Equator Principles
Encyclopedia
The Equator Principles are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing.
Project financing, a method of funding in which the lender looks primarily to the revenues generated by a single project both as the source of repayment and as security for the exposure, plays an important role in financing development throughout the world (See http://www.bis.org/publ/bcbs118.pdf). Project financiers may encounter social and environmental issues that are both complex and challenging, particularly with respect to projects in the emerging markets.
The Equator Principles in full can be found at http://www.equator-principles.com/resources/equator-principles.pdf
Equator Principles Financial Institutions (EPFIs) commit to not providing loans to projects where the borrower will not or is unable to comply with their respective social and environmental policies and procedures that implement the EPs.
The Equator Principles were developed by private sector banks – led by Citigroup
, ABN AMRO
, Barclays and WestLB
– and were launched in June 2003. The banks chose to model the Equator Principles on the environmental standards of the World Bank
and the social policies of the International Finance Corporation
(IFC). 67 financial institutions (October 2009) have adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects around the world. In July 2006, the Equator Principles were revised, increasing their scope and strengthening their processes.
The Equator Principles represent a significant industry-wide initiative. They were drafted by the banks in consultation with the IFC, project sponsors, project engineers, and non-governmental organization
s (NGOs). While they have generally been well received, some project sponsors have said they go too far, while some NGOs say they do not go far enough.
The Principles also extend to project finance advisory activities. In these cases, EPFIs commit to make the client aware of the content, application and benefits of applying the Principles to the anticipated project, and request that the client communicate to the EPFI its intention to adhere to the requirements of the Principles when subsequently seeking financing.
, including endangered species and sensitive ecosystems, use of dangerous substances, major hazards, occupational health and safety, fire prevention
and life safety, socio-economic impacts, land acquisition and land use, involuntary resettlement, impacts on indigenous peoples and communities, cumulative impacts of existing projects, the proposed project, and anticipated future projects, participation of affected parties in the design, review and implementation of the project, consideration of feasible environmentally and socially preferable alternatives, efficient production, delivery and use of energy, pollution prevention
and waste minimization, pollution controls (liquid effluents and air emissions) and solid and chemical waste management.
linked to compliance. Compliance with the plan is required in the covenant. If the borrower doesn't comply with the agreed terms, the bank will take corrective action, which if successful, could ultimately result in the bank cancelling the loan and demanding immediate repayment.
The Equator Principles apply globally and to all sectors and have been revised in the following ways:
NGOs welcomed the revisions but remained cautious, arguing that the EPs still suffered from fundamental governance and accountability problems. They want the EP banks to adopt more robust governance and implementation systems, such as a procedure for dealing with "free riders" and a regular reporting requirement.
The progress made by the 67 EP signatories on the October 2009 was as follows:
One of these is that the Principles will not make a real difference. They argue the case of the Baku-Tbilisi-Ceyhan pipeline
, which in 2004 was financed by eight Equator Principles' banks and the IFC despite an NGO assessment which alleged 127 breaches of the Principles. The banks and IFC said they were confident that the Equator Principles were followed, and said an independent consultant had confirmed this assessment.
Another expressed concern was that the banks might lobby IFC to weaken its standards on which the Principles are based. The banks point out that IFC revised and strengthened its policies in 2006 and that the banks correspondingly strengthened the Equator Principles in the same year. Other criticisms include alleged lack of enforcement and accountability, free-riders, and that the scope of the principles is limited to project finance only. Several banks have sought to address these concerns by publishing summaries of their Equator Principles screening, including the number of projects they turned down for noncompliance.
Some NGOs say that one of the adopting banks, ABN AMRO, is the most climate-unfriendly bank in the Netherlands, with estimated annual indirect CO2-emissions of almost 250 million tonne
s in 2005 from industries to which it provides financial services. NGOs say this is just over the annual CO2-emissions of the Netherlands and almost 1% of the total annual worldwide CO2-emissions. ABN AMRO defends its environmental record and has announced steps to reduce its direct emissions, but some NGOs say it is the indirect emissions through their clients that make global banks such important targets in climate change
.
