The Equator Principles have been improved but successful implementation remains the true litmus test, say Andrea Durbin and Johan Frijns.

Last month’s announcement that the Equator banks had adopted an improved set of social and environmental policies for their project finance operations was issued with much fanfare. It was greeted with a more subdued response by BankTrack and other non-governmental organisations (NGOs) that monitor the lending practices of private banks, however.

Granted, there are a number of substantial improvements in the new Equator Principles. The new standards properly require clients to pay closer attention to social impacts, to consult affected communities more effectively and to recognise the special rights of indigenous peoples in international law.

There are also improvements in the way the policies will be applied. They will now kick in for all projects of more than $10m – a reduction from the previous $50m threshold that recognises that projects with smaller price tags can have significant impacts. The banks will extend the application of the new standards to project finance advisory services. They also affirmed the importance of independent verification of information provided by their clients.

Shortcomings remain

Despite these advances, two considerations kept NGOs from breaking out the champagne. First, significant shortcomings remain in the substance of the policies. For example, the new principles are pegged to the International Finance Corporation (IFC) performance standards, but not to the sustainability policies underlying these standards. While the Equator banks insist that clients need one set of standards used by all financiers, this leads to a differentiation in requirements between IFC and the Equator banks. For example, the new principles do not include a new IFC requirement on revenue and contract transparency for extractive industries clients, a measure designed to promote good governance and combat corruption. Also, the principles fail to meet international standards and best practice in a variety of areas, including human rights and climate change.

Shortcomings in the new IFC standards also leave the Equator banks vulnerable to exactly the kind of risks that the principles are supposed to mitigate. For example, IFC’s policy to protect those who are resettled weakens previous policy by no longer recognising people without ‘recognisable’ land titles.

The Equator banks must demonstrate that they can implement the standards consistently in their day-to-day operations. Experience with the first version of the principles does not inspire optimism. A recent review by EIRIS, an independent research firm, found that the implementation varied widely among the banks and that many cannot demonstrate how environmental and social risks are evaluated.

Cause for concern

The real proof is in the portfolio. Here again, experience with the Equator Principles to date is cause for concern for those that track the banking sector’s environmental and social footprint. The first set of principles did nothing to prevent nine Equator banks from financing the 1000-mile-long Baku-Tblisi-Ceyhan oil pipeline project, which has experienced oil spills and leaks due to the use of faulty materials. Two Equator banks, France’s Calyon and Spain’s BBVA, are bidding to finance the Botnia and ENCE paper mill projects in Uruguay, which have met fierce local and Argentine opposition. (The International Court of Justice recently ruled in favour of Uruguay.)

The latest litmus test will be the Sakhalin II oil project in Russia, which poses a direct threat to the last remaining western Pacific grey whales, numbering less than 100 individuals – exactly the kind of environmental impact that the principles are designed to avoid. Yet the majority of the bidding banks in Sakhalin II are Equator banks.

We congratulate the banks for delivering an improved set of Equator Principles. But until there is more evidence of successful implementation, the champagne will stay on ice.

Andrea Durbin and Johan Frijns work for BankTrack, a worldwide network of NGOs monitoring and campaigning on the private financial sector.


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