Equator Principles

The Equator Principles (EP) are a set of environmental and social benchmarks for managing environmental and social issues in development project finance globally. Once adopted by banks and other financial institutions, the Equator Principles commit the adoptees to refrain from financing projects that fail to follow the processes defined by the Principles. 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). 60 financial institutions (April 2008) 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 organizations (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

The Equator Principles state that adopting financial institutions will provide loans directly to projects only under the following circumstances:

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The Principles apply to projects over 10 million US dollars.

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 biodiversity, 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.

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 an '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 hast 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 7: Independent Review

For the Assessment, Assessment Plan and consultation process.

Principle 8: Covenants

Incorporation of covenants 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 unsuccessful, 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. [ [http://riskybusiness.wordpress.com/2006/07/06/new-equator-principles-released-today/ New Equator Principles Released Today! « Risky Business ] ]

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. [ [http://www.banktrack.org/?show=news&id=83 B a n k T r a c k - private finance : a public interest ] ]

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. [ [http://riskybusiness.wordpress.com/2008/01/12/equator-principles-signatories-progress-with-disclosure/ Equator Principles Signatories: Progress with Disclosure « Risky Business ] ]

The progress made by the 56 EP signatories on the 13 December 2007 was as follows:
* 33 - Reported (including some in the 1st year grace period)
* 10 - In the 1st year grace period
* 9 - No information made available
* 4 - Will report soon

Institutions which have adopted the Equator Principles

As of February, 2006, the following institutions have adopted the principles:
* ABN AMRO Bank, N.V.
* Banco Bradesco
* Banco do Brasil
* Banco Itaú
* Bank of America
* Barclays plc
* BBVA
* BES Group
* BMO Financial Group
* BTMU
* Caja Navarra
* Calyon
* CIBC
* Citigroup Inc.
* Credit Suisse Group
* Dexia Group
* Dresdner Bank
* EKF
* FMO
* Fortis
* HBOS
* HSBC Group
* HVB Group
* ING Group
* JPMorgan Chase
* KBC
* Manulife
* MCC
* Millennium bcp
* Mizuho Corporate Bank
* Nedbank Group
* Rabobank Group
* Royal Bank of Canada
* Royal Bank of Scotland
* Scotiabank
* SMBC
* Société Générale
* Standard Chartered Bank
* Unibanco
* Wells Fargo
* WestLB AG
* Westpac Banking Corporation

Criticism 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, 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. [ [http://www.equator-principles.com/btc.shtml BTC Project is the First Major Test of the Equator Principles ] ] [www.abnamro.com/com/about/data/abnamro_btcpipeline.pdf ] [www.ifc.org/ifcext/btc.nsf/Content/MultistakeholderForumMeetingsReport]

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. [ [http://www.banktrack.org/doc/File/Our%20Publications/BankTrack%20fact%20sheets/What%20are%20the%20Equator%20Principles.pdf] Dead link|date=March 2008] 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-"un"friendly bank in the Netherlands, with estimated annual "indirect" CO₂-emissions of almost 250 million tonnes 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. [http://www.milieudefensie.nl/klimaat/publicaties/rapporten/bankenklimaatrapport (page 11)]

ee also

*Corporate social responsibility
*Ethical investing
*Ethical banking
*Global warming
*Income redistribution
*Quality
*Socially responsible investing
*Social security
*Special purpose entity
*Universal health care

References

External links

* [http://www.equator-principles.com www.equator-principles.com] Official website of the Equator Principles.
* [http://www.banktrack.org/?show=23&visitor=1 www.BankTrack.org] NGO website with fact sheet on the Equator Principles and critical comments.
* [http://www.banktrack.org/?show=news&id=83 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.