Royal Dutch Shell Plc  .com Rotating Header Image

Financial Times: Equator principles: Radical plan is not without critics

By Demetri Sevastopulo
Published: June 9 2006 12:39 | Last updated: June 9 2006 12:39

In 2003, 10 European and US banks agreed to adopt a set of guidelines named the Equator Principles which were aimed at infusing environmentally and socially sound practices into their project finance businesses.
 
Crafted with the help of the International Finance Corporation – the private-sector lending arm of the World Bank – the principles were based on the IFC’s social and environmental guidelines for sustainable development. They included guidelines on a host of environmental issues and other areas such as labour standards.

The unprecedented move was partly designed to defuse increasing criticism from non-governmental organisations that the banks were funding environmentally controversial projects. But it also stemmed from a perception that there was increasing reputational – and therefore financial – risk attached to socially irresponsible investing.

Three years on, the IFC and the Equator banks stress that the principles have had a dramatic impact. NGOs concede that some progress has been made but they argue that the principles suffer from a lack of transparency and accountability.
 
‘It is all but impossible to make qualitative judgments about how the banks are performing’ 
 
Since the Equator Principles were adopted, the number of member banks has grown from 10 to 41. Some of the initial leaders – ABN Amro, Barclays, WestLB and Citigroup – have been joined by other leading US and European banks, some of the largest Japanese banks and Brazilian financial institutions.

“The fact is that you have 41 banks co-ordinating on environmental and social issues,” says Suellen Lazarus, a senior adviser at ABN Amro. “It is a miracle. And I don’t think that anybody anticipated that.”

Reed Huppman, a partner at environmental consultancy ERM, says he has been surprised at how little resistance the principles have met from project finance specialists in the banks. He says he expected more dragging of feet.

Rachel Kyte, director of the IFC’s environment and social development department, says the Equator Principles have helped banks act on environmental and social issues. Instead of using cost to compete the problem away, she says, there is now an industry-wide acceptance that the principles are beneficial. They have also become an example of how voluntary action can transform markets.

Pam Flaherty, senior vice-president for global community relations at Citigroup, says the Equator Principles have had a “stunning impact” on lending practices. “Three years ago, prior to the launch of the Equator Principles, we did not have an environmental and risk management policy or system or director,” she says.

“Not only have we adopted the Equator Principles and helped create them, but we have also created a broader environmental and social risk management system which has happened in many other financial institutions as well. So we have had an impact even beyond the project finance.”

But critics suggest that some banks continue to fund projects that do not meet the principles.

BankTrack, a global coalition of NGOs that includes Friends of the Earth and the WWF-UK, earlier this year compiled a report which concluded that while the principles were a “welcome development” they marked only the beginning of a path to sustainable development. Further, they said the principles suffered from “serious flaws”.

“Given the near total lack of publicly available information on implementation, it is all but impossible to make qualitative judgments about how the banks are performing in terms of implementing their environmental and social management systems,” the report said.

The report welcomed the greater number of banks now participating in the principles but said: “It is unclear how many of these banks are taking the requirements seriously.”

The NGOs are not the only ones with concerns. Peter Woicke, former executive director of the IFC who was instrumental in working with the banks to create the Equator Principles, says he is somewhat disappointed by what he sees as a lack of transparency and accountability.

“I was very excited when the banks established these Equator Principles,” says Mr Woicke. “In the beginning, the NGOs immediately complained that there was no inspection panel or ombudsman, any accountability. I said: ‘Just give the banks some time, it will come eventually.’ My disappointment is that very much it doesn’t seem to be coming.”

Responding to the charges that the banks have not been transparent, Ms Flaherty cites the increasing number of sustainability and corporate citizenship reports produced by the banks.

Michelle Chan-Fishel of Friends of the Earth agrees that Citigroup, along with ABN Amro and HSBC, have done a reasonable job in implementing the principles. The problems, she contends, are with some of the other banks which are less proactive. She also points out that some leading project finance banks, such as Société Générale and BNP Paribas, have refused to adopt the principles.

Ms Flaherty says the issue is less that some of the banks are laggards, and more that some banks are still learning the ropes because they were latecomers.

She also disagrees with Mr Woicke and BankTrack, insisting that there is no need for an independent monitor. She says this is reinforced by the recently revised IFC standards, which are scheduled to be adopted by the Equator Bank in July.

“In the new IFC performance standards which are the heart of the new Equator Principles, there is in fact a requirement for a grievance mechanism on the part of clients. And that is where that role needs to be. It needs to be embedded in the project on the ground.”

NGOs point to certain projects as evidence that the principles are not faithfully being implemented. One of the projects that attracts much negative attention is the Sakhalin-II oil and gas project being led by Shell. Environmental groups have lambasted ABN Amro – one of several banks shortlisted to fund the project – over its potential involvement in a project that they say has serious environmental problems.

Ms Kyte dismisses suggestions that Sakhalin-II is evidence that the principles are not being followed adding that some NGOs had taken out full-page advertisements in newspapers was actually a sign of progress. “The NGOs were going after ABN Amro because ABN Amro were doing their due diligence,” says Ms Kyte. “That is great … 10 years ago, that is where people dreamed we would be.”

For a full text of the code go to www.equator-principles.com.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Financial Times: Equator principles: Radical plan is not without critics”

Leave a Comment

%d bloggers like this: