June, 2003
An amended version of these comments was submitted to the drafters of the Equator Principles in April 2003.
1.) Introduction
As representatives of the non-governmental organizations (NGOs) that drafted the Collevechio Declaration calling for environmental and social responsibility from financial institutions, we applaud the efforts of leading banks to grapple with these critical issues. In particular, we encourage banks to continue working multilaterally to develop approaches that have the potential to create industry-level progress.
However, whether or not the Equator Principles (EPs) represent a major step or a negligible one will be demonstrated through banks' commitment to transparency and implementation of the Principles. The undersigned NGOs believe that the EPs, aptly implemented, can be helpful springboard from which financial institutions can examine and confront their role in destructive projects. Modeled after guidelines from multilateral lending institutions, the Principles are only as good as the commitment behind them.
We understand from our discussions with the banks that the institutions involved recognize that the Equator Principles (EPs) are but one step, and that implementation will vary from bank to bank. We also understand that the intent of the EPs is to set a common framework, vocabulary and approach on all these issues.
For the NGO community, the key measure of success will be the ability of these Principles to create demonstrable improvements in environmental quality and social justice in the areas and communities affected by bank transactions. Implementation is a key concern regarding these Principles, and endorsing banks must ensure adequate resources and training to build the internal infrastructure to implement the Principles.
2.) Context
We view the Equator Principles within the context of a number of other principles in the financial sector – mainly the United Nations Environment Program Financial Initiative (UNEP FI) Statement, the Collevecchio Declaration and the London Principles.
So far, neither the London Principles nor the UNEP Financial Initiative have created demonstrable environmental improvements on the ground. However, they both embrace broader commitments to sustainability that are lacking in the Equator Principles. The UNEP FI now requires signatory institutions to report on its commitment to the UNEP FI Statement on Sustainability, something that the EPs do not require. The London initiative offers many examples of current best practice and future potential work that goes far beyond the letter and spirit of the Equator Principles. This is disappointing, particularly as some of the Equator banks will have been involved in the London Principles work and are indeed mentioned in that Initiative's best practice sections.
The Collevecchio Declaration (www.financeadvocacy.org) is a statement outlining civil society's expectations of the financial sectors' role and responsibilities with respect to sustainability. Although the Equator Principles are generally consistent with the Collevecchio Declaration, they fall far short of civil society's vision of sustainability for the finance sector. For example, the Collevecchio Declaration includes the following six commitments:
a) Commitment to sustainability
The Equator Principles in no way is a commitment to true sustainability – rather it is a limited change in current business. The Collevecchio Declaration calls on banks to measure the environmental and social impacts of their portfolios, and make transparent efforts to reduce the negative impacts of their transactions, while increasing the sustainability impacts of their portfolios. While the EPs represent a serious collective effort among banks to address project finance transactions, the NGO community is dedicated to seeing the financial sector make much deeper and broader commitments to sustainability. In addition, the Collevecchio Declaration stresses the need for banks to commit to continuous improvement in the sustainability profiles of their portfolios, a concept that is absent from the EPs.
We discuss below many issues regarding the implementation of the Equator Principles, and endorsing banks will need to work with NGOs on these crucial areas if the Principles are to have meaning and credibility. It must be noted than all voluntary CSR initiatives bring with it heightened spotlight from the NGO community, and thus participating institutions risk reputational damage if they are seen to be hypocritical or shirking their responsibilities.
b) Commitment to ‘do no harm'
The Equator Principles focus on procedures to screen and categorize potential deals -- steps that are recommended in the Collevecchio Declaration. However the EPs do not touch on no-go zones or categorical prohibitions, which are key civil society expectations of responsible financial institutions.
c) Commitment to responsibility.
