Environment Policy Amendment

The Organisation for Economic Co-operation and Development (OECD) has revised its Recommendation on Common Approaches on the Environment and Officially Supported Export Credits (the “Common Approaches”).  The latest Recommendation, adopted on 12 June 2007, strengthens common procedures and processes for the environmental review of projects being considered for support by the Export Credit Agencies (ECAs) of OECD countries.  Export Finance and Insurance Corporation (EFIC) – Australia’s ECA – was an active participant in the review of the Common Approaches.

A key part of the revised Common Approaches is the use of some new benchmarks for assessing a project’s environmental impact.  These benchmarks include the use of the International Finance Corporation (IFC) Performance Standards for private sector projects.  Those standards were the result of the IFC’s revision in April 2006 of its earlier Safeguard Policies.

The revised Common Approaches also encourage ECAs to exchange information with each other on their experiences in undertaking environmental reviews and in their application of the Common Approaches.  EFIC’s environmental team will participate in this process and will also seek to gain an appreciation of the experience of other financial institutions in the application of the IFC Performance Standards.

EFIC has an Environment Policy which is subject to periodic review.  Our next review of the Policy will be based in part on the experience of EFIC and others with the revised Common Approaches and the IFC Performance Standards.  Until that review, EFIC will adopt the eight IFC Performance Standards as its general benchmark for conducting environmental assessments.  The eight Performance Standards will replace the IFC Safeguard Policies currently referenced in EFIC’s Environment Policy.

For further details of EFIC’s Environment Policy please contact John Collins on 61 2 9201 2273.  A copy of the revised Recommendation is available on the OECD website at http://www.olis.oecd.org/olis/2007doc.nsf/linkto/tad-ecg(2007)9.

Angus Armour
Managing Director
Export Finance and Insurance Corporation
June 2007

1. Introduction and Background

1.1 The Export Finance and Insurance Corporation (EFIC) is the Australian Government's Export Credit Agency (ECA).  EFIC's mission is to increase Australia's exports.  For 50 years we have been doing this by providing clients with internationally competitive insurance and finance services, for countries, companies and contracts that the commercial market does not have sufficient capacity to cover.  More than 50 other countries provide similar facilities for their exporters and investors.

1.2 EFIC has adopted this Environment Policy to enable it to better identify and assess any significant environmental impacts of export transactions, overseas projects and overseas investments for which EFIC facilities are sought.  The Policy outlined below is an update of EFIC's previous Environment Policy which was adopted and implemented in 2000.

1.3 The Organisation for Economic Co-operation and Development (OECD 1) members (including Australia) have agreed to implement the revised (December 2003) Recommendation on Common Approaches on Environment and Officially Supported Export Credits (Common Approaches).  The Common Approaches are designed to strengthen evaluation of the environmental impact of certain projects for which Member country ECAs provide facilities.  The establishment of the Common Approaches involved consultations between the OECD and business, labour, non-government organisations (NGOs), and countries that benefit from officially supported export credits.

1.4 The OECD acknowledges that the primary role of ECAs is to promote trade in a competitive environment, whereas development agencies (for example AusAID 2) focus on development assistance.  Therefore, the primary objectives of the Common Approaches are to level the international playing field and ensure that projects supported by ECAs meet established international standards.  They also encourage collaboration and the sharing of information between ECAs on these issues.  EFIC was actively involved in the development of the Common Approaches and this Environment Policy is consistent with the specific requirements of the OECD Common Approaches Recommendation.

2. Principles and Objectives

2.1 EFIC's primary governing legislation is the Export Finance and Insurance Corporation Act 1991 (EFIC Act) which can be accessed via EFIC's website.  Section 7 of the EFIC Act sets out EFIC's functions.  EFIC's mandate, as defined in the EFIC Act, is essentially to facilitate and encourage Australian export trade by providing insurance and financial services.  EFIC is also empowered to provide certain facilities to companies in Australia that invest overseas.

2.2 In accordance with the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act), EFIC is annually required to report on how its activities accorded with the principles of Ecologically Sustainable Development (ESD).  These principles include the effective integration of both long-term and short-term economic, environmental and social considerations in decision-making.

