Five Questions about the Equator Principles – Special Interview with Richard Burrett, Partner, Earth Capital Partners (ECP), London, United Kingdom – April 2, 2012

On the first Monday of each month Emerging Markets ESG publishes a special interview with an academic, expert or practitioner about a specific topic with relevance to environmental, social and/or governance (ESG) issues.

This month’s interview, the second interview in the special interview series, is about the Equator Principles and is with Richard Burrett, Partner, Earth Capital Partners (ECP), London, United Kingdom.

Earth Capital Partners (ECP) is an investment management business, offering a platform of sustainable investment products. Each ECP product is launched with a specific focus on a sustainable asset investment theme, geography and investment style. ECP provides investors with a stable platform for investment into the new sustainable asset growth sectors at scale. Themes include renewable energy, energy efficiency, sustainable agriculture and forestry, water and clean technologies.  Largely fund based, ECP’s products offer attractive investment risk-return characteristics at scale and show limited correlation to both traditional and alternative investments, whilst demonstrating clear sustainability benefits.  Richard Burrett spent over 25 years working in international banking. He gained wide experience of the energy and infrastructure finance sectors becoming Global Head of Project Finance at ABN AMRO. He was instrumental in the development of the Equator Principles, creating a market recognized standard for the management of environmental and social risk within project financing. He then worked on their award winning sustainability agenda becoming Global Head of Sustainability. Richard is now a Partner at Earth Capital Partners and a Senior Associate of the University of Cambridge Programme for Sustainability Leadership. Richard is a Board Member of Forest Renewables, developing renewable energy in Scotland’s national forest estate, and a Board Member of Forest Trends, a Washington, DC-based organization promoting market-based approaches to forest conservation. He is also Co-Chair of the United Nations Environment Program Finance Initiative and leads their Biodiversity and Ecosystems Workstream. He holds a BA in German and an MBA from Durham University.

Emerging Markets ESG:  What are the Equator Principles?

Richard BurrettThe Equator Principles (EPs) are a voluntary set of standards for determining, assessing and managing environmental and social risk in project financing. Project financiers often encounter environmental and social issues that are both complex and challenging, particularly with respect to projects in the emerging markets.

Equator Principles Financial Institutions (EPFIs) commit to not providing loans to projects where the borrower will not or is unable to comply with their respective  environmental and social policies as well as procedures that implement the EPs. The Equator Principles were developed by private sector banks and launched in June 2003. The banks have modeled on the environmental and social standards and policies of the International Finance Corporation (IFC); now called Performance Standards. The Equator Principles have become the de facto standard for banks and investors on how to assess major development projects around the world.

Emerging Markets ESG:  Why were the Equator Principles developed?  Why does the international project finance system need these guidelines?

Richard BurrettMany leading project finance banks were experiencing issues emerging from the environmental and social impacts of projects they were financing. Some of these issues were not only causing reputational risk for the lenders but were also undermining the creditworthiness of the projects themselves. The banks identified a need for a much more systematic approach to the analysis and management of these ESG factors,

Emerging Markets ESG:  If a bank were to conduct a cost/benefit analysis of the Equator Principles, which issues/parameters should it include in the analysis?

Richard BurrettA bank would need to weigh any additional upfront or ongoing ESG due diligence cost against the potential financial cost of dealing with a future loss scenario. In extremis a bank might walk away from a financing and would then have to weigh that foregone opportunity against potential financial loss…. That is the essence of good risk management anyway!

Emerging Markets ESG:  From your perspective, what is the biggest challenge for a bank in adopting, implementing and reporting according to the Equator Principles?

Richard BurrettThe biggest challenge is to embed the process systematically in the bank’s existing risk management and reporting processes. These vary from bank to bank so it may need a bespoke solution, but is not difficult.

Emerging Markets ESG:  When a bank adopts the Equator Principles, which practical measures must it implement?

Richard BurrettAs indicated above, the bank must think through the whole value chain in its business from deal origination to execution and ongoing asset management and work out how to ensure that the Principles are built in to and reflected in each stage. This will involve different parts of the bank from relationship management, to project finance, loans administration and risk management and reporting. Training across that value chain is strongly recommended.