Environmental and Social Responsibility for Large-scale Development Projects

Background

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 supports the ideals behind the Equator Principles, and considers the principles as part of its environmental and social risk management framework, 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 furthering our sustainability objectives in this manner will provide significant benefits to ourselves and various stakeholders such as our borrowers and local communities.

What are the Equator Principles? (SMBC)

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, 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.

SMBC's approach to Environmental and Social Responsibility

Establishment of Internal Procedures

SMBC has established 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 consideration of the Equator Principles, and they have been implemented since June 2006 , and amended from time to time.

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 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 SMBC's environmental and social risk management framework, 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.

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 2,900 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.

What we have done till now (SMBC)

Activities	What we have done till now
Establishment of internal environmental and social risk assessment process	●Established its procedures to address environmental and social risk which reflect the ideals behind the Equator Principles among other guiding principles ●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.

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 by working together with other financial institutions.

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

Glossary of Terms

●Project Finance
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.
●Bridge Loans
Bridge Loan is an interim loan given to a business until the longer term stage of financing can be obtained.
●Refinance
Refinance is the process of replacing an existing loan with a new loan, where the new loan will be used to pay out (retire) an existing loan, and that loan is not near or in default.
●Acquisition Finance
Acquisition Finance is provision of financing for the acquisition of a Project or a Project company which exclusively owns, or has a majority shareholding in a Project, and over which the client has Effective Operational Control.
●Project Finance Advisory Services
Project Finance Advisory Services is the provision of advice on the potential financing of a development where one of the options may be Project Finance.
●Environmental and Social Policies and Guidelines of International Finance Corporation (IFC)
- 1.IFC Performance Standard (PS)
  IFC PS define IFC clients' responsibilities for managing their environmental and social risks. IFC PS consists of the following 8 standards:
  
  PS1 – Assessment and Management of Environmental and Social Risks and Impacts
  PS2 – Labor and Working Conditions
  PS3 – Resource Efficiency and Pollution Prevention
  PS4 – Community Health, Safety and Security
  PS5 – Land Acquisition and Involuntary Resettlement
  PS6 – Biodiversity Conservation and Sustainable Management of Living Natural Resources
  PS7 – Indigenous Peoples
  PS8 – Cultural Heritage
  
  Please refer to IFC's website for more details:
  IFC's website
- 2.The World Bank Group Environmental, Health and Safety (EHS) Guidelines
  The World Bank Group EHS Guidelines are technical reference documents containing examples of Good International Industry Practice (GIIP) as described in the IFC Performance Standards. They contain the performance levels and measures that are normally considered acceptable for Projects in Non ¬Designated Countries, as well as being achievable in new facilities at reasonable costs by existing technology. Two sets of guidelines are used: The General Environmental, Health and Safety Guidelines and The Industry Sector Guidelines.
  
  Please refer to the IFC’s website for the details of the EHS Guidelines:
  IFC's website