2.3 Based on the requirements referred to in sections 2.1 and 2.2, this Environment Policy establishes the framework that guides EFIC in balancing the support of client commercial outcomes, and thus fulfilling EFIC's mandate under the EFIC Act, with the mitigation of environmental and social impacts.  While these are often perceived to be competing interests, this policy details how EFIC will manage this balance in its day-to-day activities.  Specifically, EFIC requires environmental assessment (EA) to help ensure that projects for which it provides facilities meet specific environmental standards.  This policy also outlines EFIC's approach to, and requirements for, EA.

2.4 EFIC's ability to influence a project is directly related to the role of EFIC's client in the specific transaction.  If the client is the owner and operator of a project, then the client will have significantly more influence, within the confines of local laws and regulations, than if it is a sub-contractor, or merely providing goods, where its ability to influence these types of considerations will be limited or non-existent.  But EFIC recognises that in some circumstances its influence can have a positive impact on outcomes in developing countries.

2.5 Under Section 8(2)(b)(iii) of the EFIC Act, EFIC is also required to perform its functions with regard to Australia's obligations under international agreements.  The obligation to ‘have regard to' international agreements takes account of EFIC's role as a third-party financier with only limited ability to influence in relation to most transactions.  EFIC periodically reviews the treaties, covenants and agreements that have been adopted by Australia.  Detailed information regarding Australia's obligations under international agreements can be found at www.info.dfat.gov.au/treaties/.  The particular wording of each in-force treaty, covenant and agreement needs to be reviewed to determine its specific scope and possible implications for EFIC.

2.6 (EFIC has operationalised its obligation to have regard to international agreements by introducing into its due diligence processes for querying relevant parties regarding pertinent issues in cases which are relevant to EFIC as a financier).  If, after having regard to appropriate considerations and any applicable host country laws or regulations, EFIC assesses that relevant aspects of a project or transaction are unsatisfactory, EFIC reserves the right to decline a facility, despite EFIC's mandate referred to in section 2.1.

2.7 EFIC facilities are provided on the basis that counterparties are required to adhere to all local laws and regulations in force during the term of EFIC's commitment.  Additionally, EFIC's integrated approach to environmental assessment is consistent with the methodology adopted by many international financial institutions and has been demonstrated to be the most efficient and effective in terms of implementing EFIC's assessment requirements.

2.8 Consistent with the requirements of the OECD Common Approaches, EFIC has adopted the relevant International Finance Corporation (IFC) Safeguard Policies (currently being updated 3) and Environmental, Health and Safety Guidelines applicable on the date of implementation of this amended Environment Policy.  Those policies and guidelines are detailed in the following sections.  These policies and guidelines also form the basis of the Equator Principles, a voluntary approach to consistent environmental and social standards, now adopted by the majority of the international financial institutions active in project finance.

3. Scope and Application

3.1 The EFIC Board has endorsed this Environment Policy and requires periodic reporting on the implementation of the Policy and its application to facilities provided by EFIC.  The Board also currently carries the specific responsibility for approving those transactions considered to have the most significant potential environmental and social impacts and which undergo the highest level of assessment under the requirements of this Policy (namely Category A facilities).

3.2 This Environment Policy represents an important component of EFIC's broader Corporate Responsibility Policy (CRP), details of which can be accessed.  The CRP describes EFIC's approach to important issues including anti-corruption measures, nuclear-related facilities, defence exports, climate change, facilities for Heavily Indebted Poor Countries (HIPCs) and privacy.  This Environment Policy does not apply to proposed financial facilities for military or defence exports 4, which are covered separately in the CRP

3.3 This Environment Policy applies in all situations where EFIC is considering entering into a facility valued at A$20 million 5 or more and with a repayment term or coverage period of at least two years.  Facilities which do not fall within this Policy will receive appropriate environmental assessment as determined by EFIC's Projects Section.  This Policy threshold is consistent with the Common Approaches.  By comparison, the Equator Principles apply to projects that cost US$50 million or more.

3.4 In accordance with the Common Approaches, the threshold does not apply to projects in sensitive areas.  EFIC will screen all potential transactions in accordance with section 4 of this Policy and require environmental assessment appropriate to the transaction.  For Category A and B facilities environmental and social considerations will be integrated into EFIC's decision making processes for all proposed transactions.

