The move towards becoming “green” has continued to gain momentum in different sectors of the business world. Signatory banks throughout the world have taken up the call to become environmental stewards and to promote socially responsible development by adopting voluntary principles known as the Equator Principles, and becoming Equator Principles Financial Institutions.
The Equator Principles are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. Equator Principles expressly incorporate a number of the policies and guidelines of the International Finance Corporation (IFC) of the World Bank Group. Equator Principles have become the standard for most banks and investors on how to deal with potential social and environmental effects of projects requiring finance. By adopting the principles, EPFIs undertake to develop individual internal practices and policies consistent with the framework.
The Equator Principles apply where the total project capital costs are US$10m or more and provide conditions under which financial institutions agree to approve loans for these projects. The principles suggest that banks do not operate in isolation when assessing project finance, but incorporate environmental and social considerations into project finance. Projects are classified according to the risks they pose on the environment and society. Depending on the level of risk, the borrower may be required to provide a satisfactory environmental assessment or, in cases of high risk, an environmental management plan as well, which may require public consultation and reporting back to the financier.
Presently, there are about 66 Equator Principles Financial Institutions which operate globally. Amongst these are South African banks such as FirstRand, Nedbank, Standard Bank and ABSA.
What we may expect to find is that Equator Principles Financial Institutions may not provide loans to projects where the borrower will not or is unable to comply with the respective social and environmental policies and procedures that are found in the Principles. Financing may become conditional upon borrowers making certain progress on environmental and social issues, undertaking to comply with relevant environmental and social laws and regulations, and reporting on their compliance throughout the project. Non-compliance could possibly be incorporated into the finance documents as an event of default, resulting in the Institution cancelling the loan and demanding immediate repayment.
Leading the way in May 2004, the JSE’s Socially Responsible Investment (SRI) Index was launched in response to the burgeoning debate around sustainable development globally and particularly in the South African context. The SRI Index contains principles that are in line with the King Code on Corporate Governance.
The Third King Report on Corporate Governance, which became effective on 1 March 2010, emphasises that companies should become responsible corporate citizens by undertaking triple bottom line reporting and by measuring the impact of their business on social, economic and environmental aspects. Companies should each develop their own policies to define and guide their activities in order to protect, enhance and invest in the long term wellbeing of society, the economy and the environment.
The JSE has developed criteria to measure the triple bottom line reporting of companies in the FTSE/JSE All Share Index, together with an index comprising those companies that pass the criteria requirements. The SRI Index serves as a tool for investors to identify companies incorporating sustainability practices into their business activities.
Business in South Africa is moving towards being better corporate citizens, being accountable to the communities in which they operate and ensuring sustainability of the economy, society and the environment. This is illustrated in section 7 (a) of the new Companies Act, which states that one purpose of the Act is to promote compliance with the Bill of Rights as provided for in the Constitution, in the application of company law. This will include considering the need to protect the environment.
This is not only at the public sector level but can be seen in the private sector by the actions of banks and listed companies particularly. We may well see the recognition and protection of the economy, society and/or the environment become an important part of commercial transactions.
Written by: Candice Isaac and Bongani Homela, Associates at Deneys Reitz Commercial Department, Cape Town