Financial institutions have increasingly adopted responsible project financing standards. But NGOs say the standards themselves fall short and need reform

 

Financial institutions have increasingly adopted responsible project financing standards. But NGOs say the standards themselves fall short and need reform

Large infrastructure projects such as oil and gas pipelines, mines and telecommunications are important for social and economic development. But these projects, if not managed responsibly, can work against the interests of local communities and lead to environmental disasters.

Mega projects require massive investments, often made possible by a consortium of banks and international financial institutions such as the International Finance Corporation and government-backed export credit agencies.

Banks, export credit agencies and international lending organisations therefore have a crucial role to play. They should finance only those projects that meet the criteria for sustainable development and shun those that fail to meet internationally agreed principles on human rights and the environment.

In order to meet such expectations, the banking industry launched the Equator Principles, a set of voluntary social and environmental guidelines for project financing, in 2003. From the inaugural 10 signatories, which include Citibank, UniCredit, ING, Barclays, Credit Suisse, ABN Amro and Westpac, the list has grown to more than 70 banks.

The Equator Principles apply to projects with total capital cost of more than $10m. Signatory banks commit to not providing loans to projects where the borrower cannot comply with the social and environmental policies contained in the principles.

Over the years, the Equator Principles have become part and parcel of leading banks’ social and environmental risk management process. Typically, banks require the project applicant to submit an environmental impact assessment to determine if the principles are being met or not. In most cases, funding can proceed if the project owner can come up with an acceptable action plan to address social and environmental concerns.

Toughening up

A number of banks have since made efforts to implement the Equator Principles and even extend those principles to other transactions beyond project financing.

For example, at Standard Chartered Bank, which applies the principles to project financing, social and environmental standards now govern all lending operations. Standard Chartered introduced position papers in 2009 on sensitive industries including mining, oil and gas, forestry and palm oil, ship breaking, fossil-fuelled power generation, biofuels and dams.

“With the implementation of sector position papers, we have gone beyond the Equator Principles,” says Yulanda Chung, head of sustainability at Standard Chartered. “We selected these sectors because we know they have high impact on the environment and communities.”

Giving an example of how Standard Chartered is extending social and environmental principles to non-project-financing transactions, Chung says the bank advised China Forestry Holdings to work towards obtaining Forest Stewardship Council certification for plantations in the run-up to its initial public offering on the Hong Kong Stock Exchange recently. She says committing to FSC certification helped China Forestry to get a favourable response during roadshows for the IPO.

Citibank, one of the founding members of the Equator Principles, has also extended their use to non-project-financing operations. “The Equator Principles were the starting point for looking at broader environment and social risk management,” says Shawn Miller, Citigroup’s global director of environmental and social risk management (ESRM). Miller says the bank has expanded the environment and social risk management policy to other transactions as well, including corporate loans, bond underwriting and equity underwriting.

Miller says responsible lending practices have reduced the bank’s risk and increased clients’ confidence in the bank’s services. “Many clients view Citi as a sustainability leader, and they appreciate and value our advice. We have deepened and strengthened a number of client relationships because of the expertise we can bring to the table.”

Not measuring up

While NGOs agree there are banks that have made genuine efforts, they say many banks are not living up to the principles they have committed to. They also say that in many cases banks’ standards fall short of internationally agreed principles on human rights and environment.

BankTrack, an international network of civil society groups that monitors commercial banks, says bold steps are needed to reform the Equator Principles to make them effective.

In an open letter to the banking sector, written in January, BankTrack points out that banks continue to finance projects that have adverse social and environmental impact such as giant dams, huge mining projects, oil and gas pipelines, coal power plants and paper mills. John Frijns, BankTrack’s coordinator, complains that dialogue with banks over the years has achieved little.

BankTrack lists on its website a number of “dodgy deals” being supported by some of the Equator Principles signatory banks and other financial institutions. These include:

• Gunns Paper Mill in Tasmania, Australia, involving Credit Suisse, JP Morgan Chase, Macquarie Bank, Nordea, Finnvera and OeKB;
• the Rio Madeira dam project in Brazil, involving Banco Bradesco, Banco do Brasil, Banco do Espirito Santo and Banif;
• Kashagan Oil Project in Kazakhstan, involving Bank of Tokyo, BNP Paribas, Citigroup, ING Group, Mizuho, Société Générale and Sumitomo Mitsui Banking Corporation);
• the Theun-Hinboun dam expansion project in Laos, involving ANZ, BNP Paribas and Ex-Im Bank of Thailand.

