Protecting financial capital means adopting an approach also designed to manage social and environmental risks deriving from loans for industrial and infrastructural projects.
In this area, the Bank also operates in countries where human rights are often not guaranteed and local communities do not have suitable means to protect their rights, and where the use and consumption of natural resources call for careful, forward-looking assessment.
Monitoring this risk also means guaranteeing that the Bank’s operations and its reputation are protected.
To control this risk, Intesa Sanpaolo has adopted the Equator Principles (EP or Principles), a set of voluntary international guidelines to support financial institutions adopting them in managing the social and environmental risk resulting from certain types of financing. Applying these in a structured, integrated manner in a bank’s operations also allows emerging risks to be managed in countries that are vulnerable from a social and environmental viewpoint and in sensitive sectors. Being ready to face these unquestionably offers a competitive advantage, including in the long term.
The Principles, based on criteria of the World Bank’s International Finance Corporation - the Performance Standards -, refer to the protection of natural resources, health, human and labour rights, cultural heritage and biodiversity as well as the fight against climate change and specifically refer also to respect for local communities and indigenous rights. They envisage the assignment of a risk category (A, B, or C, where C indicates a low risk level) to projects to be financed, based on variables such as the socio-environmental characteristics of the country, the industrial sector and the characteristics of the project in question.
THE PROJECTS TO BE SCREENED
June 2013 saw the official launch of the third version of the Principles, or EPIII, which Intesa Sanpaolo has applied since January 2014. The changes introduced mainly regard the scope of application, which was expanded.
In fact, the Principles now apply - in all countries and for all business sectors - to all new Project Finance transactions when the total project cost is 10 million USD or higher; to corporate financing and bridge loans for project development if the total aggregate loan is at least 100 million USD, if the individual commitment of the Bank is at least 50 million USD and if the duration of the loan is at least 2 years. The EPs also apply to all advisory services on project financing.
OTHER NEW ASPECTS OF THE EQUATOR PRINCIPLES III
The updates introduced by the new Principles also concern other areas that call for an increasing focus by civil society. Firstly, they introduce additional requirements compared to previous versions, both for the financial institutions and customers, in relation to the fight against climate change. They place a stronger focus on assessing the impact on human rights and, lastly, drive members and project sponsors to increase the level of transparency in their various forms of communication.
Given the launch of the new EPIII and with a view to updating internal regulations, also in order to improve effectiveness at the same time, in 2013 the Corporate Social Responsibility Unit set up a work group which, beginning with existing internal rules, established new Operating Guidelines that were published in corporate policy in 2014. The work group was made up of representatives from all departments, who are or will be involved in different ways in the application of the Principles.
Compared to the previous version, the Operating Guidelines are more integrated into the Group’s credit policies. In fact, given the expansion of the scope of application of the Principles, reference to the new Guidelines is now present in all other lending procedures in order to detect, right from the application phase, all loans included in the scope of application of the Equator Principles.
This integration ensures that the assessment process adopted by the Credit Department evaluates the loan based on financial as well as social and environmental considerations. In addition, a business committee - the Engagement Committee - was set up in 2014 to assess consistency between certain “Significant” transactions and the business strategy defined for Corporate and Investment Banking Division customers. The committee, which does not replace the normal lending process, preliminarily ensures that - in addition to legal, compliance and risk management aspects - for the transaction in question, aspects relating to the assessment of reputational risk and the Equator Principles are also covered (see also “Business risk management”@ in the chapter “Materiality analysis”).
Operating Guidelines for implementation of Equator Principles
The Operating Guidelines for implementation of Equator Principles is an instrument which, through a process that includes the activities indicated in the Equator Principles, provides support to the Bank in identifying environmental and social risks associated with the customer’s ability to manage them and with the sector related to the project, in addition to the characteristics of the project itself.
The Guidelines require higher-risk projects, and medium-risk projects if necessary, to be assessed by an independent advisor who identifies the main social and environmental impacts and the appropriate mitigation measures. The results of this independent due diligence provide suggestions and recommendations in the event that the work performed has to be integrated with in-depth studies or mitigation measures to ensure that the project meets the requirements of international standards.
Information emerging from the due diligence is integrated into the contractual obligations and monitored with a frequency based on the level of risk identified.
Customers are required to submit regular reports demonstrating implementation of the mitigation measures required by the Bank and which may be verified also via on-site inspections. In the event of non-compliance with the agreed conditions, the Bank reserves the right to exercise the appropriate measures for assessment on a case-by-case basis.
Part of the assessment process also envisages involvement of the local communities, in order to identify the possible social impacts and identify further mitigation measures. In fact, the Equator Principles imply an ongoing relationship with stakeholders, from the design phase and throughout the entire project, via a structured and culturally suitable stakeholder engagement and complaints handling process.
In 2014, the amount agreed for projects following the Equator Principles assessment process, as outlined in the Operating Guidelines, represented approximately 7.7% of the total amount agreed for loans in the reference scope.
In order to guarantee accessibility of the Guidelines and all support documentation to all the Bank’s departments, in Italy and abroad, the full set of documents is available in Italian and English.
Consolidation of the Parent Company’s internal regulations is a fundamental prerequisite to the continued involvement of the International Subsidiary Banks. The foundations were laid in 2014 for the new Rules that will be based on the Intesa Sanpaolo Operating Guidelines and adapted to individual local needs. This will allow those Banks which, according to their operations, have to apply the new Equator Principles, to implement them effectively and consistently with the Parent Company, also as a result of a specific, customised training programme.
The training programme
The launch of the third version of the Equator Principles (EPIII) and the entry into force of the new obligations from January 2014 made it necessary to re-programme a new training plan, this time much more extensive and structured than that completed in 2012. In fact, the new broader application of the Equator Principles have driven us to add additional staff and Bank departments among the course participants, as well as the project finance specialists.
The creation of training sessions as varied as possible in terms of business and local origin was successful in that the discussion fuelled by the topics involved added value and increased the awareness of risk management in its broader sense. In addition, it is important that all the Bank’s departments and staff involved in the Equator Principles implementation process adopt a standard approach. For this reason, the classroom presence of the credit and risk management functions was fundamental.
As regards the contents of the training sessions, these were based on application of the new Operating Guidelines in actual cases, making great use of documents produced by the Equator Principles Association and made available to its members. In 2014 the first two days of a five-session training package were held.
Participation in the international debate
Adoption of the Equator Principles also means participation in the association activities and the international debate conducted by the EP Association. Once again in 2014 Intesa Sanpaolo participated in annual events dedicated to members and to conferences with other member banks, and also in meetings with our stakeholders - mainly the IFC, NGOs and the industry business associations. Lastly, the Bank continued to make its contribution to discussions on the issue of biodiversity, as part of the specific Work Group created in 2013 (Cross Sector Biodiversity Initiative).
Projects completed in 2014
There have been 282 loan applications since 2007, which also underwent the Equator Principles screening. The reference area regards all Intesa Sanpaolo departments involved in project finance covered by the scope of application of the Principles, in Italy and abroad, and two International Subsidiary Banks: VÚB Banka and Alexbank.
The table below shows the number of projects that were financially closed in 2014, with breakdown by category:
|Total||Category A||Category B||Category C|
|Business loans associated with projects||1||1|
|Project finance advisory services||1|