Adherence to Equator Principles

The Equator Principles (EP) are international guidelines that provide support to financial institutions, voluntarily applying them when financing projects related to large infrastructures and industrial plants, such as energy plants, oil refineries, mines, transport and telecommunications infrastructures.

The banks adopting and subsequently implementing the Principles (Equator Principles Financial Institutions - EPFIs) must be equipped with organisational structures and tools to identify, assess and manage social and environmental risk associated with the projects under consideration for financing.

Launched in 2003 and initially adopted by 10 financial institutions, the Principles are based on the Performance Standard (PS) of the World Bank’s International Finance Corporation (IFC) and on the Environment, Health and Safety Guidelines (EHS Guidelines). Now adopted by more than 100 institutions worldwide, the EP are they are recognized as one of the most authoritative benchmarks, for the financial sector, in the field of social and environmental risk management resulting from financing activities.
The adoption of the Principles by an increasing number of financial institutions is a key lever for the dissemination of good practices and helps to strengthen, more broadly, the dialogue around sustainable finance.

2019 saw the launch, by the EP Association, of the new EP IV, which will officially come into force in October 2020 and that widen the scope, with the inclusion of some types of loans related to refinancing and acquisitions and with lowering the application threshold for certain funding categories. The requirements for projects in OECD countries are also becoming more stringent and there is a clear commitment to respect for human rights, in line with the United Nations Guiding Principles on Business and Human Rights (UNGP), and the fight against climate change with reference to the 2015 Paris Agreement.

In October 2020 the new "EP IV" standards came into force, extending the scope of application to refinancing loans and acquisition loans, and lowering the threshold for project-related corporate loans to 50 million dollars. The Group actively participated in the review process, making its contribution together with the other members of the Association.

On climate change in particular, the new EP IVs make explicit reference to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), for example, calling for the evaluation of a project to include, among other things, the analysis of both physical and transition risks, based on the definitions of TCFD. Intesa Sanpaolo actively took part in the review process and contributed during the work together with the other members of the Association.

The Principles (IV) apply, globally and to all industry sectors, to four financial products: Project Finance Advisory Services, Project Finance, Project-Related Corporate Loans and Bridge Loans, as well as financings covering expansion or upgrade of an existing facility, whenever changes in scale or scope may create significant environmental and social risks and impacts.

Projects assessed in accordance with the EP must comply with the social and environmental standards (Performance Standards - PS) and the EHS Guidelines of the International Finance Corporation (IFC), the World Bank institution dedicated to the private sector.

Adopting the EP implies the application of the 8 Performance Standards, according to the version entered into force on 1 January 2012, summarised as follow:

1 - Assessing social and environmental impact deriving from projects to be financed and implementing appropriate management systems

2 - Protecting the rights of workers, health and safety and complying with international labour agreements

3 - Preventing pollution and promoting energy efficiency

4 - Avoiding or reducing health and safety risks in the communities in countries where the projects are implemented

5 - Consulting populations affected by land acquisition and involuntary resettlement (if inevitable), and assessing compensation in a transparent manner. Implementing a transparent, effective grievance mechanism

6 - Promoting the conservation of biodiversity as well as sustainable ecosystem and natural resource management

7 -  Protecting the rights of the indigenous peoples

8 - Preserving cultural heritage

A fundamental step in the entire assessment process is the categorisation of projects, which involves the integrated consideration of different factors, e.g. the countries concerned, the industry sector, the background of the company proposing the project or the continued presence - even before the social and environmental impact study is undertaken - of potential critical points associated with one or more aspects envisaged in the Standard. This screening, albeit done at an early stage, allows a global risk level to be assigned to projects, categorised as follows:

Category A (high) - projects with potential significant adverse social or environmental impacts that are diverse, irreversible or unprecedented

Category B (medium) - projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures

Category C (low) - projects with minimal or no social or environmental impacts.

A thorough and rapid assessment of the risk level of the project ensures that a fair assessment is made and that, at the same time, all the aspects to be screened from the outset are taken into consideration. 

In this way, for example, a Category A project will trigger a series of further investigation that considerably reduce the potential risks involved, as it envisages the respective mitigation measures already at preliminary stage, with subsequent time and cost savings.

Our Bank’s adoption of the Equator Principles (EP) dates back to 2006, even before the merger of Banca Intesa and Sanpaolo IMI, that gave rise to Intesa Sanpaolo. Membership was later reconfirmed in 2007 by the new Group and the implementation process is defined and regulated by the Rules governing the Equator Principles, which are valid for the entire Group.

Internal regulations are constantly reviewed and updated when internal or external events make it necessary. As a result, with the entry into force of the third version of Equator Principles in 2013, the legislative corpus has been updated for the first time. 

In the second half of 2019, the activity of evaluating operations subject to Equator Principles was incorporated into the "ESG and Reputational Risk Clearing" process. This integration helps to more effectively delineate the risk profile of the funds assessed and meets the objective of making the risk protection as a whole more integrated.

The internal legislation dedicated to EP is integrated into the Group's credit policies and recalled by the relevant lending procedures, in order to intercept, right from the application phase, all loans subject to the Equator Principles evaluation process.

The review of the projects involves at least two levels of assessment: the first level evaluates the compliance with Equator Principles and the risk level, the second is carried out by the credit function in the sphere of the ordinary activity. In particular, in presence of high risk category projects, independently of ordinary credit competence, the level of deliberative competency is assigned to the central deliberative body.

In 2022, a total of 17 loans subject to screening according to the Equator Principles reached financial close (a total of 404 since 2007) for an overall granted value of 1,081 million euro.

OPERATING GUIDES: EP REQUIREMENTS FOR THE FINANCING BANKS

Principle 1: Review and Categorization

• Require preliminary information on the project
• Categorize the project and identify the applicable standards
  
• Verify the reputational risks and applicable standards
  
• Inform the client about the EPs application and what they require

Principle 7: Independent review

• Define the Environmental and Social Due Diligence (ESDD) Scope of Work
• Assign or execute the Due Diligence
  
• Prepare the Memo for the deliberative Body
  

Principle 8: Covenants - Principle 9: Independent monitoring and reporting - Principle 10: Reporting and transparency

• Define the contractual obligations (Covenants)
• Monitor compliance with social and environmental requirements
  
• Produce periodic information

OPERATING GUIDES: KEY PHASES IN THE SCREENING OF A PROJECT

Since the adoption of the EPs, the Bank has committed to carry out an extended and structured training plan which involved colleagues from different areas of the Bank involved in the financing activities that provide for the application of the Principles, both in Italy and abroad.

By adopting the Principles, financial institutions also agree to participate in the ongoing international debate organised by the EP Association. This means involvement in theme-based working groups, events organised for the member banks, and also meetings with our stakeholders - mainly the IFC, NGOs and the industry business associations.