The EPs lack fundamental explicit recognition of the responsibility of banks for the impacts of the finance they provide. Wording such as ‘We recognize that our role as financiers affords us significant opportunities to promote responsible environmental stewardship…' is viewed as far from sufficient. Importantly, the Principles do not provide for much recourse for communities that are adversely affected by the non-implementation of the Principles.
d) Commitment to accountability
The Principles do not provide enough description of public consultation processes – far more detail is needed here. From a bank's risk management perspective, there are two major reasons that consultation is important: firstly, this can help avoid community opposition that can make project development more difficult. The second reason is that extensive local consultation can be a mechanism for testing the assumptions of the environmental impact assessment consultants hired by the bank.
e) Commitment to transparency
Without far more transparency on implementation processes and disclosure on bank performance regarding these Principles, the NGO community will be unable to assess whether the banks are living up to aspirations they may have to become more sustainable.
f) Commitment to sustainable markets and governance
The Collevecchio Declaration points out that banks cannot act alone if the financial and indeed the wider corporate world is to become sustainable. The supporting regulatory frameworks will need to be put in place by governments, whose role is to create the ‘rules of the game'. For this reason banks will need to ensure that government is given the necessary space to operate; there are currently far too many examples where banks are active in lobbying governments in a manner that will block, not facilitate, sustainability.
3.) Content
a) General points
The points below relate more to the spirit than the letter of the principles – specific points referring to the preamble and 1-9 principles follows in sections b) and c).
Whilst we welcome this attempt to address lending and sustainability, we believe that the banking sector must take an assessment of the facts and figures regarding the environmental and social impacts of project finance, and all kinds finance for various types of transactions. Such work would be a logical and necessary precursor to any potential initiative to advance sustainability, of which the Equator Principles might be one.
Until the details of environmental and social impact have been established, it will be difficult to assess how effective the Equator Principles, if fully implemented, will be in solving the current lack of sustainability in banking practices. A model on which such an analysis could be undertaken would be the World Commission on Dams, which was a good example of multi-disciplinary and multi-stakeholder collaboration.
While the Principles focus on project finance deals, it is important to note that other financing mechanisms also have major impacts. For instance, the bulk of bank support for forestry projects does not come from project finance and therefore much of the destruction occurring to the world's forests will in no way be abated by the Principles as they stand. The Principles only apply to direct lending in project finance transactions, and there is no indication in the Principles to suggest a broader future commitment to develop policies governing other financial vehicles such as IPOs and bonds.
The February 2003 version of the EPs covered "financing" for limited or non-recourse transactions, but by May 2003 the EPs became limited only to "direct lending." This was a step backwards, and we are disappointed that the Principles were weakened to not apply to project finance deals where a bank may be a financial advisor, underwriter, arranger, manager, etc. and not just a creditor.
We believe that it is of paramount importance that the Equator Principles are seen as a baseline on the issues that banks approach, and that endorsing banks work to raise the bar and continually improve their business practices. The IFC sector standards in some cases do not represent best practice, and the EPs should explicitly encourage the adoption of best practice sector standards in addition to IFC guidelines. In particular, NGOs view the EPs as a springboard on which banks can then address other issues such as sector standards. (See "Sector Specific & No-Go Areas," below.)
Recognition of 'no-go' areas and other categorical exclusions would have added greatly to the public credibility of the Principles. For example, the EPs should have referred to the IFC's 14 exclusions and included 'no go' areas (certain geographical areas, types of activities that endorsing banks would avoid). Unfortunately, the Equator Principles do not reference IFC's exclusion list, nor those adopted by export credit agencies such as the U.S. Overseas Private Investment Corporation.
The Principles should have encouraged the adoption of sector specific "best practice" standards, such as the recommendations from the World Commission on Dams and the ABN Amro Forest Investment Policy (which goes further than the IFC policies by excluding loans for projects in old growth forest). It also should be noted that there has been considerable criticism of the recent downgrading of the WB/IFC guidelines on forestry and resettlement.
The NGO community has also developed recommended sector standards for banks. For example, WWF is developing guidelines for the financial sector to apply WCD recommendations FoE-England, Wales & Northern Ireland and WWF-UK have recently completed a joint set of bank guidelines for the avoidance of forest destructive financing (appendix 1).
Some banks are currently developing polices for other sectors such as Mining and Oil and Gas, and this approach should be taken on by the Principles group. We would also wish to see an extension of this approach to the issue of climate change and accounting for Greenhouse Gas emissions. WWF and World Resources Institute have been developing methodologies to measure and reduce the carbon weighting of financial portfolios.