Project financing, a method of funding in which the lender looks primarily to the revenues generated by a single project both as the source of repayment and as security for the exposure, plays an important role in financing development throughout the world (See http://www.bis.org/publ/bcbs118.pdf). Project financiers may encounter social and environmental issues that are both complex and challenging, particularly with respect to projects in the emerging markets.
The Equator Principles in full can be found at http://www.equator-principles.com/resources/equator-principles.pdf
Equator Principles Financial Institutions (EPFIs) commit to not providing loans to projects where the borrower will not or is unable to comply with their respective social and environmental policies and procedures that implement the EPs.
The Equator Principles were developed by private sector banks – led by Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, ABN AMRO
ABN AMRO
ABN AMRO Bank N.V. is a Dutch state-owned bank with headquarters in Amsterdam. It was re-established, in its current form, in 2009 following the acquisition and break up of ABN AMRO Group by a banking consortium consisting of Royal Bank of Scotland Group, Santander and Fortis...
, Barclays and WestLB
WestLB
WestLB AG is a European commercial bank based in Düsseldorf in Germany which is partly owned by the German state of North Rhine-Westphalia. The letters LB in the name stand for Landesbank. The Landesbanken are a group of state owned banks unique to Germany...
– and were launched in June 2003. The banks chose to model the Equator Principles on the environmental standards of the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and the social policies of the International Finance Corporation
International Finance Corporation
The International Finance Corporation promotes sustainable private sector investment in developing countries.IFC is a member of the World Bank Group and is headquartered in Washington, D.C., United States....
(IFC). 67 financial institutions (October 2009) have adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects around the world. In July 2006, the Equator Principles were revised, increasing their scope and strengthening their processes.
The Equator Principles represent a significant industry-wide initiative. They were drafted by the banks in consultation with the IFC, project sponsors, project engineers, and non-governmental organization
Non-governmental organization
A non-governmental organization is a legally constituted organization created by natural or legal persons that operates independently from any government. The term originated from the United Nations , and is normally used to refer to organizations that do not form part of the government and are...
s (NGOs). While they have generally been well received, some project sponsors have said they go too far, while some NGOs say they do not go far enough.
The Principles
See the link http://www.equator-principles.com/resources/equator-principles.pdf for the complete Equator Principles. EPFIs will only provide loans to projects that conform to Principles 1-9 below:Scope
The Principles apply to all new project financings globally with total project capital costs of US$10 million or more, and across all industry sectors. In addition, while the Principles are not intended to be applied retroactively, we will apply them to all project financings covering expansion or upgrade of an existing facility where changes in scale or scope may create significant environmental and/or social impacts, or significantly change the nature or degree of an existing impact.The Principles also extend to project finance advisory activities. In these cases, EPFIs commit to make the client aware of the content, application and benefits of applying the Principles to the anticipated project, and request that the client communicate to the EPFI its intention to adhere to the requirements of the Principles when subsequently seeking financing.
Principle 1: Review and Categorisation
The risk of the project is categorized in accordance with internal guidelines based upon the environmental and social screening criteria of the IFC. Projects are classified, relating to social or environmental impacts, in Category A (significant impacts), Category B (limited impacts) and Category C (minimal or no impacts).Principle 2: Social and Environmental Assessment
For all medium or high risk projects (Category A and B projects), sponsors complete an Environmental Assessment, the preparation of which must meet certain requirements and satisfactorily address key environmental and social issues.Principle 3: Applicable Social and Environmental Standards
The Environmental Assessment report addresses baseline environmental and social conditions, requirements under host country laws and regulations, applicable international treaties and agreements, sustainable development and use of renewable natural resources, protection of human health, cultural properties, and biodiversityBiodiversity
Biodiversity is the degree of variation of life forms within a given ecosystem, biome, or an entire planet. Biodiversity is a measure of the health of ecosystems. Biodiversity is in part a function of climate. In terrestrial habitats, tropical regions are typically rich whereas polar regions...
