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 SMBC Group, assigns a high management priority to environmental issues. Our Group Environmental Policy sets out SMBC Group's basic action guidelines. As the policy's basic concept recognizes the importance of realizing a sustainable society, SMBC Group 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 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(*1) transactions, project-related corporate loans, bridge loans that are intended to be refinanced to project finance or corporate loans, project-related refinance, project-related acquisition finance, and project finance advisory services, 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 June 2021, 118 financial institutions have adopted the Equator Principles.

The Equator Principles apply to the following financial products when supporting a new project:

  • 1.Project Finance Advisory Services where total Project capital costs are US$10 million or more.
  • 2.Project Finance with total Project capital costs of US$10 million or more.
  • 3.Project-Related Corporate Loans (including Export Finance in the form of Buyer Credit) where all three of the following criteria are met:
  • i.The majority of the loan is related to a single Project over which the client has Effective Operational Control (either direct or indirect).
  • ii.The total aggregate loan amount and The Equator Principles Financial Institution’s individual commitment (before syndication or sell down) is at least US$50 million.
  • iii.The loan tenor is at least two years.
  • 4.Bridge Loans with a tenor of less than two years that are intended to be refinanced by Project Finance or a Project-Related Corporate Loan that is anticipated to meet the relevant criteria described above.
  • 5.Project-Related Refinance and Project-Related Acquisition Finance, where all of the following three criteria are met:
  • i.The underlying Project was financed in accordance with the Equator Principles framework.
  • ii.There has been no material change in the scale or scope of the Project.
  • iii.Project Completion has not yet occurred at the time of the signing of the facility or loan agreement.

The financial products within the scope of the Equator Principles are required to follow all of the principles below.

  • Principle 1:Review and Categorisation
  • Principle 2:Environmental and Social Assessment
  • Principle 3:Applicable Environmental and Social Standards
  • Principle 4:Environmental and Social Management System and Equator Principle Action Plan
  • Principle 5:Stakeholder Engagement
  • Principle 6:Grievance Mechanism
  • Principle 7:Independent Review
  • Principle 8:Covenants
  • Principle 9:Independent Monitoring and Reporting
  • Principle 10:Reporting and Transparency

For details, please visit the Equator Principles' official website at

Equator Principles

Since November 2021, SMBC has been a steering committee member of the Equator Principles Association consisting of the Equator Principles Financial Institutions. The Equator Principles Association Steering Committee coordinates the administration, management and development of the Equator Principles on behalf of the Equator Principles Financial Institutions. SMBC strives to develop the Equator Principles as an Equator Principles Steering Committee member.

  • *1Project 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 adoption of the Equator Principles in January 2006, SMBC 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 they have been implemented since June 2006. And the Procedures have been revised as required, such as revision in line with the update to Equator Principles IV.

Risk Assessment Structure and Process

Corporate Sustainability Department (CSD) 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 CSD. 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, CSD 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

CSD confirms that projects meet the requirements of the Equator Principles by Category and if needed, conducts site visits.
In addition, CSD 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 CSD monitor the client's compliance with these covenants to ensure ongoing consideration of environmental and social issues.

Environmental Monitoring

Training and Dissemination of Information

Internal training such as group training in our overseas offices, online training and seminars by external consultants have been conducted to help related officers understand the established environmental and social procedures. Over 2,600 officers and employees including senior management, employees from front, credit, and audit have attended the training. In addition, to improve our capability on an ongoing basis, CSD issues 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 (EPⅢ and EP IV) in 2020* are explained here. The numbers of transactions 1)~3) (marked with a  ) have been reviewed and assured by Ernst & Young ShinNihon LLC.

  • *The Effective date of EP IV : Oct 1st, 2020.
  • 1) Project Finance transactions (by Category)
  • 2) Project Related Corporate Loans (by Category)
  • 3) Project Finance Advisory Services

Independent Assurance Report (English)

Independent Assurance Report (Japanese)

1. Project Finance Transactions 

The table below shows a breakdown of the 56 transactions closed in 2020.

Total Number of projects by Category
Category A
Category B
Category C
3
46
7
Breakdown of Projects by Category
Sector
Category A
Category B
Category C
Mining
0
0
0
Infrastructure
1
6
5
Oil & Gas
1
6
0
Power
1
34
0
Others
0
0
2
Region
Category A
Category B
Category C
Americas
2
27
3
Europe/Middle East/Africa
1
8
2
Asia & Pacific
0
11
2
Country classification
Category A
Category B
Category C
Designated Country
1
37
7
Non-Designated Country
2
9
0
Independent Review
Category A
Category B
Implemented
3
46
Not implemented
0
0

2. Project Related Corporate Loans 

The table below shows a breakdown of the 4 transactions closed in 2020.

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

3. Project Related Refinance and Project Related Acquisition Finance

The transactions applicable to Project Related Refinance and Project Related Acquisition Finance are included in above 1. and 2. because we conduct environmental and social risk assessment for these kinds of finance in the same way as Project Finance and Project Related Corporate Loan.

4. Finance Advisory Transactions 

The table below shows a breakdown of the 17 advisory transactions mandated in 2020.

Total Number of Projects by Sector
17
Breakdown of Projects by Sector
Sector
Mining
0
Infrastructure
8
Oil & Gas
3
Power
6
Others
0
Region
Americas
3
Europe/Middle East/Africa
8
Asia & Pacific
6

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, conferences, and academic societies (UNEPFI, The Japan Section of the Regional Science Association International) about 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
  • Contributed an article about the Equator Principles on the "Guidebook for Exporting Infrastructure System" published by the Japan Machinery Center for Trade and Investment

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