KB Kookmin Bank Equator Principles adoption support
Photo credit: Dessy Dessy, Australia
KB Kookmin Bank, the largest commercial bank in South Korea, announced on 4 February 2021 that they have adopted the Equator Principles.
The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social (E&S) risk in projects. It is primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making. Project financing with a total project capital costs of $10 million or more, and corporate loans of $50 million or more, are subject to the Equator Principles. It is anticipated that the Equator Principles would allow KB Kookmin Bank to strengthen their competitiveness in the global project financing market.
KB Kookmin Bank announced its intention to adopt the Equator Principles in August 2020 and subsequently established a process based on the Equator Principles 4 (dated 1 July 2020) by undertaking a benchmark study with gap analysis of global financial institutions, establishing action items and a road map, and developing manuals and guidelines.
The bank selected ERM to provide support to this process, based on our significant advisory experience, both from the lender side (including our series of experience with over 75% of Equator Principles Financial Institutions) and the borrower side, and our methodology on assessing the business impact from adopting the Equator Principles. ERM’s work involved three main phases: Phase 1 Gap Assessment, Phase 2 Environmental and Social Risk Management Framework Development, and Phase 3 Training.
During Phase 1, ERM analyzed all projects within the prior five years that fall under the Equator Principles, categorized them, and further reviewed high-risk projects to determine whether KB Kookmin Bank would have proceeded with the loan under the Equator Principles. The analysis then was used to project the business impact of the adoption of the Equator Principles.
Furthermore, ERM seconded two experts in order understand the current process of reviewing the E&S risk of applied loan products. ERM performed a series of interviews and workshops with all relevant internal stakeholders (e.g., front- and mid-line officers, credit and risk departments, etc.). ERM explained the need for the Equator Principles in terms the participants were comfortable with, which encouraged the active engagement of all relevant stakeholders from a very early stage of the work. ERM then performed benchmark studies on selected Equator Principles Financial Institutions to understand how they evaluate the E&S risk of projects subject to the Equator Principles as well as non-Equator Principles projects. We benchmarked where the Equator Principles team sits within the organizations (and assessed the pros and cons of the arrangements) and what roles the team plays in the Equator Principles Association. ERM then conducted a gap analysis to identify specific action items and further developed a short-, mid- and long-term road map.
During Phase 2, ERM developed a draft version of an E&S Risk Management Framework tailored for KB Kookmin Bank, based on the identified gaps. We held a series of workshops with all relevant internal stakeholders to finalize the E&S Risk Management Framework. Many healthy discussions during the workshop further improved the framework, and all stakeholders embraced the framework as their own because of their active engagement. ERM then developed a series of manuals based on the finalized E&S Risk Management Framework that involved: guidelines for front officers, credit and risk teams; E&S checklists; E&D due diligence protocol; a collection of internationally recognized E&S standards; and many other useful documents.
During Phase 3, ERM performed a series of training sessions mainly focused on their front officers. ERM used real examples of loan applications that were being reviewed at the time as case studies, and went through the framework step by step. KB Kookmin Bank is currently working on action items developed together with ERM to fully implement the Equator Principles.