HSBC, one of the world’s largest financial institutions, is setting the standard in terms of how banks demonstrate that project financing is done in a sustainable fashion.
“Ten years ago, the approach to what we now call sustainability was to turn off lights and give money to charity. There has been a huge change globally,” says Jon Williams, Head of Group Sustainable Development, HSBC Holdings plc.
Drawing on more than 20 years experience as a banker, Mr Williams approaches his job from HSBC’s core banking business perspective. But his team is also staffed with professionals with a sustainability background from NGOs to environmental consultancies.
One of the steps that HSBC has taken to ensure that its business is conducted in a sustainable fashion is to use the Equator Principles in its assessment of project financing deals. The Equator Principles are a set of voluntary guidelines that provide a framework for assessing and managing the environmental and social impacts related to project finance transactions.
HSBC has committed to only providing loans to projects in which the borrower can and will meet the standards stipulated by the principles. For projects that are financed, action plans are created to manage the associated social and environmental impacts.
Mr Williams believes that the Equator Principles have become a global market standard. They have achieved a critical mass of participation, with 54 banks as signatories, and cover 90 percent of global project finance transactions. The total value of Equator Principles transactions approved by HSBC in 2006 was $5.171bn.
A level playing field
“The Equator Principles are important for us because they create a level playing field for project financing. Banks are competing to get the clients’ mandate, and the Equator Principles ensure we are conducting business on the same terms,” says Mr Williams.
“The principles are based on international best practice and are consistent with the International Finance Corporation’s environmental and social ‘Performance Standards’. They help us deal with some of the challenging issues that arise in conjunction with complex and long term projects, which sometimes could undermine the economics of the deal.”
“At the same time, the Equator Principles are also good for clients, because the standards are applied consistently and fairly. In general, having a global market standard is the best way to get sustainable criteria implemented,” notes Mr Williams.
Each bank that adopts the Equator Principles commits to report publicly about its implementation process and experience, including the number of transactions that were screened. But financial institutions have been under increasing pressure to disclose more information about how the Equator Principles are applied.
Mr Williams adds, “HSBC reports extensively, principle by principle and by category of deal. But to protect the confidentiality of our clients, we do not disclose the details of individual deals.”
New industry standard
In its 2006 Corporate Responsibility report, HSBC took its reporting on the Equator Principles to a new level when it had its adherence to the principles independently verified by DNV.
“We decided to go ahead with a third party audit as a means of enhancing the credibility of our reporting, while maintaining confidentiality. We believe we are the first bank to take this step. The initiative has been received positively, by all types of interested parties including NGOs, other banks, lawyers and accountants.”
“I believe other financial institutions will follow suit, and will continue to provide more detailed reporting of the volume and value of deals within the Equator Principles, as well as choosing third party verification. This will be part of a broader trend of increased reporting and independent verification of non-financial data,” concludes Mr Williams.
“The biggest environmental and social impact we make is indirect, through our lending to and investing in companies. To help ensure that this is handled in a sustainable manner, HSBC applies a framework of sustainability policies including the Equator Principles,” says Head of Group Sustainable Development Jon Williams.
DNV’s CEO Henrik O. Madsen is pleased with the cooperation between HSBC and DNV. “This is a good example of how we can work together with customers to come up with innovative ways to add value. At the same time, application of the Equator Principles is in line with DNV’s vision to make a ‘global impact for a safe and sustainable future’.”
The HSBC approach to sustainability
HSBC has a three step approach to sustainability:
“The first step is to be profitable. Economic success allows HSBC to provide employment, pay taxes and carry out philanthropic initiatives,” says Head of Group Sustainable Development Jon Williams.
“Secondly, we must have a sustainable long term client base. Ensuring our customers have confidence in both the service we provide and the way our business is conducted is crucial. Thirdly, HSBC believes that, if we are to succeed in the long run, we must make sure that we measure the social and environmental performance of our operations.”
“To achieve this, HSBC manages its direct environmental impacts in terms of energy use, water consumption, waste production and carbon emissions. We made a commitment in 2004 to be the world’s first major bank to become carbon neutral, and achieved this in 2005. The information in our annual Corporate Sustainability Report is externally audited by DNV. This includes a review of our carbon neutrality and the data in our global reporting system, which accounts for 96% of HSBC employees.”
“Another aspect of our approach to corporate sustainability is our philanthropic activities, which are consistent with our approach to running the bank and working with clients.” More than 75% of HSBC’s total philanthropic expenditure is directed at the core areas of education and environment, with a focus on forming long term relationships. Major projects include the HSBC Climate Partnership – a five year USD 100 million partnership to tackle the impacts of climate change worldwide – and Future First, which aims to combat global poverty through the provision of healthcare, education and shelter.
“But the biggest impact we have is indirect, through our lending to and investing in companies,” notes Mr. Williams. To help ensure that this is consistent with its commitment to sustainability, HSBC applies the Equator Principles to project financing and has also developed a set of Sector Policies covering the bank’s activities in specific sectors, such as forestry, chemicals, energy, mining and water.
To learn more
The Equator Principles
http://www.equator-principles.com/
Corporate Social Responsibility at HSBC
http://www.hsbc.com/1/2/corporate-social-responsibility
Case studies
http://www.hsbccommittochange.com/