The Equator Principles: Banking on Sustainability

Financial institutions worldwide are increasingly benchmarking their larger investment projects to the Equator Principles of social and environmental risk assessment. A third and more comprehensive edition of these guiding principles has now been drawn up and is being used by 79 financial institutions in 35 countries to gauge the impact of investments.

Banks adhering to the Equator Principles together account for nearly 70% of project debt financing in emerging countries. The latest bank to sign up is the Infrastructure Development Finance Company (IDFC) based in Mumbai, India.

In its third edition the Equator Principles now include human rights. This mostly applies to labour conditions and the relocation of people displaced by large-scale projects such as mines and dams. According to Managing Director of Environmental and Social Risk Management at Citibank, Shawn Miller, “projects need to engage and protect the people affected. These may be indigenous people, ethnic societies or other vulnerable groups. Financiers need to make sure that the rights of these groups are respected and appropriate protections are in place. That in turn requires robust engagement and consultation processes.”

The Equator Principles also address labour conditions at both the project and its associated supply chain. “We aim to do this through audits that ascertain compliance with standards on working conditions and labour conventions,” says Mr Miller who emphasizes that the Equator Principles go beyond merely observing local laws and customs.

“Financiers need to make sure that the rights of these groups are respected and appropriate protections are in place.”

By embracing human rights as one of its core values the Equator Principles move onto more shaky ground: “Contrary to, say, environmental standards that can be objectively measured and gauged, human rights issues are more often than not emotive and as such a lot harder to explain, quantify and address. The Principles do, however, provide banks with a framework and a language that enables them to speak about human rights.”

Mr Miller furthermore has found that any major project stands much to gain from obtaining a social license to operate: “If any of our clients’ projects do not apply strict standards, they will inevitably suffer from opposition and delays. These are costly and may significantly increase the risk. The cost of these avoidable setbacks can easily run into the billions of dollars.”

The Equator Principles, which apply globally, were first adopted by a group of 12 financial institutions – including Citigroup, ABN-AMRO and Barclays – in 2003 at the urging of the International Finance Corporation, part of the World Bank Group. The framework has since undergone two major revisions: The latest version was drafted earlier this year at the June gathering of participating banks in Amsterdam, The Netherlands, and concludes a strategic review initiated in 2010.

The principles now apply to project-related corporate loans and bridge financing as well. Previously, the framework was only used for direct project financing. The threshold at which the Equator Principles come into play was also lowered from $50 million to $10 million.

Although most NGOs (Non-Governmental Organizations) welcome the Equator Principles, some critics argue that the framework lacks teeth as well as independent oversight and enforcement. An oft cited example of how the framework may apparently be ignored at will concerns the ABN-AMRO and its involvement in countless projects deemed damaging to the environment.

For example, projects financed by ABN-AMRO in 2005 – prior to the splitting-up of the Dutch financial behemoth in 2010 – contributed to CO₂ emissions of about 250 million tonnes, or fully one per cent of the world’s total carbon dioxide production for that year. Since then ABN-AMRO, a founding bank of the Equator Principles, has tried to clean up its act.

The Equator Principles are supplementary to the IFC’s own Performance Standards on Environmental and Social Sustainability and to the World Bank’s Environmental, Health and Safety Guidelines. Projects taking place outside a group of 31 countries designated as having robust national standards and legislation must not only comply with the Equator Principles but also have to meet the often more stringent IFC and World Bank criteria.