Implementation of the Principles is critical and implementation and accountability measures should have been included as a condition of endorsing the EPs. At the very least, the Principles should have offered implementation guidelines to endorsers, including information on staff resources, training, monitoring and compliance, policy development, external verification (by a panel and not just one expert), transparency, consultation (see below) and public disclosure.
In terms of staffing it should be noted that the IFC and World Bank already have large staffs working on these issues and yet have still been involved in supporting egregious projects. Although investment banks may claim that they may have far better internal auditing than the IFC – NGOs will need to be convinced that the banks have put in place the necessary resources to back up aspirations and commitments.
Ultimately, NGOs will be looking to see how and if the banks are implementing the Principles, and what effect the Principles are having on lending processes. The problem of free-riders (banks that endorse the Principles but do not implement them) has undercut the credibility of the UNEP-FI, and the EPs have no mechanism to monitor endorsing banks.
The EPs only require disclosure of Environmental Assessments (EAs). To ensure that banks are living up to the aspirations of the EP, the Principles should have required endorsing banks to provide some kind public reporting on their performance and implementation of the Principles (e.g. the number of projects by type financed by banks and the number of rejections etc.).
Social issues are not adequately addressed by the Equator Principles, and the Principles would have improved greatly by referencing lending in or near conflict zones, human rights issues and potential land-use challenges and related risks in non-democratic states. The January 2003 version of the EP included reference to "human rights," but it was substituted with the term "socially responsible" in subsequent versions. This term has a very unclear meaning whereas ‘human rights' are clearly agreed upon by the UN.
There is no mention of the potential for the positive effects of sustainable finance and the Principles should have incorporated language that supports a commitment to sustainability.
As mentioned above, implementation is a key concern of NGOs. Public consultation for sensitive transactions is vitally important – and it should be noted that this is an area in which the IFC is weak. Consultation can help address community opposition that can make project development infinitely more difficult. However, banks should explicitly commit to respecting a community's right to say ‘no,' and refrain from offering financing if the community does not provide its full, prior and informed consent.
b) Preamble
The preamble acknowledges the opportunities for the promotion of responsible environmental stewardship but does not explicitly link the responsibility of financiers to the impacts of the activities they fund. 'Doing no harm' and the 'precautionary principle' should have been clearly articulated in the introduction to be consistent with the civil society expectations as outlined in the Collevecchio Declaration, and to recognize that banks are responsible for the environmental and social impacts of their transactions.
This paragraph indicates that the Equator Principles will be integrated into banks' existing "environmental and social procedures and standards" governing project finance. However, existing procedures, standards and implementation capabilities across various banks differ widely, suggesting that in practice the EPs will be implemented differently among various endorsers.
We note that "to review carefully all proposals for which [bank] customers request project financing," financial institutions will need in-house staff and expertise. However, the Principles do not entail any management or performance requirements of endorsers. This issue is addressed briefly in the ‘implementation' section below.
c) The Principles
1. The Principles require the creation of guidelines ‘based upon' IFC environmental and social screening criteria. In March 2003, NGOs suggested that the wording here should be strengthened to ‘fully consistent with'.
2. The Principles do not appear to explicitly require an adoption of IFC sector and safeguard policies for project appraisal, but rather emphasize the need for an environmental assessment to address IFC-referenced issues. IFC standards are in many cases not best practice. Other standards which should be aspired to include the Strategic Priorities of the World Commission on Dams and the private sector leadership exhibited by ABN Amro's forest policy.
Although there was an improvement from the January to February 2003 version, the Principles should have clearly explained how the World Bank and IFC standards will be used as a basis for proceeding with or rejecting projects. NGOs also suggested to the banks that the EPs should have clarified how the standards will apply to Environmental Management Plans.
NGOs also noted to the banks that the preparation of an EA in itself does not say a great deal unless it is integrated in a cost-benefit exercise extended to all project alternatives, including no-go option, and internalizing social and environmental mitigation costs – even though this cannot be done in all cases for all kinds of impact.
For this reason we encouraged the use of Strategic Environmental Assessments that would cover the wider range of cumulative and knock-on impacts to wider areas from project development. Such assessments would have covered the fuller aspects of risk management and lead to environmental management plans that more truly reflected externalities that need to be covered by project finance.
