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July 12, 2006
Revised Equator Principles Fall Short of International Best Practice for Project Finance
    by Bill Baue

While some observers praise the strengthening of labor rights, others decry the failure to implement adequate transparency, accountability, and governance mechanisms.

Last week, the Equator Principles (EPs) launched a revision of their voluntary environmental and social standards for project financing, which provides capital to infrastructure projects in return for a percentage of future revenues. The changes follow from April 2006 revisions to the International Finance Corporation (IFC) Performance Standards on Social and Environmental Sustainability, upon which the EPs are primarily (though not exclusively) based. The EP revisions were also informed by the three years of experience under the belts of the 40 EP banks (33 of which have already adopted the new guidelines), as well as some consultation with nongovernmental organizations (NGOs) that have been critical of the EPs.

The main changes to the EPs include a lowering of the threshold of projects covered from $50 million to $10 million; an extension to cover upgrades and expansions of existing projects as well as project finance advisory activities; and annual reporting by EP banks on implementation. The EPs also integrate IFC's new social and environmental standards, including significantly expanded labor rights standards. The revisions met with praise mixed with continued criticism by the likes of Friends of the Earth (FoE) and Rainforest Action Network (RAN), both members of the BankTrack network of NGOs that seeks to keep global financial institutions accountable.

"The Equator banks have failed to use this revision opportunity to introduce adequate transparency, accountability, and governance mechanisms to ensure EP implementation," said Michelle Chan-Fishel, program manager of FoE's Green Investments Project. "The banks should have made EP implementation a priority, especially since public confidence in the EPs is weak."

"Right now, half of the banks bidding on the controversial Sakhalin II oil and gas project--which could wipe out the last Western Grey whales--are Equator banks," Ms. Chan-Fishel told, referring to the project in Russia sponsored by Shell (ticker: RD). "Such implementation gaps call into question the credibility of the whole initiative, and it's a pity the revised EPs do not include significant new accountability mechanisms."

Ms. Chan-Fishel also criticized the EPs for rubber-stamping certain shortcomings in the new IFC performance standards, as well as for failing to adopt improvements in the new standards.

"Friends of the Earth tends to prefer bank financing standards that are based on international best practices, norms, and laws," said Ms. Chan-Fishel. "In this sense, there are serious gaps--human rights is not well addressed, and the Principles fall short of recognizing the right of indigenous peoples (in ILO Convention 169) to give or withhold their Free, Prior, and Informed Consent to activities that would impact their traditional territories and resources."

"In addition, it's a pity that the Equator banks chose to not adopt one of the new IFC requirements that require extractive industries clients to now report the payments they make to national governments, and to disclose key terms of agreements they sign with host countries," she added. "These revenue and contract transparency requirements are meant to promote good governance and prevent corruption, key factors which contribute to the 'natural resource curse'--the irony of people in resource-rich countries often staying poor despite natural wealth."

The EPs did adopt certain improvements in the IFC performance standards.

"The EPs' new biodiversity standard is rooted in the UN Convention on Biodiversity, and the ILO core conventions are now referenced in the new labor standard--these are welcome developments," Ms. Chan-Fishel said.

Ergon, a London-based network of labor and human rights experts, echoed this praise for the EPs' improvements on labor conditions.

"The adoption of an updated version of the Equator Principles has the potential to significantly improve labor rights and working conditions for many workers in developing countries," stated Ergon in a special briefing. "While other aspects of the new IFC Performance Standards--and therefore the Equator Principles--have proved controversial among some NGOs, the labor component has been welcomed by trade unions as a major step forward."

"Simply agreeing a new set of Equator Principles will not improve working conditions on the ground and reduce the risk of violations of labor rights overnight," Ergon added. "Effective implementation is the key."

Unfortunately, implementation of the aspirations of social and environmental sustainability contained in the EPs remains incomplete. Ethical Investment Research Services (EIRIS), a London-based socially responsible investing (SRI) research non-profit, performed an analysis of social, environmental, and ethical (SEE) risk management by seven on EP banks (and two non-EP banks active in project finance.) EIRIS examined 22 indicators in five categories: strategy and responsibility, risk assessment, compliance and monitoring, reporting and dialogue, and performance and innovation.

"The Equator Principles offer a useful starting point for assessing a company's risks in relation to project finance, however, as the implementation and compliance are not defined within the framework, it is insufficient from an investor's perspective for a financial institution to adopt solely the Principles," said Franziska Jahn, a senior analyst at EIRIS. "Only by focusing on the implementation of the Principles will investors have the information they need."

Of the EP banks, only ABN AMRO and Barclays qualified for classification as "good" SEE risk management in project finance, with BBVA and Westpac qualifying as "intermediate" and Credit Suisse First Boston, JPMorgan Chase and Sumitomo Mitsui enacting "limited" implementation. EIRIS applauds the instances where banks such as ABN AMRO, Barclays, Citigroup, HSBC, and JPMorgan Chase have implemented policies that surpass the EPs.

"Because some banks have adopted individual environmental and social financing standards that have gone beyond the Equator Principles, the EPs should be viewed as a baseline for responsible financing," said Ms. Chan-Fishel of FoE. "But even so, it's important to remember that few banks have adopted standards that meet international best practice."


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