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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 social and environmental impacts of the projects when providing financial support. Financial institutions often encounter social and environmental 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 has adopted the Equator Principles in December 2005 and has established the Environment Analysis Department (EAD) 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 social and environmental issues related to project financing. 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.

The Equator Principles apply to all project finance transactions with total project costs of US$10 million or more, regardless of the country and the sector. The Equator Principles are based on the social and environmental 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 social and environmental 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 social and environmental guidelines and procedures in accordance with the Equator Principles, and to conduct social and environmental risk assessment.

In June 2009, SMBC joined the Equator Principles Scope Review Working Group (which considers the scope of applying the Equator Principles), and Outreach Working Group (which encourages development of the Equator Principles in developing countries.) Together with other Equator Principles financial institutions, SMBC strives to improve the content of the Equator Principles, and to reach out to financial institutions in developing countries, especially in Asia, with the purpose to promote its understanding.

As of the end of March, 2012, 76 financial institutions have adopted the Equator Principles. For detail, please visit the Equator Principles’ official website at
http://www.equator-principles.com

SMBC's approach to the Equator Principles

Establishment of the Internal Procedures

Since its establishment in January 2006, EAD has made efforts to establish its own internal procedures and has completed the Procedures for Social and Environmental Risk Assessment(Procedures). The Procedures set the internal policy and procedures for social and environmental risk assessment in accordance with the Equator Principles, and EAD has started their implementation in June 2006.

Risk Assessment Process

EAD is responsible for SMBC's overall operations in relation to social and environmental risk assessment for the project financing all over the world. The risk assessment process is summarized as follows:

1. Screening

When considering an involvement to a project that is subject to the Procedures, the lending branch will submit a Screening Form to EAD. The Screening Form is a checklist to understand the potential social and environmental impacts of the project. Based on the Screening Form and the related information, EAD categorizes the project to one of the following:

Category	Definition
Category A	Projects with potential significant adverse social or environmental impacts that are diverse, irreversible or unprecedented
Category B	Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures
Category C	Projects with minimal or no social or environmental impacts

2. Environmental Review

For all category A and B projects, EAD conducts an environmental review. Environmental review is done in order to confirm that the project meets the requirements for social and environmental considerations stated in the Procedures. EAD reviews all the related information of the project and, when appropriate, conducts site visits. EAD refers to its original sector checklists to prepare the Environmental Review Sheet. The Environmental Review Sheet is then forwarded to the Credit Department which becomes an important factor in the credit approval process.

3. Environmental Monitoring

For category A and B projects, social and environmental covenants are included in the financing documents in accordance with the Procedures. The lending branch and EAD monitor the client’s compliance with these covenants to ensure ongoing considerations towards social and environmental issues.

Training and Ongoing Improvement

EAD has been conducting internal training to help related officers understand the established social and environmental procedures. Since EAD was established, about 780 officers including senior management, front officers, credit officers, audit officers and CSR officers have attended the training. To improve our capability on an ongoing basis, EAD issues a newsletter on a monthly basis to provide related information such as sector checklists and projects with social and environmental impacts. In addition, EAD is trying to improve and share its professional knowledge by attending seminars and holding internal sessions.

Our Screening Experience

During the fiscal year of 2011 (from April 2011 to March 2012) and the fiscal year of 2010 (from April 2010 to March 2011), EAD has conducted the screening as follows (non project finance transactions included):

By category

Category	Projects
	FY 2010	FY 2011
Category A	12	16
Category B	73	112
Category C	19	43
Total	104	171

By sector

Sector	Projects
	FY 2010	FY 2011
Power	41	51
Infrastructure	40	76
Oil & Gas	14	21
Mining / Steel / Non-ferrous Metals	5	14
Petrochemical	1	7
Other	3	2
Total	104	171

By region

Region	Projects
	FY 2010	FY 2011
Asia & Pacific	37	40
Europe / Middle East / Africa	35	86
Americas	32	45
Total	104	171

What we have done so far

Activities	What we have done
Establishment of internal social and environmental risk assessment process	Completed the Procedures for Social and Environmental Risk Assessment Incorporated the revised Equator Principles into the Procedures
Incorporation of social and environmental risk assessment into the business	Started the social and environmental risk assessments Applied the Equator Principles to non project finance transactions Conducted site visits in the environmental review and monitoring process
Training and ongoing improvement	Conducted training for related officers Improved professional knowledge by attending external environmental seminars and holding internal sessions. Provided updated and related information through monthly newsletter
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

Future Prospective and Focuses

• To keep updating our social and environmental risk assessment operation by incorporating international best practices
• To enhance awareness of social and environmental risk assessment with continued training for all related officers
• To enhance awareness of social and environmental 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 developing 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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