The Equador Principles

The Equator Principles, which were developed by private sector banks and launched in 2003, are a set of voluntary environmental and social benchmarks for managing environmental and social issues in development project finance globally. The banks chose to model the Equator Principles on the environmental standards of the World Bank and the social policies of the International Finance Corporation, or IFC, the World Bank’s private sector arm.

By May 2008, approximately 40 financial institutions and banking conglomerates had adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects across the world. The guidelines and framework by which banks can assess and manage environmental and social issues in project financing provide guidance on issues such as assessment of the baseline social and environmental conditions, the proposed project and anticipated future projects; pollution prevention and abatement; protection and conservation of biodiversity, including endangered species and sensitive ecosystems in modified, natural and critical habitats; impacts on affected communities and indigenous peoples, involuntary resettlements, including forms of compensation; safety of dams; impacts of project operations in river ways and international waters, safe and healthy working conditions, child labor and forced labor prevention, and so forth.

Since the 2006 revision, these principles, which originally contemplated project finance in excess of US$50 million, apply in respect of project finance in excess of U.S.$10 million.

Financing for projects in respect of which the Equator Principles apply is granted only upon verification that certain social and environmental requirements are met. Thus, in addition to meeting legal and regulatory requirements of the host country, and of applicable international treaties and agreements, a project must also meet the social and environmental standards established in the Equator Principles, which are designed to ensure the project sustainability. From this standpoint, the Equator Principles perform a key role in the financing of major development projects.

The risk of the project is categorized in accordance with internal guidelines based upon environmental and social screening criteria of the IFC. Based of the IFC Safeguard Policies, projects are classified relative to social or environmental impacts in Category A (significant impacts), Category B (limited impacts) and Category C (minimal or no impacts). The lending banks, acting through expert analysts, provide categorization. For all medium or high risk projects (Category A and B projects), the lending banks complete an Environmental Assessment, the preparation of which must meet certain requirements and satisfactorily address key environmental and social issues. The Environmental Assessment report addresses baseline environmental and social conditions, as well as the other issues discussed above, and may result in a recommendation not to proceed.

It should be noted that, based on the Brazilian environmental legislation, jurists understand with grounds on the joint liability legally established in respect of all parties directly and indirectly responsible for environmental damages that, as lenders, the banks could be held jointly liable with the project sponsors for possible environmental damages caused by projects they finance. For this additional reason, in order both to avoid the credit risk and the risk of potentially being held jointly liable for environmental damages, there is a strong trend for banks to adopt ever more detailed project assessments standards.

The indirect interest InfraBrasil (a mixed debt/equity investment fund managed by Banco Real ABN Amro, a signatory and adopting institution of the Equator Principles) holds in the Company’s capital stock participation requires that Renova adopts higher social environmental and sustainability standards. Renova believes having InfraBrasil as a shareholder is indicative of its concern with adoption of socially and environmentally responsible practices, and strict compliance with rules and standards designed to promote sustainable development.