Equator Principles – Progress or Failure?

Last week, over 100 NGOs  from around the world called for major reforms of the Equator Principles. Are these Principles, adopted by major project finance banks and export credit agencies (ECAs), really the failure they are made out to be?

 In their letter to Equator Banks, the NGO signatories note that

“Today we find ourselves continuing to campaign against the very same projects that we expected the Principles to prevent or significantly improve: supersized dams blocking life-supporting rivers, driving thousands of people from their submerged villages and lands; huge mining projects scarring entire mountains and polluting rivers and seas with their waste; oil and gas pipelines carrying their toxic load straight through devastated forests and threatening marine sanctuaries; coal power plants belching out millions of tons of greenhouse gases into our already fatigued atmosphere; enormous paper mills with insatiable appetites that devour the last wilderness areas, etc. Much to our disappointment, the Equator Principles allow for all of these disgraces to proceed, only now in an ‘Equator compliant’ mode.”

In reality, the Equator Principles (launched in 2003 and revised in 2006 as 'EP2') were not designed to stop investment in certain sectors mentioned above. Instead, they provided a ‘good practice’ benchmark and, probably more importantly, were designed to counteract a downward spiral of project developers migrating towards financing sources with the lowest environmental, social and transparency requirements.

The question I have is this: are the Equator Principles (and financial institutions and ECAs trying to adopt them) the drivers of an upward or downward spiral? How do sovereign wealth funds and state-owned organizations, which have emerged as major investors in large scale and extractive projects in emerging markets, fit into this picture?

5 Comments to Equator Principles – Progress or Failure?

  1. Mary Walsh says:

    I’ve worked on a number of projects where the Equator Principles have been invoked and it’s true that they do raise the issue of environmental compliance and sustainability to a level that was previously not seen. In fact, they’ve played an important role in getting developers to meet best practice and not to cut corners.

    However, as noted in the post above, they don’t appear to guide the underlying decision as to what investments will be made – rather, they strive to ensure that the projects in which the investment is made meets certain minimum requirements.

    On the issue the NGOs above raise, alas it will take more than a reworking of the Equator Principles – rather what will be needed is a fundamental shift in the investment psyche – a holistic consideration of the impact of the project.
    To that end, the NGO appeal may be missing the point.

  2. Thanks for your comments, Mary. The required shift you mentioned can surely not just be imposed by some sort of guidelines focused on banks (although they also have a role to play). Perhaps the weak political outcome in Copenhagen illustrated that better than anything…

  3. I contacted Herman Mulder, one of the key people behind the development of the Equator Principles (and now also blogging http://www.hermanmulder.nl/) to hear about his recollections of why the Principles were developed. He provided the following response:

    “Equator Principles meant creating a level playing field amongst the lead PF transactors, each of which had, in isolation, business principles but yet where struggling with civil society reactions to their involvement. Such level playing field by sector leaders is crucial for advancement of more responsible business practices: they should raise the bar and improve market practices.”

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