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Commitment, Compliance and Capacity — How Environmental, Safety, Security and Social Financial Issues Affect Lenders’ Risk

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Author G A Brown and G S C Murray

Description

Major mining projects are developed with the assistance of lending institutions who provide hundreds of millions of dollars in funding over several years, and of course expect those funds to be returned with interest. Two Australian banks have adopted the Equator Principles, an emerging financial industry benchmark for assessing and managing environmental and social risk in project financing.

Project financiers have encountered environmental and social issues that are both complex and challenging, particularly with respect to projects in the emerging markets of Asia-Pacific and elsewhere. There are many recent and historical examples of failures by resource companies to effectively manage their environmental, social, safety and security risks, some of which have caused the project to fail completely, and some of which have caused the temporary cessation of production. These events put the financial institutions’ funds at risk through inadequate management capacity and non-compliance adversely affecting the ability of the borrowers to repay the loans. They can also reflect adversely on the reputation of the lending institutions.

In assessing these risks, lenders are increasingly looking at the track record of the borrower in its country of origin and in other countries where it operates. Lenders are wary of companies that have one standard for operations in a developed country, where the regulatory environment may tightly control what they do, and another standard for operations in countries where the regulatory regime is perhaps less stringent. Lenders may require environmental and social reviews or audits to be conducted on their behalf by competent third parties prior to a loan being approved, and annually over the life of the relationship. The mining industry’s concept of the unwritten ‘social licence to operate’ is highly relevant in relation to the delivery of community benefits that are sustainable post-mine closure.

This paper provides examples of recent practices that support financial viability and sustainable development, as well as examples of some failures that have put lenders at risk.

FORMAL
CITATION:
Brown, G A and Murray, G S C, 2007.
Commitment,
compliance and capacity – how environmental, safety, security and social
financial issues affect lenders’ risk, in Proceedings
Project
Evaluation 2007
, pp
35-42
(The
Australasian Institute of Mining and Metallurgy:
Melbourne).