklists
Implementation of environmental and social risk assessment
  • Reported the results of environmental and social risk assessment to management and shared the information with the relevant departments
  • Conducted site visits in the environmental review and monitoring process
Internal training and ongoing improvement
  • Conducted training for related departments
  • Provided online training for domestic and overseas departments to disseminate knowledge of the Procedures
  • Provided updated and related information through newsletters
  • Participated in international and domestic conferences and seminars on environmental and social risk assessment, to reflect internal operation.
Encouragement of understanding
of the Equator Principles
  • Spoken at CSR or environmental seminars and conferences on the Equator Principles
  • Given lectures on environmental and social risk to universities
  • Introduced the Equator Principles and SMBC’s experience to business partners all over the world
  • Held an environmental seminar for our corporate clients, inviting experts on environmental risk management
  • Published a practical guidebook on implementation of the Equator Principles in Japanese

Future Perspective and Focus (SMBC)

  • To keep updating our environmental and social risk assessment operation by incorporating international best practices
  • To enhance awareness of environmental and social risk assessment with continued training for all related officers and employees
  • To enhance awareness of environmental and social 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 by working together with other Equator Principles financial institutions.

SMBC will endeavor to realize a sustainable society through its environmental and social considerations of the projects it takes part in.

For details regarding Initiatives for managing environmental risks, please see the link below.

Management of Environmental Risks