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Wednesday, December 12, 2012

Specialist “Equator Principles Bank” Role in Project Finance?

EPFI have diverse approaches to the management of environmental and social risks and implementation of the EP. Some banks have a highly decentralized approach, where implementation of the EP is managed by lending officers, with support from centralized risk management teams for higher risk projects. At other EPFI, environmental and social risk management is more centralized. Centralized risk management teams may specialize only in environmental and social risk issues, or be staffed by generalist credit risk management personnel. Some EPFI utilize advisory centres which provide technical support to front line business managers or lending officers who are ultimately responsible for EP compliance. Legal compliance officers may have dotted line oversight of this process.

The question becomes whether the current approach is adequate for environmental and social risk management, particularly where multiple banks are involved in a project financing through a syndicate that may have varied approaches and in light of the growing risks of getting it wrong.

Despite the complexity and risk of the process, EP implementation is not typically managed by a single "EP bank" in the same manner as other major project related risks, like documentation and insurance. Instead, banks often rely on so-called "technical experts" to provide ad hoc advice on EP implementation. This is likely due to a perception that the risks of EP implementation are not great enough to treat as a major risk category on project financing deals to assign a single responsibility centre. An exception may be where a major development bank is involved like the IFC, that has significant internal resources dedicated to such issues and sets the high water mark for the project.

A new trend that may emerge post-EP III is an effort towards increased standardisation of EP implementation strategies, which in turn could lead to increased specialisation and the evolution of an "EP bank" role in project financing. The advantages of such an approach would include:
  • consistency in application of the EP framework;
  • more effective management of legal and reputational risks;
  • economies of scale in the development of EP expertise to the benefit of the industry; and
  • competitive advantage for banks that can leverage their expertise in the EP space to obtain deals.

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