In their daily operations, financial institutions need to navigate risky environments. Companies and governmental agencies initiate measures as a part of efforts to mitigate various risks. For instance, financial institutions are required to adopt the Equator Principles (EPs) to help in the management of social and environmental risks during project implementation (The Equator Principles Association, n.d.). Primarily, the EPs framework provides standards that ensure monitoring and due diligence in making decisions about risk.
Banks are expected to apply the guiding principles when funding development projects globally (The Equator Principles Association, n.d.). In addition, the principles are critical in the projection of funding requirements across mining, forestry, oil and gas sectors.
The EPs demand that banks should provide financing to projects whose sponsors are willing to abide by comprehensive processes that ensure projects are implemented in a socially responsible way. Towards this end, projects must be developed in a manner that promotes environmental management best practices. In addition, the EPs apply to projects whose capital expenditure is $50 million and above (The Equator Principles Association, n.d.). Moreover, banks are required to observe the idea of project finance which dictates that when financing private-sector projects, the repayment should be dependent on revenues generated from the initiative.
When operating under the EPs, companies are required to observe a stringent screening process. Based on the guidelines, projects fall into three categories, namely A, B, and C (The Equator Principles Association, n.d.). Category A refers to a high degree of risk, while B and C refer to medium and low risks respectively. The requirements direct that sponsors of projects that fall into categories A and B need to undergo environmental assessment. After further consultations with local communities, sponsors must develop Environmental Management Plans to monitor environmental threats and initiate protective measures.
Application of EPS in Bank of American Corporation
Bank of American Corporation is among the entities that have adopted the EPs. For instance, an electric power organization from an emerging country invited Bank of America to take part in a corporate bond underwriting (Bank of American Corporation, n.d.). The developing country was planning to expand its electricity production and supply to its remote parts. In line with the EPs, Bank of America undertook due diligence by evaluating the position of the firm in terms of generating energy in a sustainable manner. Bank of America focused on the ability of the firm on carbon conversion before proceeding with the deal.
In another case, a commercial client engaged Bank of America regarding extension of a credit facility. The firm in question is involved in the food and agriculture business in the United States (Bank of American Corporation, n.d.). Bank of America carried out due diligence leading to the discovery of concerns about the entity’s foreign associate company. The analysis of Bank of America established that the firm’s activities in the developing world breached human rights. In particular, Bank of America found allegations bordering on the use of forced labor across the company’s supply chain. However, the American firm was not directly involved with the violations. After consultations and discussions between the firm and Bank of America, a decision to proceed with the partnership was reached.
In line with the EPs, Bank of America Corporation has adopted an Environmental and Social Risk Policy Framework (ESRPF). In particular, the bank uses the policy to track ESRPF relationships, related items, and transactions (Bank of American Corporation, n.d.). What is more, the bank tasks its front-line units with the responsibility of assessing and managing all risks.
References
Bank of American Corporation. (n.d.). 2019 environmental, social & governance performance data summary. Web.
The Equator Principles Association. (n.d.). Reporting – Bank of America Corporation (2018). Web.