The Equator Principles and SMBC



Background of SMBC's adoption of the Equator Principles

Large-scale development projects may have significant impacts towards society and the environment; therefore, the international civil society requires financial institutions to assess environmental and social impacts of the projects when providing financial support. Financial institutions often encounter environmental and social 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. As the policy’s basic concept 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 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.


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 finance1 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 variety of issues such as environmental and social impact assessment process, pollution prevention and abatement, considerations to 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.


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

  • Equator Principles Outreach Working Group, which encourages development of the Equator Principles in emerging countries
  • External Relationship Working Group, which builds relationship with external parties
  • Consistency Working Group, which works to improve consistency in the Equator Principles implementation
  • Climate Change Working Group, which works to share good practice in climate risk management practice

Together, with other Equator Principles financial institutions, SMBC strives to improve the content of the Equator Principles and reach out to financial institutions in emerging countries, especially in Asia, with the purpose to promote an understanding of the Equator Principles. Also, SMBC participates in the discussion to consider the long-term strategy of the Equator Principles and its future improvement.


As of the end of May, 2016, 83 financial institutions have adopted the Equator Principles. For detail, please visit the Equator Principles’ official website at

http://www.equator-principles.com

  • Note11 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 securities of the borrower.


SMBC's approach to the Equator Principles

Establishment of the 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 (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. As the Equator Principles were revised in 2013 (Equator Principles III), the Procedures were also revised in October 2013 to reflect changes of the Equator Principles by expanding its scope and strengthening the assessment standard.


Risk Assessment Structure and Process

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


1. Environmental Screening


When considering financing toward 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 the related information, ENAD categorizes the project to 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 the Projects meet the requirements of the EPs by Category and if needed, conducts site visits.
Also, for all category A and B projects located in developing countries, ENAD prepares an Environmental Review Sheet based in our original sector checklists.
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 with respect to the environmental and social considerations are to be included in the financing documents. The lending branch and ENAD monitor the client’s compliance with these covenants to ensure ongoing considerations towards environmental and social issues.



Training and Ongoing Improvement

ENAD has been conducting internal training such as group training in our overseas offices, online training and seminar by external consultants to help related officers understand the established environmental and social procedures. Since ENAD was established, over 1,600 officers including senior management, front officers, credit officers, audit officers and CSR officers have attended the training. In addition, to improve our capability on an ongoing basis, ENAD issues a newsletter on a monthly basis to provide relevant and up-to-date information such as sector checklists and articles on environmental and social impacts.


Transactions subject to the Equator Principles

Transactions subject to the Equator Principles (EP III) in 2015 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 56 transactions closed in 2015.

Total Number of projects by Category

Category A

Category B

Category C

2

46

8

Breakdown of Projects by Category

Sector

Category A

Category B

Category C

Mining

0

0

0

Infrastructure

2

7

6

Oil & Gas

0

15

0

Power

0

23

0

Others

0

1

2

Region

Category A

Category B

Category C

Americas

1

27

2

Europe/Middle East/Africa

0

11

3

Asia & Pacific

1

8

3

Country classification

Category A

Category B

Category C

Designated Country

2

32

7

Non-Designated Country

0

14

1

Independent Review

Category A

Category B

Implemented

2

43

Not implemented

0

3


2. Project Related Corporate Loans

The table below shows a breakdown of the 8 transactions closed in 2015.

Total Number of projects by Category

Category A

Category B

Category C

3

4

1

Breakdown of Projects by Category

Sector

Category A

Category B

Category C

Mining

0

0

0

Infrastructure

1

0

1

Oil & Gas

0

2

0

Power

1

1

0

Others

1

1

0

Region

Category A

Category B

Category C

Americas

2

0

0

Europe/Middle East/Africa

0

2

0

Asia & Pacific

1

2

1

Country classification

Category A

Category B

Category C

Designated Country

0

0

0

Non-Designated Country

3

4

1

Independent Review

Category A

Category B

Implemented

3

0

Not Implemented

0

4


3. Finance Advisory Transactions

The table below shows a breakdown of the 18 advisory transactions mandated in 2015.

Total Number of Projects by Sector

18

Breakdown of Projects by Sector

Sector

Mining

1

Infrastructure

3

Oil & Gas

7

Power

7

Others

0

Region

Americas

4

Europe/Middle East/Africa

6

Asia & Pacific

8


What we have done till now

Activities

What we have done till now

Establishment of internal environmental and social risk assessment process

  • Completed the Procedures for Environmental and Social Risk Assessment
  • Incorporated the revised Equator Principles into the Procedures

Implementation of environmental and social risk assessment

  • Conducted site visits in the environmental review and monitoring process
  • Reported the results of environmental and social risk assessment to management

Internal training and ongoing improvement

  • Conducted training for related officers
  • Provided online training to familiarize the Procedures
  • Provided updated and related information through monthly newsletters
  • Participated in international conferences on environmental and social risk assessment

Encouragement of understanding of the Equator Principles

  • Spoken at CSR or environmental seminars and conferences on the Equator Principles
  • Introduced the Equator Principles and SMBC’s experiences to financial institutions all over the world
  • Held an environmental seminar for our corporate clients, inviting experts on environmental risk management

Future Prospective and Focuses

  • 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
  • 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 in emerging countries 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.



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