Eighteen months ago a group of leading project finance banks adopted the Equator Principles. They are now under attack from critics who claim the banks were more interested in profits and PR than in principles.
On June 4, 2003, 10 banks from seven countries signed up to the Equator Principles (EPs), a voluntary set of guidelines for assessing and managing environmental and social risks in project financing. The banks, including Citigroup, ABN AMRO, Barclays, Royal Bank of Scotland and Credit Suisse First Boston, which constitute 30% of the total project finance market, agreed to implement the principles for projects valued at $50 million or more.“In the past we didn’t have any explicit standards,” explains Richard Burrett, global head, sustainable development, ABN AMRO Bank.“The EPs gave us an explicit set of guidelines to use in our decision making.”
The EPs use a screening process to classify projects into Category A, B or C (high, medium or low environmental or social risk). Category A and B projects require an environmental assessment, addressing issues such as sustainable development, socioeconomic impact, land acquisition, involuntary resettlement and pollution prevention. Where appropriate, an environmental management plan for mitigating environmental and social risks may also be required.
A year after the principles’ adoption, however, non-government organizations (NGOs) have accused Equator banks of failing to implement the principles in good faith. In June Amsterdam- headquartered BankTrack, an international network of advocacy NGOs made up of organizations such as Friends of the Earth and the Rainforest Action Network, published a damning report—titled “Principles, Profits, or Just PR? Triple P investments under the Equator Principles”—which described banks’ implementation of the EPs as “poor to middling.”
It listed “controversial” projects that still went ahead “virtually unaltered”: the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, the Kárahnjúkar hydro project in Iceland and the Omkareshwar dam in India. The report also accused the Equator banks of withholding information on particular deals, stating it was impossible to determine whether the principles were being applied or not.
Equator and Beyond
Equator bank ABN AMRO maintains that the banks have invested a considerable amount of time and money in implementing the EPs.“I wouldn’t say the BankTrack report was particularly just,” says ABN AMRO’s Burrett, claiming that a number of facts it contained were inaccurate. ABN AMRO and other Equator banks say that in some instances they have gone beyond Equator, applying the principles to “sensitive” financing areas such as oil, gas and mining.
Chris Bray, head of environmental risk policy at Barclays, maintains the bank has done a considerable amount of work embedding the concept of environmental and social risk across its business groups. In mining, he says, it treats every project as Category A. “A few years ago if you spoke to an investment banker about environmental and social issues, they would have thought you were a hippie smelling of joss sticks,” he observes. “The environment is now a mainstream business issue.” Rachel Kyte, director, environmental and social development department, IFC, says the fact that banks had signed up to the EPs indicated just how far the industry had come. “We [the IFC] spent 20 years knocking on the doors of Wall Street trying to get anybody to open the door. Now NGOs have that open door,” she says.
Johan Frijns, coordinator of Bank- Track, acknowledges that the EPs are an important “first step” for the banks and that some have implemented the principles rigorously.Yet BankTrack’s report highlights a fundamental disconnect between banks and environmental groups. Despite all the well-intentioned rhetoric, banks are in the business of making money for their shareholders. NGOs, on the other hand, believe that projects such as the BTC oil pipeline, which they say contravenes the EPs on more than 30 counts, should never have been funded.
Outlining how the perspectives of the Equator banks and NGOs differ, Frijns explains:“We want to understand what projects are not being financed because of Equator, but the banks say this is the wrong criterion.There is no categorical exclusion of projects.” Frijns would like to see the EPs applied not just in project finance, but in any other corporate loan or advisory role performed by the banks.
An example of this is the Omkareshwar dam in India, which according to BankTrack violates five of the IFC’s safeguard policies, which are the foundation for the Equator principles (see Newsmakers, page 4). Equator bank Barclays played an advisory role in the scheme. Although it did not lend any money to the project directly, it helped arrange a £28 million loan for the expenses of the project’s main sponsor, India’s Hydro-Electric Power Corporation. Although there is no evidence to suggest this money was used to directly fund the project, NGOs maintain that the EPs should still have been applied.
