A growing number of bankers around the world have joined together to craft environmental standards for use in deciding whether to fund major international projects such as dams, power plants and oil pipelines.
The project finance guidelines, known as the Equator Principles, are voluntary environmental and social standards designed by, and for, financial institutions. Drafters included banks headquartered in Germany, Netherlands, United Kingdom and the U.S. The Principles impact the core of what banks do — lend money.
Michelle Chan-Fishel, coordinator of the Green Investments Program at Friends of the Earth-USA (FoE), said non-governmental organizations (NGOs) had worked for many years to secure strong social and environmental standards for development projects financed by the World Bank. This included safeguarding the rights of people displaced by projects and protecting endangered ecosystems.
But by the late 1990s, the number of funders of international development projects had expanded beyond the World Bank.
“As privatization became more common in developing countries and as more corporations entered the emerging markets, private banks and financiers started to back the same kinds of destructive projects that the World Bank used to fund,” Chan-Fishel said.
“These new power players in international development finance were driving a lot of projects in these emerging market countries. We wanted to put them on alert, saying, ‘You have a role and a responsibility for the environmental and social impacts of your investments.’ We didn’t take our eyes off the World Bank, but it was no longer the only player. The private sector had become a critical actor.”
Since 1990, the Charles Stewart Mott Foundation has provided 19 grants totaling $2.4 million to FoE that have supported initiatives to increase public participation in the economic decisionmaking process of institutions such as the World Bank Group, International Monetary Fund and World Trade Organization.
The Equator Principles were named for the large geographic region below the equator where developers traditionally had focused little attention on the social and environmental impacts of their projects. They are modeled after policies and guidelines used by the International Finance Corporation (IFC) — the arm of World Bank Group that lends money to the private sector.
In October 2002, after a series of NGO campaigns, several bankers discussed the environmental and social challenges associated with large project finance deals during a meeting in London, and within one year the Principles were fully developed.
When they were made public in June 2003, 10 banks already had adopted them. In November, 33 financial institutions (32 banks and one export credit agency) have vowed to follow the Principles — both when making initial project finance decisions and also throughout the funding process, which often takes several years from start to finish.
Together, these banks operate in about 100 countries and represent more than 80 percent of the total project finance market worldwide. They have pooled their collective clout and created an industry standard that targets development projects with capital costs of $50 million or more. It’s sometimes called “the Triple P” approach to project finance, i.e., balancing people, profit and planet.
There are nine compliance requirements for banks that have adopted the Principles. The banks, in turn, require their borrowers to adhere to the same standards. Examples of these requirements are:
- completion of a formal environmental assessment that addresses specific health and safety concerns, and also complies with minimum World Bank/IFC standards;
- preparation of an environmental management plan that addresses plan monitoring and risk management; and
- consultation with affected groups, including indigenous people and local NGOs.
Supporters say the Principles are strong because they are specific and “binding” for those banks that have adopted the principles. The standards spell out what can and cannot be done on particular projects, and they also require clients receiving financing from EP institutions to involve groups affected by the projects throughout the process.
But critics say the Principles are not as effective as they could be because there is no banking industry requirement stating they must be adopted by banks providing loans in developing countries. While the guidelines are internally binding once they are adopted, they are not legally enforceable, and their adoption is totally voluntary.
Also, the Principles apply only to the largest projects, and their scope is limited to “project finance” loans, a specific banking term for a less common type of corporate loan; the guidelines do not apply to other types of development loans. Additionally, there is little recourse for communities if the Principles are not followed.
Many NGO leaders say adoption of the guidelines has not prevented signatory banks from participating in projects reported to violate standards in the Principles. This includes the current 1,000-mile-long Baku-Tblisi-Ceyhan oil pipeline project, which will run underground from Azerbaijan to Turkey and is being financed by nine banks that have adopted the Principles. Another controversial project likely to be financed by signatory banks is Sakhalin II, a $12 billion oil and gas operation on Russia’s Pacific Coast.
Still, people from the private, public and nonprofit sector agree that the guidelines — coupled with increased public scrutiny — are reforming the field of international finance worldwide.
“When adopted, the Equator Principles were a big step forward,” said Johan Frijns, coordinator of BankTrack, a network of 14 NGOs. Network members monitor IFIs (international finance institutions) and ECAs (export credit agencies), along with private financial institutions, and work to reform them.
“This has gone from being a non-issue to part of the standard risk assessment that is done for large projects. There is a consensus emerging among banks that says, ‘Some things are more precious than business,’ which is a categorical shift.”
BankTrack, a Mott grantee based in Utrecht, Netherlands, received a two-year, $150,000 general purposes grant in 2005.
