Conference title Environmental and Social Risk management. Financing Metal Mining Projects – The Equator Principles David Glenister Sustainability Specialist SGS Conference title

Metal Mining & Sustainability The mining and metals industry faces a broad range of challenges in producing the essential materials for today's society Among others issues, Environmental and social risks management are key factors for grant access to finance from Development or private international Financial institutions The Equator Principles guidelines have an impact on mining & metals project finance from the perpective of sponsors and borrowers in terms of their environmental and social contractual obligations.

Metal Mining & Sustainability The dialogue on the inter-relationship of financing, mining and sustainability has four objectives: to support a better understanding amongst the finance community of issues raised by the mining industry’s uneven performance with respect to sustainable development as they relate to financial and reputational risk and shareholder value; to examine what role, if any, the financial community could play to enhance themining industry’s performance (e.g. guidelines, standards, or similar criteria); to examine mechanisms (reporting, rating, certification, monitoring) suitable to improve overall industry performance, thereby reducing risk exposure for the financial community at large; and to move toward a broader consensus on the evaluation of sustainability specific risk factors in mining finance, and their application.

Metal Mining & Sustainability The causal link between sustainability and financial performance is tenuous and most likely reflects the quality of a mine’s management. The mineral and financial sectors are realizing that reputational risk carries with it economic risk and on-going mining accidents have both reputational and financial risk elements. Hard-to-manage risks: Legal Risks Market & Political Risks Force Majeur Manageable Risks Technical & Operational Risk Environmental & Social Risk Economical Risk Type of risks;

SOURCES OF RISK MARKET/POLITICAL LEGAL/FINANCIAL Contractor insolvency Breach of contract Price, currency, interest rates fluctuation Inconvertibility of currency Disable currency transfer Change in law and legal system Political instability violence Riot, strike, civil commotion Terrorism, war OTHER Natural peril, disaster Earthquake, fire explosion Force majeur SOCIAL/ENVIRONMENTAL TECHNICAL/OPERATIONAL Labor and working conditions Pollution Health, safety and security (community, employee) Land acquisition and involuntary resettlement Biodiversity conservation & sustainable natural resource management Handling/operation Construction Faulty design, materials, workmanship Reliability of feasibility study Project performance Supplier performance Contractor performance Defects Alterations/betterments

International Cyanide Management Code THE VALUE OF STANDARDS AND AGREEMENTS, AUDITS AND INDEPENDENT VERIFICATION The mining industry had embraced principles for sustainable development and environmental best practices to properly address those risks by developing several voluntary codes of conduct such as; International Cyanide Management Code International council for mining & metals’s sustainable development framework Mineral Policy Center’s Guidelines on Responsible Mining World Bank’s 2003 Extractive Industries Review IFC’s Environmental H&S sector guideline for Mining

Equator Principles – The Project Finance Benchmark Standards, codes, and agreements are useful to the lending community. However, these need to be specific, with measurable performance factors, actionable, responsible and timely. A voluntary framework for banks to manage environmental and social risks in project finance Based on IFC’s Performance Standards and WBG Environmental, Health and Safety Guidelines First announced in June 2003 with ten banks. Re-launched as EP2 in July 2006, in line with the new IFC E&S Performance Standards Currently more than 65 financial institutions “EPFIs” arranging around 90% of global project finance All projects undergo categorization and social and environmental review Speaker’s Notes:

Equator Principles – The Project Finance Benchmark Over 70 financial institutions have adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects around the world. – 90 % Project Financing Once adopted by banks and other financial institutions, the Equator Principles commit the adoptee not to finance projects that fail to follow the processes defined by the Principles.

Equator Principles – The Project Finance Benchmark The principles apply to all new project financings globally with total project capital costs of US$10 million or more, and across all industry sectors. the Principles also apply to all project financings covering expansion or upgrade of an existing facility where changes in scale or scope may create significant environmental and/or social impacts, or significantly change the nature or degree of an existing impact.

Equator Principle – Ten Principles Principle 1: Review and Categorization Principle 2: Social and Environmental Assessment (Process) Principle 3: Applicable Social and Environmental Standards High-income OECD countries vs. Emerging Markets Principle 4: Action Plan and Management System Principle 5: Consultation and Disclosure Principle 7: Grievance Mechanism Principle 8: Independent Review Principle 9: Covenants Principle 10: EPFI Implementation Reporting

Equator Principles – The Project Finance E&S Benchmark The Equator Principles can bee seen closely mirror the International Finance Corporation (IFC) Performance Standards on Social and Environmental Sustainability,: Performance Standard 1: Social and Environmental Assessment and Management System Performance Standard 2: Labor and Working Conditions Performance Standard 3: Pollution Prevention and Abatement Performance Standard 4: Community Health, Safety and Security Performance Standard 5: Land Acquisition and Involuntary Resettlement Performance Standard 6:Bio-diversity Conservation and Sustainable Natural Resource Management Performance Standard 7: Indigenous Peles Performance Standard 8: Cultural Heritage

The Criteria Categorization of projects, based on International Finance Cooperation (IFC’s) environmental and social screening criteria, to reflect the magnitude of prospective impacts and risks Category to: Category A – Projects with potential significant adverse social or environmental impacts that diverse, irreversible or unprecedented; Category B – 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; and Category C – Projects with minimal or no social or environmental impacts.