, including endangered species and sensitive ecosystems, use of dangerous substances, major hazards, occupational health and safety, fire prevention
Fire prevention
Fire Prevention is a function of many fire departments. The goal of fire prevention is to educate the public to take precautions to prevent fires, and be educated about surviving them. It is a proactive method of reducing emergencies and the damage caused by them. Many fire departments have a Fire...
and life safety, socio-economic impacts, land acquisition and land use, involuntary resettlement, impacts on indigenous peoples and communities, cumulative impacts of existing projects, the proposed project, and anticipated future projects, participation of affected parties in the design, review and implementation of the project, consideration of feasible environmentally and socially preferable alternatives, efficient production, delivery and use of energy, pollution prevention
Pollution prevention
Pollution prevention ' describes activities that reduce the amount of pollution generated by a process, whether it is consumer consumption, driving, or industrial production...
and waste minimization, pollution controls (liquid effluents and air emissions) and solid and chemical waste management.
Principle 4: Action Plan and Management System
Based on the Environmental Assessment, Equator banks then make agreements with their clients on how they mitigate, monitor and manage those risks through a 'Social Environmental Management Plan'.Principle 5: Consultation and Disclosure
For risky projects, the borrower consults with stakeholders (NGOs and project affected groups) and provides them with information on the risks of the project. The borrower has to consult the project affected communities in a structured and culturally appropriate manner. The process will ensure free, prior and informed consultation for affected communities.Principle 6: Grievance Mechanism
The borrower will establish a grievance mechanism as part of the management system.Principle 8: Covenants
Incorporation of covenantsLoan covenant
A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.Typically,...
linked to compliance. Compliance with the plan is required in the covenant. If the borrower doesn't comply with the agreed terms, the bank will take corrective action, which if successful, could ultimately result in the bank cancelling the loan and demanding immediate repayment.
Principle 9: Independent Monitoring and Reporting
Over the life of the loan, in Category A and, if necessary in Category B, an independent expert is consulted.Principle 10: EPFI Reporting
Each EPFI commits to report publicly at least annually about its Equator Principles implementation processes and experience.Revised Equator Principles Launched in 2006
On 6 July 2006, the Equator Principles Financial Institutions (EPFIs) announced the launch of the final revised Equator Principles. The revised principles reflect revisions to the IFC's Performance Standards, upon which the Equator Principles are in part based.The Equator Principles apply globally and to all sectors and have been revised in the following ways:
- The Principles apply to all project financings with capital costs above USD 10 million. This threshold was lowered from USD 50 million.
- The Principles now also apply to project finance advisory activities.
- The revised Principles now specifically cover upgrades or expansions of existing projects where the additional environmental or social impacts are significant.
- The approach in applying the Principles to countries with existing high standards for environmental and social issues has been streamlined.
- Each EPFI is now required to report on the progress and performance of Equator Principles' implementation on an annual basis.
- Stronger and better social and environmental standards, including more robust public consultation standards.
NGOs welcomed the revisions but remained cautious, arguing that the EPs still suffered from fundamental governance and accountability problems. They want the EP banks to adopt more robust governance and implementation systems, such as a procedure for dealing with "free riders" and a regular reporting requirement.