3.5 EFIC will begin an update of this reviewed Environment Policy 5 years from the date of implementation.
 

4. Environmental and Social Screening Process

4.1 Only a small number of transactions considered by EFIC have the potential for significant environmental and/or social impact.  Therefore, EFIC has adopted a targeted environmental screening process to enable the scale of environmental and social impacts associated with potential transactions to be determined and assessed.  This screening process recognises the range of environmental and social impacts that exports, projects and investments can have, as well as the differences between the types of exports and investments that EFIC helps to facilitate.

4.2 EFIC has implemented a hierarchical system of screening under which each potential transaction is categorised as an A, B, or C, depending on the significance of impact and extent of EA required (based on the IFC/ World Bank Group (WBG) approach).  This risk categorisation methodology and the definitions of each category are consistent with the Common Approaches, which endorses the approach of the World Bank Group, and other major multi-lateral institutions.

4.3 Category A Projects

4.3.1 A proposed project or transaction is classified as Category A if it is likely to have significant adverse environmental and/or social impacts.  Category A projects usually affect an area broader than the sites or facilities that are subject to physical works.  Category A, in principle, includes projects in sensitive areas.  This definition is consistent with the Common Approaches.

4.3.2 EFIC provides few facilities in relation to Category A projects or investments.  In recent years EFIC has provided, on average, less than one such facility per year.  But each proposed project must be considered on its merits and so EFIC has decided not to provide a list of indicative sectors, projects and issues generally considered to be Category A.

4.3.3 For a Category A project, the applicant or sponsor is required to provide EFIC with a full report, normally an EA undertaken in accordance with IFC Safeguard Policy 4.01 ‘Environmental Assessment'.  That Policy requires all Category A projects to invite local public comment in host countries as part of the EA process, and includes a requirement for a mitigation or management plan.  Under these circumstances, EFIC encourages project sponsors to adopt the IFC's environmental assessment policy and procedures as described in Safeguard Policy 4.01 that requires, amongst other things, the retaining of independent EA experts not affiliated with the project to carry out the EA.

4.3.4 Sponsors developing Category A projects are also required to address the relevant guidelines in the World Bank Group's Pollution Prevention and Abatement Handbook (PPAH).  The PPAH describes pollution prevention and abatement measures and emission levels that are normally acceptable for different sectors and issues, however, taking into account country legislation and local conditions, the EA may recommend alternative emission levels and approaches to pollution prevention and abatement for the project.  The EA report must provide full and detailed justification for the levels and approaches chosen for the particular project or site.  In addition, where applicable, EFIC requires the consideration of IFC's series of Environmental, Health and Safety Guidelines for which there are no parallel guidelines in the International Finance Corporation - Environmental Guidelines.

4.3.5 In addition to requiring that a Category A project meets the environmental requirements of the applicable host country's national and local authorities, EFIC will apply, as relevant, the other IFC Safeguard Policies (applicable on the date of implementation of this Policy) listed below:

• OP 4.04: Natural Habitats (November 1998)
• OP 4.09: Pest Management (December 1998)
• OP 4.36: Forestry (November 1998)
• OP 4.37: Safety of Dams (September 1996)
• OP 4.20: Indigenous Peoples* (September 1991)
• OP 4.30: Involuntary Resettlement* (June 1990)
• OPN 11.03: Cultural Property* (September 1986)
• Policy statement: Child and Enforced Labour** (March 1998).

4.3.6 EFIC notes that at the time of preparing this Environment Policy, IFC was undertaking an update of its Safeguard Policies and proposing a revised approach to more appropriately meet the needs of the private sector.  EFIC will monitor and review the implications of such changes once IFC completes its process.  EFIC had elected to move to the IFC Safeguard Policies given their more direct relevance to EFIC's business.  EFIC does, however, reserve the right to apply World Bank policies, in lieu of applicable IFC policies, if dealing with a Government counterparty.

4.3.7 EFIC recognises the impact that some Category A projects (for example, mining projects) can have on development in the recipient country and upon communities generally.  When assessing Category A projects EFIC reviews the development and community impacts of the proposed facility by applying the IFC Safeguard Policies marked ‘*' above.

4.3.8 In relation to a Category A project where EFIC is considering a significant facility and the potential client has influence relating to labour practices, EFIC will query our client in relation to labour issues in accordance with the relevant policy statement marked ‘**' above.

4.3.9 During the EA process, the proponent consults project affected groups and local organisations about the environmental aspects of the Category A project.  The proponent initiates such consultations as early as possible.  These groups are generally consulted at least twice, ideally before the terms of reference for the EA are finalised and once the draft EA report is prepared.  In addition, the proponent consults with such groups throughout the project implementation phase, as necessary, to address EA related issues that affect them.