Equator Principles – The Project Finance E&S Benchmark For Category A and B projects, the borrower must conduct a social and environmental assessment to determine the associated risks of the project and prepare an action plan which addresses the relevant findings and propose the mitigations measures, corrective actions and monitoring to properly managed them. Furhtermore, the must maintain and establish a social and environmental management system that addresses the management of the action plan

Equator Principles – The Project Finance E&S Benchmark Borrower must covenant to: Comply with all host country social and environmental laws, regulations and permits in all material respects Compy with the action plan during the construction and operation of the project Provide periodic reports to the Financial institution representation of compliance with Action plan and host country environmental and social regulation Decommission the facilities where applicable in accordance with an agreed decommisioning plan

Equator Principles Work-Flow Lender Borrower EP2) E&S assessment EP1) Project categorization EP3) Applicable E&S Standards EP4) Action Plan and mangement system EP 5) Consultation disclosure EP7) Independent Review EP6) Grievance Mechanism As a resume, we can see here the EP workflow in which the responsibilties to comply with the EP of both Lender and borrower are set. Depending on each EPFI or project, some of the responsibilities can vary or been shared. EP8) Coventants EP9) Independent monitoring EP10) Reporting

How to manage Once the risk are identified, On-site action is needed to manage risk The Equator Principles itself rely on external technical expert to help EPFI and borrowers manage E&S issues relate to the project Principle 7 : Independent Review Principle 9 : Independent Monitoring and Reporting

Independent Third Party can Help? Many EPFI has set procedures to involve independent third parties on these activities It clearly improve the way they partner with: Clients Governments Civil society and NGOs On-site assessments and monitoring also improve transparency and accountability of EPFI efforts on implementing EP and IFC performance standards

Case Study – Northern Peru Corporation Business Challenge: Review a resettlement process against the Equator Principles as part of Northern Peru Copper Corp’s development plan for a mine in Peru. Approach checked whether the local Peruvian contractor was completing the resettlement in line with best practice and proposed ways to close the gaps. In so doing, the Auditor reviewed resettlement documents and social management plans and met stakeholders to determine the extent of process application. The Auditor also liaised with the community to review their involvement in the resettlement process and the degree to which it was consistent with plans. Benefits & Value Auditor identified breaches of the Equator Principles requirements that could jeopardize the NPC’s prospects of World Bank financing. Auditor also provided actionable recommendations to improve community relations and resettlement process management.

Case Study – Pt Agincourt Resources Business Challenge: Undertake an environmental impact assessment to Equator Principles to ensure PT Agincourt Resources attained local AMDAL approval and could commence construction on a Gold and Silver Mine in Indonesia. Approach The Third Party Firm collected information required to meet the government and company’s requirements; from air quality to socio-economic data. Simultaneously the Third Party also had to follow strict processes set out by AMDAL relating to public engagement. The Third Party submitted Terms of Reference for the project which were reviewed and approved by the relevant authorities. This was followed by submission of the AMDAL itself and accompanying environmental monitoring and management plans.   Benefits & Value AMDAL approval was granted in early 2008 and the project is on schedule according to plans.

On Site Assessment On site assessment is used predominantly on the basis of confirming:- that the Project Operator and/or EPC contractor(s) are aware of the need for certain socio-economic and/or EH&S related issues to be addressed within the project, that these requirements are factored into the project development and execution process, that the project design, planning, approval processes, project management and implementation parameters are in line with EP / IFC criteria, and, that the desired outcome is likely to be achieved in respect of the project’s environmental and socio-economic probity, if implemented effectively.

Equator Principles Assessment Objectives; To assess and report on - in the context of statutory obligations, and any other applicable discretionary corporate social and environmental obligations - whether the Project is in accord with the Equator Principles requirements and associated IFC Performance Standards identified. To identify any areas where inconsistencies exist between the Equator Principles, action plan or loan terms and conditions requirements and current performance or where some re-examination or strengthening of current management performance might be warranted.

Equator Principles Benefits; Standardize E&S lender requirements; Equator Principles bring a level of social and environmental evaluation, transparency and discipline to projects which might otherwise be absent. Promote responsible investments development: The banks are secure in the knowledge that their investments are being used to support ethical and sustainable work and that the project conforms to the required standards. Open new market. Provide effective project finance risk management; Protect Project Return of Investment Reduce cost overruns and delays Protect Financial Institutions from the environmental and social liabilities of the project. Preserves Financial Institutions reputation Provides access to capital From international EPFI or Multilaterals

Any Questions? David Glenister, SGS United Kingdom Ltd SGS House 217-221 London Road Camberley Surrey GU15 3EY United Kingdom Tel: +44 (0) 7889 939814 david.glenister@sgs.com