Environmental and Social Responsibility in Lending: Citi’s Journey with the Equator Principles May 13, Mumbai, India Rajesh Jogi Global Portfolio Risk Management Citi India The New Global Business Environment Increasing resource scarcity Photo courtesy of Planet Ark Growing stakeholder awareness Strengthening legislative, regulatory and enforcement frameworks worldwide Photo courtesy of Amazon Watch Photo courtesy of USDA NRCS Increased transmission of global reputational risk to the financier Photo courtesy of Dirty Money.org 2 Environmental and Social Responsibility in Lending: Citi's Journey There have been – and continue to be – criticisms of financial institutions focused on the financing of projects with sensitive social and environmental impacts… … 3 Environmental and Social Responsibility in Lending: Citi's Journey Equator Principles II • The Equator Principles (EPs) are a benchmark for the financial industry to assess and manage environmental and social risk in project finance • Developed and launched in 2003 by ten global financial institutions (including Citi), there are currently 68 signatories globally. • Equator Principles apply to all project financings (regardless of sector or geography) with total capital costs above USD 10 Million 4 Environmental and Social Responsibility in Lending: Citi's Journey Equator Principles II • Projects in emerging markets must comply with IFC Performance Standards and Environmental Health and Safety (EHS) Guidelines Review and categorization criteria are based on IFC’s process • Other EP requirements include, but are not limited to, preparation of an Environmental Impact Assessment and associated management plans, consultation with local communities (including indigenous people), mitigation of impacts to sensitive habitats, and compliance with IFC labor standards • However, each institution that adopts the Equator Principles commits to integrate the Principles into its own institution’s internal credit policies and procedures, and without recourse to the IFC or any other institution • Website: www.equator-principles.com 5 Environmental and Social Responsibility in Lending: Citi's Journey How have the Equator Principles helped Citi? • The Equator Principles have helped us go from purely risk and brand management...to brand enhancement and positive reputation • The Equator Principles have informed and are the backbone of our broader Environmental and Social Risk Management (ESRM) Policy • We partner better with: – Clients – Other Equator Principles Financial Institutions (EPFIs) – Multilaterals (like the IFC), bilaterals and ECAs – Civil society and NGOs • Sustainability and environmental issues are now considered center-ofthe plate issues for the Firm 6 Environmental and Social Responsibility in Lending: Citi's Journey How have the Equator Principles helped Citi? The business benefits are clear: – We are viewed as a leader in banking & sustainability • Citi ESRM Policy is viewed as a market leader • Recent Position Statement on Climate, including a USD 50 billion commitment over ten years focused on climate-related issues • Successive commendations from Financial Times Sustainable Banking Awards • 2007 Corporate Award from International Association of Impact Assessment – Citi is a leader in micro-finance 7 Environmental and Social Responsibility in Lending: Citi's Journey What are the potential benefits to Indian Banks in adopting the Equator Principles? • There are currently no Indian banks who have joined the Equator network (firstmover advantage goes to first bank that adopts ) • You would use common terminology in assessing environmental and social issues, and a common framework for implementation and documentation • Potentially increase productivity through reduced transaction review and processing time (i.e., “get it right the first time”) • Have more certainty in closing project financings – easier to syndicate deals internationally to other Equator Principles signatories • Gain access to network of professionals and international best practice • Citi can assist and provide advice, if necessary. Further Equator Principles adoption process information and website, found here: http://www.equator-principles.com/join.shtml 8 Environmental and Social Responsibility in Lending: Citi's Journey Lessons Learned from Implementation Experience • The Equator Principles review process needs to be independent, but also needs to have credit approval authority within the business: this can’t be a public relations or public affairs exercise • An environmental risk policy (which would include the Equator Principles) should be integrated fully into your credit risk policies and procedures – back it up with senior support and staff training • Using the Equator Principles framework allows a financial institution to proceed with environmentally or socially challenging projects – but, in the right way and with a defined and comprehensive process that provides clarity and greater certainty. • Clients appreciate banks’ review and advice on social and environmental issues – the Equator Principles and IFC standards provide a useful “benchmark” on which to have a discussion and provide that advice 9 Environmental and Social Responsibility in Lending: Citi's Journey Case Study – Applying EP to a toll road project in India What were the environmental and social risk issues? •Involuntary resettlement of 1,600 households (covered under IFC Performance Standard 5) •Impacts to scheduled tribes / castes, and indigenous peoples •Relocation of temples & mosques, and sacred groves •Impacts to biodiversity What is the potential Equator Principles Risk Category? •Due to potential sensitive issues, such as resettlement, this was classified as a Category A (high risk) transaction, and Citi Indiabased Transactors immediately contacted ESRM Unit for advice and clearance •Sponsor understood Equator Principles would apply, and requested Citi’s advice on how to structure the Independent Review 10 Environmental and Social Responsibility in Lending: Citi's Journey Case Study – Applying EP to a toll road project in India Detailed Due Diligence Process: •IFC Performance Standards applied •Timing was extremely tight from Diligence phase to Credit Approval and Commitment (~ 1 month) •Challenge: Government responsible for implementing and managing resettlement (not Citi’s client) •ESRM Unit required hiring of Independent Consultant to conduct an Equator Principles Compliance Review •ESRM Unit accompanied the Independent Consultant on due diligence visit •Independent Consultant helped facilitate discussions between client and government agencies responsible for resettlement implementation 11 • Independent Consultant wrote E&S Due Diligence Report for Citi, and identified certain gaps that needed to Environmental and Social Responsibility in Lending: Citi's Journey be filled Case Study – Applying EP to a toll road project in India Closing and Disbursement: • Loan documentation signed • Covenant to comply with Equator Principles, and Action Plan •Action Plan outlines actions to be taken to eliminate or offset adverse impacts or reduce them to acceptable levels; and, therefore addresses mitigation, actions, monitoring, management of risk, as well as schedules and costs needed to implement these measures over the life of the project. •Independent monitoring carried out over life of loan to ensure project stays in compliance 12 Environmental and Social Responsibility in Lending: Citi's Journey Quick sample of other Indian projects subject to the IFC Performance Standards • Reliance Jamnagar oil refinery • Tata Mundra Ultra Mega Power Project – coal-fired power in Gujarat • Vicat Sagar Cement Project in Karnataka 13 Environmental and Social Responsibility in Lending: Citi's Journey Thank you – Questions?