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June 05, 2003
Will Equator Principles Deliver Social and Environmental Responsibility from Banks?
    by William Baue

Social investors and NGOs question whether the Equator Principles will serve their stated purpose of increasing global banks' social and environmental responsibility.


Yesterday, ten banks from seven countries announced their adoption of the Equator Principles (EPs), a voluntary set of guidelines for promoting social and environmental responsibility in financing development projects, especially in emerging markets. Social investors and nongovernmental organizations (NGOs) welcome the establishment of the principles, but they caution that the EPs do not necessarily represent a panacea, and they point out many potential pitfalls and loopholes.

"We applaud the banks for being willing to publicly acknowledge that they do have responsibility for the negative social and environmental impacts of the projects they finance," said Elizabeth McGeveran, vice president of governance and socially responsible investment (SRI) at ISIS Asset Management. In conjunction with other SRI firms and NGOs, ISIS has been in conversation with EPs signatory bank Citigroup (ticker: C) since late 1999, when the bank was involved in negotiations concerning the controversial Three Gorges Dam project in China.

"Banks love to take credit for all the good that providing capital does, especially in developing nations, but they've not been willing to date to take any responsibility for the many negative repercussions of their role in financing globalization," Ms. McGeveran told SocialFunds.com.

The Equator Principles specifically address many of these negative repercussions, such as involuntary resettlement of indigenous people and pollution of local and regional environments. The EPs are based in large part on the policies and guidelines of the International Finance Corporation (IFC), the private-sector investment arm of the World Bank.

The EPs require signatory banks to categorize projects as A (high), B (medium), or C (low) in environmental or social risk as a precondition of consideration for financing. Borrowers must conduct an environmental assessment (EA) and prepare an environmental management plan (EMP) for category A and B projects. The EPs apply to projects with a total cost of $50 million or more.

Only those banks that are participating in Eps are responsible for implementation and compliance of the principles. The participating banks include ABN AMRO (ABN), Barclays (BARC.L), Credit Suisse Group (CSR), Rabobank (RABT.AS), Royal Bank of Scotland (RBOS.L), and Westpac (WBC.AX).

Eight NGOs from five countries, such as Friends of the Earth US and UK, Rainforest Action Network (RAN), and World Wide Fund for Nature (WWF), banded together to critique the EPs over their omissions and loopholes, among other things.

"The principles blackout what we call 'no-go zones,' and that's the recognition that there are [geographical] areas that are so critical for long-term sustainability that any short-term gains off investment do not outweigh the long-term benefits of leaving them intact," said Ilyse Hogue, a global finance campaigner for RAN. "The principles are also very weak on social issues."

"For example, there's not enough in the principles that recognize and assure indigenous communities' right to prior and informed consent for development on their land, much less a straight-out right to veto like you or I would have if these companies came into our homes."

The eight NGOs compared the EPs to the Collevecchio Declaration on Financial Institutions and Sustainability, a document signed in Italy in January 2003 by more than 100 NGOs worldwide. The declaration called on financial institutions to make six commitments to sustainability, to "do no harm" (according to the Precautionary Principle), to responsibility, to accountability, to transparency, and to sustainable markets and governance. This comparison found the EPs significantly lacking.

Ms. McGeveran identified other potential problems with the EPs, expressing specific concern over so-called "free riders."

"Some banks will be best practice implementers, and other banks could just sign and do nothing," she said. "Because the principles don't have clear enforcement or review mechanisms, how are the best practitioners going to police the system to ensure that free riders don't undermine it?"

Ms. Hogue summarized the concerns over achieving best practice.

"What we want to see is the sector brought up to the best existing practices, not settling for the least common denominator," Ms. Hogue told SocialFunds.com. "These Equator Principles are a good first step only if there is a second, third, and fourth step."

 

 
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