Equator Principles

Significant environmental and social risks can arise in large projects, such as the construction of an airport, a power plant or an oil refinery.  The Equator Principles provide a common set of voluntary guidelines, based on best practice, to help financial institutions and their clients to address these impacts.  Since HSBC adopted the Principles in 2003, they have become a key component of our Project & Export Finance business and they also form a core part of our wider approach to managing environmental and social risks which, together, we call sustainability risks.

The details given here build on the summary provided in our annual Sustainability Report and provide further details of our implementation of the Principles.

The Revised Equator Principles

Financial institutions which have adopted Principles are committed to reviewing and strengthening them from time-to-time, based on experience learned from implementation and from emerging examples of best practice. In 2007, we helped to develop the management structure of the Equator Principles and we are currently managing the policy development on governance.

HSBC played a key role when we chaired the Working Group which conducted the first review of the Principles in 2006.  This involved working closely with the other financial institutions, as well as wider stakeholders such as clients, industry associations, the International Finance Corporation and non-government organisations (NGOs).  An example of the consultation process undertaken was a meeting we hosted at our London office in April 2006 which involved 16 financial institutions and 11 NGOs.  This particular meeting resulted in several key amendments to the proposed Principles as well as the opportunity to clarify certain issues.

The revised Principles were released on 6 July 2006.  The main changes included:

• Reducing the minimum cost threshold for projects requiring compliance from US$50 million to US$10 million.
• Referencing the International Finance Corporation's new Performance Standards, which provide an updated framework to manage environmental and social impacts.
• Extending the Principles to cover advisory work on projects, not just financing.
• Removing potential duplication for clients when carrying out detailed assessments of the impacts.
• Requiring the financial institutions to report publicly on implementing the Principles.

Over 50 financial institutions have now adopted the Equator Principles, which is a testament to their success.

How the Equator Principles work

Project finance is a common way of lending money to fund a large project and of obtaining repayment, in due course, from the revenues generated by that project.  The loans required to fund these projects are large and are commonly shared – or syndicated – among different financial institutions.  As the environmental and social risks can be significant in these projects, there are advantages - for the clients, the financial institutions, the local communities and the environment – in using a consistent process to assess the risks and to either avoid or reduce the impacts.

The Equator Principles set out the process which in summary consists of four phases:

1. We assess the potential scale of the impacts, with projects falling into one of three categories A, B or C, with category A indicating the highest degree of impact. 
2. An environmental and social impact assessment to analyse projects with higher impacts, resulting in an action plan to address those impacts.  The main underlying benchmark used to assess the impacts is the International Finance Corporation's Performance Standards. 
3. If the commercial, environmental and social risks are acceptable, we will lend money to the project but the conditions of the loan will require that the action plan is followed. 
4. We will report publicly on our implementation of the Principles.

HSBC has undertaken to ensure that all applicable project finance proposals, including where we advise on the structuring of project finance transactions, fall within the requirements of the Principles.  We will not provide loans directly to projects where the borrower will not, or is not able to, comply with either the Equator Principles or our own internal sustainability risk policies, whichever carries the higher standard.

The Principles are an integral part of the advice and finance which we provide to clients, helping to identify both impacts and solutions.  Our Project & Export Finance business has grown significantly in the last three years and we regard the implementation of the Equator Principles as part of that success.  We report annually on Equator Principles transactions.

We continue to see the majority of transactions falling into categories B and C, although we consider financing category A where the impacts can be managed in a sustainable manner.  We also record the number of transactions in which we formally decline to participate and where failure to comply with the Principles was a contributory factor.  This number continued to fall, reflecting the good standards of our clients and the experience and training of our executives in filtering out high risk proposals at a very early stage, well before formal approval is considered.

Implementation & Independent Verification

We recognise that some of our stakeholders, such as investors and NGOs, would like greater disclosure of how the Principles are being implemented.  In order to provide greater transparency and assurance, we asked Det Norske Veritas Certification BV (DNV), an international provider of certification services, to undertake an independent verification of our compliance with the Principles.

DNV undertook its work during March to May 2008, checking a sample of both approved and declined projects from 2006 and interviewing a number of HSBC executives.  DNV concluded from its work:

In DNV's opinion, HSBC has good processes in place to ensure an adequate adoption of the Equator Principles. These are supported by a range of sector policies and associated guidelines and tools. There is a good level of awareness of the Equator Principles among personnel in the Credit and Risk functions, Project Export Finance and Sustainability Risk Managers. There is evidence of commitment and good collaboration between staff in these areas with regards to the adoption of Equator Principles  and sustainability in general.

Read DNV's assurance statement on the Equator Principles. (2 page pdf 43k)

The full text of the Equator Principles can be found at www.equator-principles.com.