“We often see many private banks simply state that they are complying with social and environmental standards without actually demonstrating them in projects,” says Doug Norlen, policy director of Pacific Environment, a San Francisco-based non-profit group campaigning for responsible finance. He says the Equator Principles are narrow in scope, fail to incorporate human rights safeguards and are largely ineffective.

Lack of transparency and disclosure particularly worry campaigners. “Often, the environment and social impact assessments of projects don’t describe what specific benchmarks within the applied social and environmental standards are to be met and how the project will meet those standards,” Norlen says.

The Equator Principles themselves are based on the IFC’s policy and performance standards on social and environmental sustainability. NGOs say the IFC’s standards are also inadequate and require reforms. The IFC – the World Bank’s private sector investment arm – has been repeatedly criticised for poor implementation of performance standards and financing projects that activists allege violate its own principles.

For example, World Bank president Robert Zoellick ordered suspension of IFC investments in palm oil companies in September 2009. An investigation was launched after NGOs lodged a complaint with the IFC’s compliance adviser ombudsman raising concerns about the adverse environmental and social impacts of Wilmar Group’s palm oil operations in Indonesia, financed by the IFC.

“Our research shows a big gap in the IFC standards around forced evictions and land acquisitions that lead to displacement of communities affected by the project,” says Jennifer Kalafut, co-director of International Accountability Project, which campaigns against developments that cause forced displacement of communities.

She says IFC standards fall short of other international codes such as the UN’s guidelines on development and forced eviction and displacement.

The IFC is in the middle of reviewing its policy and performance standards on social and environmental sustainability and disclosure policy. An international coalition of civil society groups is preparing a draft that will make the IFC policy and standards more stringent. Kalafut, whose organisation is part of the coalition, says: “The main issues with IFC relate to a lack of due diligence and disclosure and failing to ensure that their clients are conducting appropriate consultations with the affected community.”

The IFC invested more than $32bn in 2008 in private companies operating in developing countries. Advocacy groups say the IFC has substantial influence on the standards applied by the private banks in project financing. They say the IFC standards are not only meant to protect communities and the environment by responsible lending, but also set examples for private banks.

New approaches

Norlen says relying too much on the IFC performance standards has prevented development of competitive standards and approaches.

The export credit agencies of the members of the OECD, a key player in project financing, also refer to the performance standards as a common environmental and social benchmark for export credits and loan guarantees. Still, projects supported by export credit agencies often run into controversy for ignoring social and environmental impacts. (See EthicsWatch)

Observers say ineffective standards and poor implementation mean multinational companies building large projects or environmentally and socially sensitive heavy industries can often get around the standards. “Heavy industries use policies of the IFC and the Equator Principles to get a stamp of approval from a legitimate institution. And they use this approval to attempt to demonstrate decreased project risk and increase their availability of financing,” Norlen says.

“For heavy industry, this is often a way to greenwash their projects,” he concludes.

Equator Principles: what do NGOs want from banks?

1. Open up, by improving the transparency of the Equator Principles through full disclosure of banks’ implementation efforts on the project level, and disclosure of all information related to a project’s social and environmental impact.

2. Be accountable, by improving the community consultation process, establishing guidelines for project grievance mechanisms, and establishing an accountability mechanism for the EPs themselves.

3. Expand the scope beyond project finance transactions to general corporate loans, asset management activities and initial public offerings.

4. Stop financing climate change, by developing exclusion criteria for projects and activities with a high impact on carbon emissions, such as fossil fuel exploration projects and coal power plants, and by developing stringent climate targets for other projects.

Source: Open letter sent to Equator banks by BankTrack, an international coalition of NGOs that monitors commercial banks

IFC standards: the changes that NGOs want

• Require full transparency for extractive-industry-related contracts and payments to governments.
• Adopt new, more rigorous indicators of gender impact, displacement impacts, poverty reduction and sustainability for IFC projects.
• Put into practice and report publicly how IFC and its clients ensure free, prior and informed consent of communities for projects with significant impacts.
• Revise project categorisation criteria, and ensure implementation that is consistent with these criteria.
• Disclose more information, such as project implementation and completion reports, including specific provisions to safeguard human rights.

Source: International Accountability Project