Sustainable project finance
It has taken the Equator Principles just 10 years to have a positive impact on lenders and clients alike. In less than a decade, the global framework by which banks manage environmental and social risks in project financing, known as the Equator Principles (EP), has impacted lending procedures by financial institutions and influenced the work of corporate clients and sponsors. So says Christopher Steane, Head of Lending Services at ING.
Steane believes the guidelines have intensified ING’s sustainable lending practices and become a catalyst for a new commercial focus on sustainability overall. “This journey has gone by very quickly for us; from the initial scepticism of some in our commercial teams, to the full endorsement of the principles across the organisation,” he said. “Today we accept the rules, and this is helping our clients become more accepting of them too.”
“Our approach is to establish a clear dialogue with clients early on, so we can identify potential issues and address them together. Dialogue and cooperation are essential.”
Deepening the dialogue
One of the greatest challenges in EP implementation, says Steane, has been to raise awareness among sponsors and clients, especially in markets where social and environmental standards for business are less stringent. Companies with little or no experience in applying mitigation measures often require additional support and advice from their lenders.
“Clients don’t want banks telling them how to behave, they want assistance.” says Steane, who is quick to point out that the credibility of global financial institutions is still under heavy scrutiny following the financial crisis. “Our approach is to establish a clear dialogue with clients early on, so we can identify potential issues and address them together. Dialogue and cooperation are essential.”
Steane references the example of a EUR 1.18bn ING deal with Kazahkstan China Pipeline, owners of the pipeline transporting crude oil from Kazakhstan to China, in which China National Petroleum Corporation (CNPC) was the sponsor. The syndicate, consisting of ING and several Chinese non-EP banks went through a highly challenging process to ensure that all applicable international environmental and social standards were implemented. It became the first time that CNPC achieved full EP compliance on any of its projects around the world and was also the first-ever EP-compliant project in Kazakhstan.
Businesses that have applied the framework once are likely to do so again, and this has a knock effect across their industries, says Steane. “What we are seeing is that when a client or sponsor embraces the principles on a particular deal, it lifts up the standards everywhere, not just for themselves, but for peers as well.”
Sustainability and innovation
For ING, the sustainability momentum created by the EP has also been a driver for the development of new business models, processes, products and services that have sustainability at their core. This has led to a notable increase in volumes of business in areas with strong sustainability credentials, and is becoming a distinctive feature for ING in the corporate market.
“It is only recently that we have concrete evidence pointing to the fact that companies with the best CSR practices are also those that tend to produce higher investment returns,” says Steane, pointing to a recent study by the Harvard Business Review. “Resource-efficient companies are more likely to display high levels of innovation and entrepreneurship and that pushes them above the average business,” he explains.
An example of ING’s stronger focus on sustainability has been its growing presence in the renewable energies market. Since 2008, the number of deals relating to renewable energy within ING’s global project finance energy portfolio has consistently grown at a faster rate than energy projects relating to coal, which have the highest GHG emissions and impact on global warming.
Although it is a promising trend, Steane cautions against having unrealistic expectations about the types of deals that ING will finance in the future. “Sustainable business opportunities are growing, but it is as critical as ever that we lend to businesses that are well established and commercially viable,” he says. “We will not lose sight of the fact that our primary responsibility is towards our deposit holders, and that means deploying their savings in an economically beneficial way.”
The road ahead
What began as a small and predominantly European and US initiative, the EP framework is today endorsed by almost 80 financial institutions from over 32 countries, many of them from emerging markets. “To have achieved such critical mass so quickly is a tremendous success,” says Leonie Schreve, Chair of the EP Steering Committee and Head of Sustainable Lending at ING. “We continue to see new financial institutions adopting, and recently welcomed our first members from Russia and India.”
Most significantly, EP association members have overwhelmingly approved the third and most robust iteration of the principles to date, EP III. As part of its role as Chair, ING was responsible for overseeing the development of EP III, which will capture more projects under the framework by extending the scope to project-related corporate loans and bridge loans.
“We have moved the agenda forward, even though there are plenty of issues we continue to struggle with,” says Schreve. “It is as important as ever that the pace of change be one that the industry and our clients can sustain.”
Steane also agrees on the importance of getting the balance right. “EP has helped us to broaden our sustainability journey, but the challenges facing the world today are also broad and many. We are adapting our lending processes for the wider world, but equally important is that we partner with our clients and help them in their own sustainability journeys.”