NGO leaders and bankers cite several reasons for now using the Principles to “push for a race to the top, not the bottom” when it comes to standards. They regard adoption of the Principles as the minimum commitment banks should make. In some specific areas, Citigroup, HSBC and JPMorgan Chase have developed guidelines that are stricter than those outlined in the Principles, thus raising the bar for all banks.
But perhaps the most noteworthy commitment has come from Goldman Sachs, a leading global investment banking institution. In late November 2005, Goldman Sachs became the first global investment bank to adopt a comprehensive environmental policy similar to the Principles. However, it went even further by publicly announcing it would invest $1 billion of its capital in alternative energy projects as well as create the Center for Environmental Markets to develop public policy options for establishing markets around climate change, biodiversity conservation and ecosystem services.
“By doing this, Goldman Sachs has given us things to measure them by,” said Jonathan Lash, president of World Resources Institute (WRI).
WRI is a Mott grantee that has received $3.3 million in support since 1993. The grants were provided for several initiatives to reform the international finance field, including a project aimed at making the development finance field more supportive of environmental sustainability.
Bankers say adopting the Equator Principles makes sound business sense because they allow financiers to address issues up front, and avoid lawsuits and work stoppages that could be time-consuming and costly. Having an industry standard also makes it easier to manage project finance deals, which tend to involve multiple lenders.
In addition, implementing new risk management strategies can reduce loan defaults. Finally, adopting socially and environmentally responsible lending practices creates goodwill among customers and the general public.
The Principles have sparked changes in the way many banks do business, including Citigroup, the most recognized bank in the world. It was one of the four drafters of the guidelines and also one of the first to adopt them.
“Our role in the creation of the Equator Principles was inspired in part by our dialogue with shareholders, clients and NGOs,” said Pamela P. Flaherty, Citigroup senior vice president of global community relations, who served on the task force that developed the Principles.
“We are pleased to see the number of banks that have now become signatories to the Principles and, within our own company, how our bankers have embraced them.”
Citigroup executives said they felt a responsibility to take an early leadership role to ensure that the Principles became the industry standard, and were fully integrated into Citigroup’s project finance policies and procedures — not as suggestions but as mandatory practices to be audited.
Shawn Miller, director of environmental and social risk management for Citigroup CIB (Corporate and Investment Bank) and a previous employee of the World Bank’s IFC, has witnessed operational changes at big-name banks and also in the way projects are selected and managed in emerging market countries.
“Because of the Equator Principles, affected communities around the globe are benefiting from a higher level of transparency and engagement with these large development projects,” he said.
“I know of one case in which a host country had its first public hearing ever on a development project due to application of the Principles. That’s real progress. We can see that the Principles are making a positive difference on the ground.”
The next steps, says BankTrack’s Frijns, is to discuss ways to limit projects in biodiversity hot spots, and also expand project transparency so developers are less shielded and the public is more informed.
It’s now time to turn up the heat on non-Equator banks in North America, Europe and Japan, he said. It’s also time to shine the spotlight on non-Equator banks in China and India that have been quick to fund projects other financiers rejected because of their potentially harmful social and environmental effects.
“To move some of the most controversial projects forward, local developers are stepping away from Western banks and looking to emerging-market banks,” Frijns said. “There’s now a space for less scrupulous banks to step in and fund these projects.”
As a result, he said, BankTrack and other NGOs are quickly trying to educate themselves about effective ways to influence Asian banks.
Meanwhile, implementation of the Principles has led to promising reforms in banks in the U.S. and also in financial institutions in Germany, which is recognized as the third largest investor in the World Bank behind the U.S. and Japan.
As recently as 2002, WestLB, a large German bank, made international headlines for supporting a controversial pipeline project in the Amazon rainforest.
But just one year later it was an active member of the team that drafted the Principles, showing that rapid change is possible, said Heffa Schücking, director of Urgewald, an NGO in Sassenberg, Germany.
Since 1994, Mott has provided Urgewald with eight grants totaling $837,300 in support of its efforts to establish and strengthen environmental and social standards for German banks. The NGO’s work also includes monitoring privately financed development projects and supporting policy reforms.
WestLB, one of Germany’s major players in the global project financing field, looked for ways to improve its social and environmental responsibility record after receiving intense negative publicity at home and abroad following its lead role in supporting the Amazon pipeline project, Schücking said.
WestLB is different from many other banking institutions because a quarter of its ownership belongs to the provincial government of North Rhine Westphalia, making it a public bank that can be influenced at the municipal and state levels.
For Schücking, individuals and organizations who work to reform the policies and practices of international financial institutions see the Equator Principles as an obvious — and effective — way to protect vulnerable people and their fragile environments worldwide.
“We knew that campaigning wouldn’t convince an oil company to get out of the oil business, but we could go to the funders and discuss the impact of these projects on the environment and the people who lived nearby,” she said. “We chose to go for the financing angle to achieve our goals.”