4.3.10 For meaningful consultations between the proponent and project affected groups and local organisations in relation to Category A projects proposed for an EFIC facility, the proponent will provide relevant material in a timely manner prior to consultation and in a form and language that are understandable and accessible to such groups.

4.3.11 EFIC will also arrange disclosure of Category A project information for public comment as described in section 5 below.  Transaction details for Category A projects for which EFIC has provided a facility will be included in EFIC's Annual Report.
 

4.4 Category B Projects

4.4.1. A proposed project or transaction is classified as Category B if it has the potential for an adverse impact on communities or environmentally important areas.  But these potential impacts are less severe than those of Category A projects.

4.4.2. Typically, Category B impacts are site-specific, few if any of them are irreversible, and in most cases mitigation measures can be designed more readily than for Category A projects.

4.4.3. The scope of assessment for Category B transactions will generally be narrower than that applying to Category A projects.  EFIC will examine the actual and potential impacts, both positive and negative, and the measures to prevent, minimise, mitigate, or compensate for the adverse impacts.  Relevant EFIC decisions will include consideration of these findings.

4.4.4 For Category B transactions, exporters, sponsors or investors will be required to provide sufficient information to enable EFIC to undertake a reasonable analysis of environmental risks and corresponding
mitigation measures.

4.4.5 Transaction details for Category B projects in relation to which EFIC has provided a facility will be included in EFIC's Annual Report.

4.5 Category C Projects

4.5.1 A proposed project or transaction is classified as Category C if it is likely to have minimal or no adverse environmental or social impact.

4.5.2 The goods and services covered by these transactions may be of an "off the shelf" nature, normally consumed or incorporated into larger projects, or used by established operations in the normal course of their businesses.  Financial facilities for vessels, aircraft, railway rolling stock, and associated equipment, are considered Category C transactions.

4.5.3 No environmental assessment information will be required by EFIC in respect of a Category C transaction, except as may be required to confirm the categorisation of the project.

4.5.4 Transaction details for Category C projects in relation to which EFIC has provided a facility will be included in EFIC's Annual Report.

5. Consultation, Disclosure and Public Comment

5.1 EFIC is committed to the principle of stakeholder input to assist in effective decision making both at the sponsor's project or activity level and in terms of EFIC's own considerations regarding a potential significant facility.  This section sets out EFIC's approach to stakeholder consultation, disclosure of information and the opportunity for public comment in the process.

5.2 It is the responsibility of EFIC's project sponsor, generally according to the relevant IFC policies, to ensure appropriate consultation is initiated with directly affected Category A project stakeholders in respect of potential project impacts.  EFIC's obligations are limited in this regard to consultation with its direct stakeholders as part of its decision making process.  EFIC does not consider consultation with project-affected stakeholders to be its role in any situation and will not undertake this in the absence of effective consultation by the sponsor.

5.3 For Category A projects, effective project consultation processes, combined with appropriate disclosure of relevant information for public comment, are considered by EFIC to be important mechanisms to obtain feedback on the concerns of both directly and indirectly affected stakeholders.  EFIC's endorsement of the IFC's policies nominated above ensures that the quality and consistency of project consultation and information disclosure is maintained even when EFIC is not directly involved.

5.4 The issues of materiality and the relative influence that EFIC may impose through a transaction are also key considerations affecting EFIC's consultation and disclosure requirements, and, where applicable, are considered in EFIC's decision making process (refer sections 2.4 and 3.3).

5.5 Where this Policy applies, for a proposed Category A transaction which is above the facility threshold (A$20 million 6 or more) EFIC will initiate a public consultation period in relation to an EA undertaken by the sponsors.  The duration of the EFIC public consultation period will be:

• no less than 30 days for any facility; and
• where commercial circumstances permit, EFIC may agree a comment period in excess of 30 days with the sponsor.

5.6 The EFIC public consultation period is in addition to the usual project level sponsor initiated consultation process generally as set out in IFC Safeguard Policy 4.01.  EFIC's consultation period may run in parallel with any sponsor initiated consultation.  EFIC will not make its decision regarding a proposed Category A transaction until the public consultation period has closed and submissions received within the stipulated comment period have been considered.