The Equator banks emphasize the need to strike a balance between addressing environmental and social risks and adopting a “pragmatic” approach to project financing. “Some of these groups [NGOs] fundamentally believe that the oil and gas industry should not exist,” Burrett of ABN AMRO asserts. “Sustainable development is about trying to balance the desire to create economic development with the environmental and social impacts of the business,” he adds.
The IFC says it has had the same debate with NGOs as to whether it should be financing oil and gas projects. “I don’t think the EPs answer those kinds of questions, which are more strategic level,” says Kyte, adding that superimposed on the EPs was a set of strategic financial decisions banks needed to make about whether they wanted to get involved in a specific transaction. “At that point you have different world views and different business imperatives,” she notes.
In terms of extending the principles beyond project financing,ABN AMRO maintains it already does that by including all corporate engagements in the oil, gas and mining sectors. However, Burrett stresses that unlike project financing, where the bank could exert more leverage when it acted as an adviser or extended a corporate loan, the bank could not force borrowers to sit up and take notice. “If you are lending money to an Indian electricity company and you are not sure how they are going to use that money, then end up making an overall assessment on their overall sustainability, you haven’t got the leverage that you have in project finance, where you’re doing due diligence on a specific transaction,” he says.
Indicators of Success
But is there a measure by which NGOs, local stakeholders and banks can determine whether the EPs are being correctly applied? In its 2003 Sustainability Report, ABN AMRO published figures pertaining to the number of project advices approved or declined, which indicated that only a small number of deals were rejected, except in Europe, where 31 deals out of a total 150 advices were declined. Since implementing the EPs, ABN AMRO reports that the quality of projects submitted for approval is such that it has not declined any projects.
Burrett says projects declined or approved is not an accurate measure of the EPs’ effectiveness. Do you include those projects the bank has rejected out of hand, he asks, or should due diligence be completed before a bank can decline a project? The Equator banks stress the need to educate and advise borrowers, providing them with finance to develop their sustainability capabilities. “The primary aim of the EPs is to engage and improve the overall level of management,” Barclays’ Bray notes. “In some quarters, however, there is a belief that we have more influence than we really have,” he continues. “We are not environmental regulators.”
The IFC’s Kyte says one of the challenges for Equator banks is quality control—understanding how the principles can be applied across different business models. She says the success of the EPs could be measured in terms of results on the ground and in terms of whether risk is assessed in a meaningful way within banks.
The Baku-Tbilisi-Ceyhan oil pipeline is at the heart of environmentalists’ claims that commercial banks are not applying the Equator Principles in good faith. Critics maintain it contravenes the principles on more than 30 counts
One of the chief criticisms of the Equator banks is that they are not transparent about the decisions they make on projects.“If you have principles,you need to give external parties the opportunity to criticize or judge how you apply those principles,” says Frijns, adding that, in the case of the BTC pipeline,ABN AMRO referred to IFC environmental and social impact studies. “We have never seen those studies, so it is difficult to judge whether the project is Equator-compliant or not,” Frijns continues.
BankTrack wants to see some form of formal information disclosure from the Equator banks, similar to that implemented by the IFC for projects it finances, as well as some means of redress for those stakeholders affected by the principles.The Equator banks, however, are reluctant to disclose information pertaining to particular projects, saying it could breach client confidentiality.
“Client confidentiality is something NGOs have struggled to understand,” says ABN AMRO’s Burrett, adding that unlike the World Bank and the IFC, which are often “lenders of last resort,” commercial banks did not have the leverage to demand higher levels of disclosure from borrowers.“ They [NGOs] want some sort of ombudsman mechanism,which is difficult when you are dealing with a syndicate of banks—including non-Equator banks— which differs from deal to deal,” Burrett continues. Bray observes that the Equator banks are “already regulated by the fact that they operate in the glare of NGO scrutiny.” He stresses that some environmental and social impact studies were completed before banks got involved in a project. “We need to sit down with NGOs and explain whether banks may have some influence on how a project moves forward,” he says.
Burrett believes it will be some time before the level of trust between the NGO community, project sponsors and financial institutions improves. Kyte says NGOs need to learn the business of commercial banks.“There is a huge education process needed within the NGO community as to how banking really works,” she says. “A similar process needs to occur within banks as to how NGOs work and what their concerns are.” ■