We talked to Citigroup's Pamela Flaherty, senior vice president of global community relations, and Shawn Miller, environmental and social risk management (ESRM) director in Citigroup's corporate and investment bank, about the new Principles and Citigroup's approach to environmental and social responsibility.
Do you think clients care whether or not a bank is socially and environmentally friendly?
Flaherty: Yes, I think they do. Clients with strong environmental and social track records want to partner with responsible financiers. Implementing standards such as the Equator Principles means financial institutions also have to understand even more deeply their clients' business - what are the social and environmental impacts, challenges and opportunities in these various sectors, which makes us better partners.
What do the Equator Principles mean for Citigroup?
Miller: The Equator Principles have had a very significant and positive impact on Citigroup's approach to environmental and social responsibility. First, they have given our firm a common framework to assess and manage environmental and social risks for often complex and challenging projects. Second, Citigroup has taken some of the core aspects of the equator principles - such as categorisation - and extended them to other transactions where we know the use of proceeds (corporate and government loans, bond underwriting, etc).
Thus, we now have a market-leading environmental and social risk management (ESRM) policy. In fact, Citigroup recently received a commendation from the Financial Times recognising our ESRM team's efforts in this policy development. Having a framework to manage these issues has helped us speed up transaction review and approval, which ultimately has allowed us to support clients and undertake more and better projects and investments.
One of the most striking revisions is that the Equator Principles now apply to all project financings with capital costs above $10 million, down from $50 million. Won't that just add a huge layer of bureaucracy to your project financing business?
Miller: No, we don't think so. We had a long and important debate within the Equator Principles Financial Institution network, and within Citigroup, on this issue. While there are just a small number of project financings with capital costs below $50 million, it is still important to review these projects under the Principles' guidelines. We all came to an agreement to lower this threshold to be sure that we are including all significant projects.
In a similar vein, the Principles now apply to project-finance advisory activities, how many more layers of work does this create for Citigroup?
Miller: We think this is a big improvement to the Equator Principles, and will help ensure better and stronger outcomes for projects. We definitely do not think this will add "more layers of work" for our bankers. On the contrary, ensuring our clients are structuring projects in accordance with the Equator Principles is in the client's interest; this may likely lessen delays as the project-financing process progresses. Having a candid conversation with our client on what the Equator Principles entail is certainly in everyone's interest.
Are there any deals that you know of that Citigroup has turned down because they didn't meet the requirements of the Equator Principles?
Flaherty: We don't think this is a good indicator of success. What we want to do is more and better deals, working jointly with our clients to improve outcomes on the ground. Deals come and go, and we may decline or approve these projects based on a variety of factors. Obviously, there are deals that we may feel do not fully meet the Equator Principles standards, and we only invest in those that comply. But, for the most part, we believe the equator principles provide us a framework to do more and better business. We believe open discussion on the Equator Principles with our client may enable us to help structure a transaction that can comply with the requirements, allowing us to move forward with a financing we otherwise might have had to decline.
Can you give an example of how a client may have changed a project to comply with the Equator Principles?
Miller: Project designs change all the time. To be compliant with the Equator Principles, project sponsors routinely change and update their projects. I have witnessed countless examples of this happening: pipeline routes are changed to minimise land acquisition and lessen resettlement or economic displacement; a thermal power plant incorporates best-available technology to ensure appropriate pollution controls are in place to comply with the World Bank's industry guidelines. This is common.
Citigroup has taken the lead in this space, who is driving this at Citigroup?
Flaherty: Our chairman and CEO, Chuck Prince, and our board have set Citigroup's goal "to be the most respected financial services company" in the world. To be an environmentally and socially responsible leader is an important and key part of that goal. He believes strongly in our programmes and sustainability goals, including robust implementation of the equator principles.
Importantly, three years after we originally adopted the Equator Principles, there has been a sea change internally. We now have greater involvement and awareness of a broad cross-section of employees and businesses eager and willing to get involved. This is real progress.
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