NGOs also noted that the OCP pipeline, for instance, should have been rejected due to the actual impacts of the pipeline but even if those had been minimal the intention of the project is to facilitate widespread drilling throughout Ecuador that would clearly have massive cascading effects. The Baku-Ceyhan Oil pipeline project is another example where such assessment would have been appropriate and would have short-circuited many of the problems now confronted by the case. We asserted that a credible set of Principles would be rigorous enough to screen out the most egregious projects, such as the Camisea gas project in Peru, the OCP pipeline in Ecuador, and the Chad-Cameroon project.
Finally, we believe should have been a human rights impact assessment in several contexts, which means referring to international human rights law and eventually introducing requirements for human rights independent monitoring.
3. We believe that the final wording, "In each case, the EA will have addressed, to our satisfaction, the project's overall compliance with (or justified deviations from) the respective above-referenced Guidelines and Safeguard Policies," is not explicit enough in stating that projects will be rejected based on non-compliance with the safeguard policies.
4. The Principles emphasize mitigation but must include prevention as a core value. Analysis of impact alone is not sufficient without clear commitments to abstain from funding certain projects and activities. Principle 4 should have clearly stipulated prevention as the main aim. Mitigation and management of risk, particularly of Category A projects (which by IFC's definition can involve irreversible, diverse and unprecedented negative impacts) should be the sole objective of the EPs.
All responsibility for monitoring seems to be put on the borrower and not the endorsing bank. On the contrary, the bank should have a direct responsibility and allow project-affected communities to monitor projects for compliance through a specific reporting mechanism to the bank (similar to the IFC's Compliance Advisory Ombudsman)). The same principle should be followed during the consultation process before project approval.
Furthermore, we note that an earlier version of the EPs called for an ‘independent' expert to prepare the Environmental Management Plan (EMP), but it was later replaced with "third party."
5. The Principles State that the EA and EMP prepared for Category A projects will be subject to independent expert review. NGOs welcomed this directive, but raised questions as to who will carry out the independent review and what recourse there will be for potentially affected persons. (For example, what will happen in the case that the independent review does not validate the EA and EMP?)
We believe that the language mentioning consultation with potentially affected groups is weak. Stronger language is needed and consultation should have been made mandatory for all category B projects – ‘as appropriate' is not sufficient. We also suggested that a "reasonable minimum period" of 120 days for publication of the EA should have been stated.
6. Para 6c): We noted that to the drafting banks that in many sectors, industry standards are very unclear on decommissioning – see the case of oil and gas pipelines for instance. This should be clarified.
7. The Principles should have provided for some description of how the independent environmental expert will be appointed.
8. Enforcement of the Principles should have been explicitly framed by the final veto of default. The Principles should be explicit that when projects are not brought back into environmental and/or social compliance within a specifically stated time frame, loans will be viewed as in default. Also, the EPs should have provided a specific arranger with the right to leave the financing consortium on environmental and social grounds. Experience from the OCP pipeline has shown that all social and environmental clauses should be included in project finance agreements between different financiers and not just with the client.
We believe that covenants should be made public so that local people know what commitments the project sponsor has made and can help enforce these.
9. Although the Principles stipulate that they apply to projects with a total value of $50 million or more, NGOs noted to the drafting banks that complex projects are often broken into smaller components (for example, upstream and downstream). We urged signatory banks to ensure that complex projects are not broken into segments that individually fall below the applicability threshold.
Next steps
Suggestions for the Process Moving Forward:
In March 2003, we emphasized to the drafting banks the need to continue this initiative with as many members of the financial community as possible, and to broaden the discussion beyond project finance to other banking areas.
We signaled our desire to be work with the banks involved to ensure that the many concerns we have can be dealt with, and that above all, that the Principles can be implemented in a meaningful and transparent way.
Finally, we suggested that the conveners and proponents of the EP create a process for moving beyond IFC safeguard policies, and work with NGOs to implement best practice sector standards in a similar multilateral forum.
More Information on NGO's
More Information on the Environment
FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