Annual Disclosure Reports
The Equator Principles website has a disclosure section which provides information on how the EP signatories are progressing with their annual disclosure reports, a requirement of Principle 10.The progress made by the 67 EP signatories on the October 2009 was as follows:
- 52 - Reported
- 12 - In the 1st year grace period
- 3 - No information made available
Institutions which have adopted the Equator Principles
See the Equator Principles website for the up to date list of adopting institutions http://www.equator-principles.comCriticism of the Principles
NGOs have generally welcomed the Principles, but some have expressed concerns over their integrity.One of these is that the Principles will not make a real difference. They argue the case of the Baku-Tbilisi-Ceyhan pipeline
Baku-Tbilisi-Ceyhan pipeline
The Baku–Tbilisi–Ceyhan pipeline is a long crude oil pipeline from the Azeri-Chirag-Guneshli oil field in the Caspian Sea to the Mediterranean Sea. It connects Baku, the capital of Azerbaijan; Tbilisi, the capital of Georgia; and Ceyhan, a port on the south-eastern Mediterranean coast of Turkey,...
, which in 2004 was financed by eight Equator Principles' banks and the IFC despite an NGO assessment which alleged 127 breaches of the Principles. The banks and IFC said they were confident that the Equator Principles were followed, and said an independent consultant had confirmed this assessment.
Another expressed concern was that the banks might lobby IFC to weaken its standards on which the Principles are based. The banks point out that IFC revised and strengthened its policies in 2006 and that the banks correspondingly strengthened the Equator Principles in the same year. Other criticisms include alleged lack of enforcement and accountability, free-riders, and that the scope of the principles is limited to project finance only. Several banks have sought to address these concerns by publishing summaries of their Equator Principles screening, including the number of projects they turned down for noncompliance.
Some NGOs say that one of the adopting banks, ABN AMRO, is the most climate-unfriendly bank in the Netherlands, with estimated annual indirect CO2-emissions of almost 250 million tonne
Tonne
The tonne, known as the metric ton in the US , often put pleonastically as "metric tonne" to avoid confusion with ton, is a metric system unit of mass equal to 1000 kilograms. The tonne is not an International System of Units unit, but is accepted for use with the SI...
s in 2005 from industries to which it provides financial services. NGOs say this is just over the annual CO2-emissions of the Netherlands and almost 1% of the total annual worldwide CO2-emissions. ABN AMRO defends its environmental record and has announced steps to reduce its direct emissions, but some NGOs say it is the indirect emissions through their clients that make global banks such important targets in climate change
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
.
See also
- Corporate social responsibilityCorporate social responsibilityCorporate social responsibility is a form of corporate self-regulation integrated into a business model...
- Ethical investing
- Ethical bankingEthical bankingAn ethical bank, also known as a social, alternative, civic, or sustainable bank, is a bank concerned with the social and environmental impacts of its investments and loans. Ethical banks are part of a larger societal movement toward more social and environmental responsibility in the financial...
- Global warmingGlobal warmingGlobal warming refers to the rising average temperature of Earth's atmosphere and oceans and its projected continuation. In the last 100 years, Earth's average surface temperature increased by about with about two thirds of the increase occurring over just the last three decades...
- Income redistribution
- Socially responsible investingSocially responsible investingSocially responsible investing , also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to consider both financial return and social good....
- Social securitySocial securitySocial security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
- Special purpose entitySpecial purpose entityA special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
- Universal health careUniversal health careUniversal health care is a term referring to organized health care systems built around the principle of universal coverage for all members of society, combining mechanisms for health financing and service provision.-History:...
External links
- www.equator-principles.com Official website of the Equator Principles.
- www.BankTrack.org NGO website with fact sheet on the Equator Principles and critical comments.
- www.BankTrack.org BankTrack comments on revised Equator Principles, July 7, 2006.
- http://www.equator-principles.com/btc.shtml Equator Principles website discussion of the BTC project criticism.
- http://www.abnamro.com/com/about/data/abnamro_btcpipeline.pdf ABN AMRO report on its application of the Equator Principles to the BTC pipeline project.
- http://www.ifc.org/ifcext/btc.nsf/Content/IFCResponsetoESIAPublicComments IFC rebuttal of NGO criticism of its environmental and social assessment of the BTC pipeline project.
- http://viewer.zmags.com/showmag.php?mid=drddw#/page6/ The Equator Principles and IFC Performance Standards in Mining.