Application of Equator Principles lands adherents in hot water

It seems churlish to criticise the Equator Principles. How does one find fault with a set of laudable – and voluntary – guidelines established to reduce the social and environmental risks often associated with project finance?

The nub of this uncomfortable question lies in the fact that setting high standards in just one part of the business is a bit like a child who promises to behave while sitting at the dinner table, but runs around daubing paint on the walls the rest of the time. From outside the bank, the idea that the Principles apply only to a particular kind of non-recourse lending – leaving a bank that is signed up to Equator free to invest via its asset management or principle finance arms, or via another part of the lending business which does not fall under the banner of project finance – can appear as an exercise in convenient semantics.

One problem is that grey areas created by the patchy application of standards compound what is arguably a rather subjective decision-making process. The integrity and success of the Equator Principles hangs on how banks categorise projects according to their risks, and consequently what they do about them.

Category A projects are those with potential significant adverse social or environmental impacts that are diverse, irreversible or unprecedented; Category B includes projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; while Category C contains those with minimal or no social or environmental impacts.

The key is that one person’s view of what is significant, limited or minimal, may not be the same as someone else’s. And who is the final arbiter of whether a particular level of pollution is acceptable or a specified amount of environmental destruction is worth the jobs and wealth created? Many environmental groups and local populations take issue with such decisions.

For the banks, one of the key drivers for adopting the principles was to limit the reputational damage caused when inflamed local residents protest about a project, or by vociferous non-governmental organisations campaigning against potential social and environmental damage. But the point about a seemingly inconsistent application of ethical standards is that it leaves too much room for argument. A bank may believe that it is behaving according to the principles it has laid out; an onlooker may not.

Banks have voluntarily committed themselves to admirable principles, but in doing so have opened themselves up to accusations of contravening their spirit in practice. Banks must tighten up and clarify their application of Equator Principles, and better communicate their policies to those outside the industry.