Equator Principles III: Helping Banks ‘Get It Right’

Authors

• John Hodges

  Former Vice President, BSR

John Hodges, Director, Financial Services, BSR

Having spent almost a decade at the World Bank advising governments in Africa, Asia, Eastern Europe, and South America on major private-sector led and financed infrastructure investments, I saw a lot of half-baked projects. In many cases, I often found myself wondering, “Why would a reputable commercial bank even consider funding this project?”

My reservations stemmed from my experience with governments and project developers who improperly addressed social and environmental concerns up front, which often led to project delays and cost increases down the road. For example, in 2006 I spent a year in Kosovo working on a major new power plant that is still in the project development phase today as a result of lingering social and environmental issues—even while Kosovo continues to experience regular power outages. 

This week, these issues will be addressed by members of the Equator Principles Association—which includes BSR members ANZ, Bank of America, BNP Paribas, JP Morgan Chase, and Sumitomo Mitsui Banking Corporation—during their annual meeting in Washington, D.C. The primary topic will be the adoption of a third update to the Equator Principles, which are a set of minimum standards that 75 member banks use to assess environmental and social risks in large-scale infrastructure and industrial projects. 

This updated version, referred to as Equator Principles III (EP III), will expand the Principles’ jurisdiction beyond project finance to also include project-related corporate loans and bridge loans, which are a common method for financing large-scale infrastructure and industrial projects. EP III will also incorporate the latest evolution of social and environmental standards and increase its emphasis on the protection of human rights and the mitigation of climate change.

In a recent Guardian article, "Sustainable Finance: How Far Have the Equator Principles Gone?," the author discusses the criticism of the EP III for not going far enough. Most agree that the Principles, which have always been based upon and aligned with International Finance Corporation’s Performance Standards, should include new language regarding human rights and climate change. However, the key is in exactly how banks will follow the mitigation practices.

As part of the EP III consultation process, BSR participated in events in Asia, Europe, and South America to assess the updates and provide detailed recommendations for improving the EP III draft. In our view, EP III does a good job of further addressing environmental and social performance risk management but could also benefit from some further standardization. For example, EP III could require the integration of the Guiding Principles on Business and Human Rights—which are the established international human rights framework—into project assessment, review, and implementation.

Too often, banks want to do the right thing but are unsure of exactly how to do it. Though improved standardization is still needed, the EP III will provide much-needed further guidance.