5.7 EFIC will provide mechanisms whereby interested parties (including parties in overseas communities which may be impacted by projects in relation to which EFIC has or proposes to provide facilities) may register to receive e-mail notification that there has been a change to the Category A register page on EFIC's web site.

5.8 Following expiry of the EFIC initiated public consultation period, and promptly after execution of transaction documents, EFIC will publish on its web site confirmation that it has entered into a Category A facility.

5.9 There will be no EFIC initiated consultation or public comment period for Category B or C projects or transactions.

5.10 Details of all Category A, B and C transactions entered into will be published in EFIC's Annual Report.

6. Decision Making Authority and Processes

6.1 As part of its structured risk management system, EFIC is committed to integrating environmental and social considerations into its due diligence and decision-making processes.  This approach takes into account the issues of materiality and the relative influence EFIC may have over a project's details.

6.2 If, after applying the requirements of this Policy, EFIC determines that the environmental and/or social consequences of a proposed project or transaction are unacceptable, or the proposed mitigation and management plans are inadequate, then the proposal will be declined.

6.3 Until further notice, the decision to approve or decline a Category A project will be taken by the EFIC Board, rather than EFIC Management under its delegated authorities.  EFIC Management acts under delegated authority in relation to Category B and C transactions, where applicable.

6.4 In the event a project sponsor withdraws a proposal to EFIC for a potential Category A facility, and hence no longer requires an EFIC facility, the project details will be removed from EFIC's Category A register.  The removal of such details under these circumstances should not be construed as representing an EFIC decision to decline the proposal.

7. Monitoring and Reporting – Category A projects and facilities

7.1 EFIC provides significant financing facilities subject to binding contractual terms.  In relation to a Category A project, EFIC will agree with its client appropriate terms, including terms regarding environmental and social issues which will clarify roles and EFIC's expectations with respect to the regular monitoring and reporting requirements for the life of the EFIC facility.

7.2 These binding contractual terms are negotiated and agreed on a case-by-case basis, enabling a tailored approach to important issues relating to any unique circumstances in respect of individual project locations, impacts or transaction details.  These contractual terms are considered confidential to EFIC and its client, although, where appropriate, EFIC's Annual Report will include comments regarding environmental issues relating to key projects.

7.3 During project implementation (and only where EFIC has a direct contractual relationship with the project sponsor), the sponsor is required to report to EFIC on:

• compliance with measures agreed with EFIC on the basis of the findings of the EA, including implementation of any Environmental Management Plan;
• the status of mitigatory measures; and
• the results of monitoring programmes.

7.4 Wherever possible, project sponsors are encouraged to publicly report on project performance and the requirements in 7.3 above.  However, EFIC will not disclose individual sponsor reports generated for EFIC's transaction monitoring.

7.5 It is important for EFIC and its clients to maintain open dialogue in relation to the ongoing impact of transactions.  EFIC will encourage project operators, where EFIC's influence permits, to continually improve environmental performance by undertaking environmental audits.  This objective is supported in many jurisdictions by legislation protecting the confidentiality of voluntary audits.

1 The OECD groups 30 member countries sharing a commitment to democratic government and the market economy.  It has active relationships with some 70 other countries and non-government organisations.  Its covers economic and social issues from macroeconomics, to trade, education, development and science and innovation.

2 AusAID manages the Australian Government's official overseas aid programme.  The objective of the aid programme is to advance Australia's national interest by helping developing countries reduce poverty and achieve sustainable development.

3 Following the IFC review under way as at March 2005, the IFC Safeguard (or Operational) Policies are proposed to be recast as ‘Performance Standards'.

4 Supporting defence sales is a normal part of what Export Credit Agencies do - but only a small part of EFIC's business.  EFIC will provide a facility regarding defence exports only if all Government requirements for the proposed export are met.  Ministerial approval is required if the export is of lethal equipment.

5 The Common Approaches have a threshold of SDR 10 million.  The SDR is an international reserve asset, created by the International Monetary Fund.  The SDR also serves as the unit of account of the IMF and some other international organisations.  Its value is based on a basket of key international currencies.  EFIC may update this A$ threshold periodically with reference to the SDR.  The current A$ / SDR rate can be found at http://www.imf.org/external/np/fin/rates/rms_five.cfm

6 Subject to change; refer footnote 5.
 

Angus Armour
Managing Director
Export Finance and Insurance Corporation
Policy implemented May, 2005