Project finance lending requires comprehensive due diligence, involves long maturities and seeks a community of interest among stakeholders. Environmental and social aspects were already regarded as crucial factors of risk and given proper consideration within Calyon's credit process.

Moreover, we were seeing a growing commitment from our clients to sustainable development and many of them had already reached a very sophisticated level regarding these aspects. What was lacking was a common language among stakeholders. The World Bank and IFC guidelines offered the well-respected, reasonably neutral and immediately available benchmark that was needed.

As anticipated this initiative has been generally well perceived by our clients and sponsors as the Principles establish a clear and consistent level of requirements as well as saving time by doing it right the first time.

Implementation and findings

Implementation is a key issue. Banks adhering to the principles must categorise projects as A, B or C (indicating high, medium or low environmental and social risks) on the basis of the IFC's environmental and social screening process and express requirements consistent with the outcome of the categorisation process.

Banks include covenants in the loan documentation and request regular reports by the project company on compliance. In case of non-compliance, banks would encourage the borrower in its efforts to return to compliance and may eventually default the loans if no proper corrective action is taken.

Banks have also committed to implement the Equator Principles in a timely and efficient manner. At Calyon the Principles have been integrated into the existing credit process. More importantly, Calyon has heavily invested in people through an extensive training scheme involving the IFC that has already trained 120 individuals world-wide. Of these, around 50% are front office staff and 50% are people indirectly involved (credit department, in-house consultants, middle office).

While the objectives and content of training are consistent, its format is adapted to the culture prevailing in the various project finance units world-wide and to the people concerned. In addition, and as an opportunity to increase practice and progress more quickly on the learning curve, we have undertaken a full review of our current portfolio.

We have rapidly switched from a screening process where industrial sector and scale of project were determining the intrinsic rating of projects to one that privileges the sensitivity of the location and the extent of the potential environmental and social impacts of the project. Applying such a screening process to a large and significant sample of projects has resulted in the following breakdown into the A, B and C categories:

Projects rated:

Category A Category B Category C

between 5 and 10% around 80% almost 10%

As a second step, we assess the capacity of the sponsors to deal with the environmental and social impacts that have been identified.

And finally, as a third step, we determine our requirements in terms of completeness of the Environmental Impact Assessment (EIA), review of such EIA by independent consultants, Environmental Management Plan and public consultation.

For projects rated B, the level of the requirements imposed depends directly upon the combination of the nature of the potential impacts identified and the categorisation of the sponsors. Assessment of sponsors' capability is thus a key step in our due diligence process as most projects belong to the B category.

While the Equator Principles were mainly consistent with our values and existing practice, we have found that formalising the daily practice through these principles has created a virtuous circle. While assessing the sensitivity of a location can be regarded as straightforward, we have recorded a fairly significant improvement in the accuracy of the assessment of the potential environmental impacts as a result of training and usage.

To a large extent, we can say that we have increased our professionalism and in so doing the management of the reputation risk for all stakeholders. We are convinced that the ability to manage these issues will be more and more a key factor of success for project financing. As a direct result, Calyon has been developing a real capacity to help its clients to also assess and manage, in an efficient manner, market requirements.

Challenges ahead for Equator banks

The last months have been brisk with the release of the controversial Extractive Industries Report and the launch by the IFC of its consultation process regarding the revision of its safeguard policies. We have given careful consideration to both as they will determine best practices for the next few years.

In our answer to the Extractive Industries Report, signed together with 10 other banks, we have emphasised the crucial role of the World Bank Group in ensuring sound environmental and social practices. Should the IFC withdraw from the financing of extractive industries projects either due to a ban on coal and oil extraction or as a result of setting well intentioned but unfortunately unrealistic preconditions, we believe that this could lead countries that are most in need of development assistance to face a cruel choice. Either to remain mired in poverty or find less desirable paths to develop their extractive potential.

Our intention, somehow misinterpreted, wasn't of course to support or blame any specific energy policy, for which banks have no mandate. It was merely to outline the most efficient way to address concerns expressed in the Extractive Industries Report. Moreover, we share the conclusions on key issues including improved governance, adequate mitigation of adverse impacts, preservation of health and safety and need for an equitable sharing of value.

In addition, having 11 Equator banks sign the same letter doesn't mean that Equator banks act as an organised group. There is presently no intention to have a secretariat representing Equator banks as this would raise a major legitimacy issue. Individual banks have no mandate to speak for other financial institutions.

Each Equator bank has its own culture, its own environmental and social policy and its own model to implement the Principles. At Calyon, we work in close connection with the Sustainable Development Group at our parent company, Credit Agricole SA, on all these matters. Banks do exchange information on best practice and the variety of implementation models adopted is beneficial in this respect - we learn much from each other.

Potential evolution of IFC safeguards

Regarding the revision of IFC policies, we appreciate the efforts by IFC to recognise the respective objectives and responsibilities of the various stakeholders but we regard the existing policies as already fairly satisfactory.

In our opinion, the main challenge to improving these policies rests on including flexibility in order to better adapt requirements to each particular circumstance while limiting the risk for interpretation. In order to remain a market standard and favour consistency among all parties, the new policies should remain predictable and determine clearly what is requested in any specific situation. To enhance efficiency, they should also be easily understandable, realistic and manageable at the project level for all parties concerned.

Achieving these goals is not easy, but several levels of text might be part of the answer. In any case, we believe that the input of clients will be essential to ensure an efficient process.

Limited leverage of Equator banks

Another important step was the meeting held on July 1 among Equator banks and NGOs to exchange views on implementation of the Equator Principles. Subsequently, a working group in which Calyon is a participant has been set up in order to make suggestions to better address concerns expressed by some NGOs. It will also be crucial to have the clients involved in this process as they are the key stakeholders on whom most of the constraints ultimately impact. The suggestions are due to be presented at the next general meeting to be held in February 2005.

In our opinion, a basic question implicit in all these forums is: "What influence can we have as a banker on the environmental and social footprint of a project." As already said, banks have no legitimacy to define industrial policies and we certainly have no intention to supersede Governments, citizens or NGOs. Neither are commercial banks development bodies with a social mandate. As commercial banks, we are private companies that report to their shareholders.

However, as Equator banks, we are clearly and fully committed to enhance sound environmental and social practice as well as to seek sound project economics and a fair return for our own shareholders. We therefore contribute to sustainable development in the framework of the projects we finance. While we believe that banks can exercise a clear influence until funds are disbursed, we are more sceptical regarding the influence they may have thereafter.

Monitoring is a difficult task, in particular for social matters, and banks will have ultimately to rely on the project company. In theory, banks might exercise a right of step in, triggered by certain circumstances but even in such a situation, the power of banks should not be over estimated. Often, local laws, such as Chapter 11 or receivership, limit significantly what banks are entitled to do.

And in any case, any right of action of banks will not be a straightforward process. Local employment, pollution and rights of the various parties may lead to a serious conflict of interests, the arbitration of which may be difficult to predict. These limitations are one of the reasons that led us to put significant emphasis on the capability of the sponsors during our screening process.

Furthermore, at Calyon, we attach a lot of importance to our ability to deliver. We strongly believe that the framework needed to achieve the level of environmental and social performance sought for a specific project should be determined before disbursement of the loan. This is a question of predictability and we believe that it will be beneficial for all stakeholders.

Have the Equator Principles changed anything? When 28 of the most active banks in project financing reject environmental and social neglect on the projects they finance, meet regularly to debate best practice and engage in consultation processes with all stakeholders - something has changed dramatically and positively in banking practice.