The International Finance Corporation’s tougher ethical guidelines for project finance are likely to result in an update of the Equator Principles. Oliver Balch reports on what this will mean for banks.

The project finance industry is facing pressure to strengthen its management of ethical risks as the International Finance Corporation (IFC) prepares to publish stricter social and environmental standards. The new-look standards are set to be approved by the IFC board later this month and, if passed, they will mark a shift forward from the commitments made by many of the world’s biggest banks under the Equator Principles.

These principles, launched in 2003, establish a system for considering non-financial risks related to large-scale project finance schemes. They currently use the IFC’s earlier standards as their point of reference.

Beefed up standards

“There are stronger requirements on social and environmental assessment than ever before,” Rachel Kyte, the IFC’s director of environment and social development, says of the revised performance standards.

The new standards are set to include requirements to combat child labour, to protect community health and safety, and to quantify a project’s greenhouse gas emissions.

The changes will also require ongoing monitoring and reporting by the IFC’s clients to prove their compliance throughout the life-cycle of a project. Previously, companies were only obliged to provide a one-off social and environmental risk assessment as part of the initial finance agreement. Companies involved in high-risk projects will have to provide quarterly social and environmental appraisals, as well as regular updates to the affected communities.

“Companies will have to be more transparent than ever before. That enables people to hold the IFC accountable for the outcomes on the ground,” Ms Kyte explains.

Participants in the Equator Principles, among them HSBC, Barclays and ABN AMRO, are discussing how the changes will alter their current commitments.

Revised Equator Principles – ‘Equator 2’ – are expected to be released shortly after the ratification of the IFC’s new standards. Although the details of Equator 2 remain undisclosed, it is understood that the proposed changes will reflect the IFC’s emphasis on increased transparency.

Visible progress needed

 “Adopting Equator is one thing, but people want to see progress in implementing it within each participating organisation,” says Richard Burrett, managing director of sustainable development at ABN AMRO.

“We feel that the banks that are going to adopt the revised Equator need to consider how they are going to report on what they are doing in terms of implementation,” he adds.

Although client confidentiality prevents banks from revealing information on the individual projects they finance, they can and should reveal the number of deals rejected or amended in the light of the Equator Principles, Mr Burrett says.

The possibility of increased transparency will please environmental and human rights groups. A recent report by campaign groups BankTrack and WWF, Shaping the Future of Sustainable Finance, found that the Equator banks had lower levels of general disclosure than the average for the banking sector.

Disclosure to stakeholders

“The current revision of the principles is an opportunity for the banks to convince stakeholders that they intend to be judged by their actions in a way that is transparent and comparable,” says Niall O’Shea, an analyst at the Co-operative Insurance Society, in response to the study.

However, the report concedes that progress has been made under the Equator Principles. HSBC, for example, has committed itself to considering globally recognised standards in the financing of dams, and ABN AMRO has developed a policy specifically to address the social and environmental risks that are associated with finance projects in the extractive industry.

Still, pressure groups are increasingly looking for evidence that Equator signatories are meeting these commitments, says Paul Watchman, a banking specialist at law firm Freshfields Bruckhaus Deringer. “After almost three years of the Equator banks talking a good game, the NGO [non-governmental organisation] community has begun to lose patience with talk and, like Jerry Maguire’s client, want the banks to ‘show them the money’,” he says.

Equator Principles: IFC’s Performance Standards:


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