In Canada, credit and debit (ATM) cards are king. We put our money in, the banks pay no interest and they charge us to take it out. This is a topic of some controversy in Canada media. A topic that gets less media play but actually damages more people is the effect of project loans on communities and the environment. It would be unfair for the law to make banks liable for all of their borrowers bad acts, but there is at least one important set of principles, the Equator Principles, which are taking a step towards reducing the downside of project lending. They accomplish this through requiring project pre-loan assessment, reporting, monitoring and compliance. This has the possibility of reducing risk and increasing accountability of banks and their clients. There are possible criticisms of the EPs, but they are a starting point and hopefully a road towards better and better environmental and human rights practices.

1. What are the Equator Principles?. 1

2. Equator Principles are full of holes. 2

3. Bottom line - the Equator Principles are a step towards stronger CSR.. 3

1. What are the Equator Principles?

The Equator Principles (EPs) are “[a] financial industry benchmark for determining, assessing and managing social & environmental risk in project financing”[1]. Project financing is defined in the EPs as ““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”.[2] The EPs provide a floor for borrowers' CSR obligations based on International Finance Corporation and World Bank standards[3]. The EPs first require categorization (A, B, C in decreasing order of risk[4]) based on internal due diligence to assess environmental and social impact (Principle 1). The assessment must “establish to a participating EPFI’s satisfaction the project's overall compliance with, or justified deviation from, the respective Performance Standards and EHS Guidelines” (Principle 3). For category A and B projects in developing countries, the borrower must create a management system (Principle 4), consult with the community (Principle 5), and establish a grievance system (Principle 6). The EPFI must appoint an independent reviewer of the assessments (Principle 7) and, in category A and some B projects, appoint an ongoing independent monitor (Principle 9).

The EPs state explicitly that they do not create “rights” or “liabilit[ies]”[5]. However, once the parties include the principles as a covenant in the project financing agreement (Principle 8) the lender gains rights in the event of a breach by the borrower:

For Category A and B projects, the borrower will covenant in financing documentation:

a) to comply with all relevant host country social and environmental laws, regulations and permits in all material respects;

b) to comply with the AP (where applicable) during the construction and operation of the project in all material respects;

c) to provide periodic reports in a format agreed with EPFIs (with the frequency of these reports proportionate to the severity of impacts, or as required by law, but not less than annually), prepared by in-house staff or third party experts, that i) document compliance with the AP (where applicable), and ii) provide representation of compliance with relevant local, state and host country social and environmental laws, regulations and permits; and

d) to decommission the facilities, where applicable and appropriate, in accordance with an agreed decommissioning plan.

Where a borrower is not in compliance with its social and environmental covenants, EPFIs will work with the borrower to bring it back into compliance to the extent feasible, and if the borrower fails to re-establish compliance within an agreed grace period, EPFIs reserve the right to exercise remedies, as they consider appropriate.[6]

The “appropriate” remedies are not defined, which is a topic of some concern.

2. Equator Principles are full of holes

There is definitely room for improvement in the EPs although to be fair the financial institutions who have adapted them, the EPs are at least a step in the right direction. The principle critiques include vagueness, conflicts of interest, and the unrealistic application of the lenders’ rights under Principle 8. Vague terms like compliance with laws in “material respects” are too vague given that historically environmental abuse has not been considered “material” (Principle 8 (a)).

The borrower is in conflict of interest under the grievance process because it runs the process but has an interest in not remedying grievances that cost more to fix than the cost of the breach (Principle 6). The borrowers may have a defence because of the vague requirement that they must be bring a project back into compliance “to the extent feasible”. This may permit them to argue that a fix would be infeasible to carry out, if an unexpected social or environmental issue arose after the assessment plan and the start of the project.

The lender is in conflict of interest in granting (Principle 2), and monitoring (Principle 9) loans, because the higher standard demanded, the less likely the banks are to grant profit making loans. While they are committed to taking steps to deal with covenant non-compliance under Principle 8, it is unlikely that they will take steps like calling in a loan or attacking the project in the media that might be required to prevent the project’s non-compliance. However, the lender’s interests are linked to ensuring the financial return on the loan so it is unlikely that they would call in the loan or ask a court for an injunction to stop an action of the borrower.

3. Bottom line - the Equator Principles are a step towards stronger CSR

While there are certainly flaws in the EPs there are two powerful reasons to support them. First, the compliance covenants provide an example of a mandatory CSR standard. Second, they represent a statement of intention to include CSR in the loan granting process. This at the minimum takes away the banks’ claims that they have no responsibility for the bad acts of their borrowers. This shift in tone will help in ensuring that CSR will become more and more obligatory. Awareness of the standards combined with independent monitoring will enable communities and NGOs to bring forward grievances and “name and shame”. This has the potential to separate out the bad from the good corporate apples.