Are Equator Principles Still Relevant after Rio+20 and UN PRI?

EP Membership and DistributionThe 2003 launch of the Equator Principles signaled a virtuous spiral for environmental and social risk management in project finance. In light of Rio+20 and emergence of the UN-backed Principles for Responsible Investment are the EPs still relevant?

 

A couple of recent blog entries in The Guardian’s Rio+20: the Earth Summit diaries about the financial sector and Achim Steiner, head of the United Nations Environment Program (UNEP), caught my eyes. They made me reflect on my experience working with multilateral financial institutions, project finance banks, export credit agencies - typically ‘Equator Banks’ - and my involvement in risky capital developments in emerging markets.

 

As blogged in greater detail previously, the Equator Principles are a voluntary environmental and social risk-management framework. In 2002, ABN Amro, Barclays, Citigroup Inc. and WestLB AG spearheaded the development of this banking industry framework.

 

Today, the Equator Principles have been formally adopted by nearly 80 so-called Equator Principles Financial Institutions (more commonly referred to as ‘Equator Banks’) worldwide. In addition, some 15 European Development Finance Institutions and over 30 Export Credit Agencies from the Organisation for Economic Co-operation and Development (OECD) refer to the IFC Performance Standards in their operations.

 

The Equator Principles are generally applied to project finance and advisory mandates that exceed US$ 10 million. Given the need for syndication of large deals in emerging markets that can involve a dozen or more financial institutions, ECAs and political risk insurers, the Equator Principles have become the de facto environmental and social (E&S) risk management standard that is applied in the process of environmental and social due diligence and financing of these deals. Also, many financial institution that adopt E&S risk management or sustainable finance practices tend to apply these across many other products and services.

 

In May 2012, the Mauritius Commercial Bank became the latest (76th) financial institution to adopt the Equator Principles (about which I blogged here). Although the membership of the Equator Principles is still mainly European, it is both growing (see bar chart inserted further above) and diversifying geographically (see below). The Equator Principles Association is transitioning form a largely voluntary and low-budget structure to a professional and niche industry association with more formalized and updated governance structure. Recently, ING (represented by Leonie Schreve, ING’s Head of Environmental and Social Risk Management) was elected as the new Chair of the Equator Principles Association Steering Committee for 2012/13. This is all good news.

 

EP Membership and Distribution by Region

However, ten years since the launch of the Equator Principles, its members’ activities continue to be criticized by advocacy NGOs (see While BankTrack criticizes Equator Principles, IFC celebrates Community of Learning). A strategic review commissioned by the Equator Principles Association resulted in a number of strategic, operational and administrative recommendations (summary published here). The resulting changes and expected launch of the next/3rd generation of the Equator Principles (or EP III) have been delayed a couple of times already (now expected to emerge in October 2012).

 

Perhaps more fundamentally, other voluntary frameworks relating to the financial sector have emerged. These promote the incorporation of Environmental, Social and Governance (ESG) issues into financial decision-making and ownership practices. Given UN’s increasing focus on collaboration with the private sector, this includes the emergence of the United Nations-backed Principles for Responsible Investment Initiative (UN PRI) in 2005. Today, UN PRI boasts over 1,000 investment institutions as signatories. Their combined assets under management is approximately US$ 30 trillion.

 

As an organization, it seems that the Equator Principles Association still needs to continue to make its case why and how its existence adds (unique?) value to its members, its members’ clients and society at large. It may also need to close the gap between leaders and laggards, raise the reporting standards and introduce assurance, scale up further (and faster) and justify why it should not be absorbed by other initiatives which can provide additional benefits. For example, the UN PRI provides much greater co-branding opportunities (cynics refer to this as ‘blue washing’) and the scale of UN PRI means it can spread costs over a much larger membership footprint.

 

Do you feel that the Equator Principles has been successful in improving and scaling up E&S risk management practices in the financial sector? What role should the Equator Principles play post Rio+20 and since emergence of UN PRI?

About the author: Mehrdad Nazari (MBA, MSc, LEAD Fellow) is a Corporate Responsibility & E&S Risk Advisor, and Director of Prizma (US), an advisory practice. Mehrdad was previously Principal Environmental Specialist at the European Bank for Reconstruction and Development (UK), Head of CSR Research at CoreRatings (UK), advising asset managers (merged with DNV/Innovest), and Project Manager and EHS Auditor with Dames & Moore (Germany, now URS), a leading environmental and engineering consultancy. Mehrdad has delivered numerous short courses on IFC Performance Standards, Equator Principles and GRI’s sustainability reporting framework. Access Prizma’s latest newsletters here (or access blog version of Spring 2012 News here).

6 Comments to Are Equator Principles Still Relevant after Rio+20 and UN PRI?

  1. Charles Talbott, VP at Capital Trust Services, left this comment on LinkedIn: “As you so emphasized in your blog, the UN PRI should indeed co-brand with the EP (I-III) to further insure integration of underwriting standards. This would allow for finacial institutions to mandate standardisation of both pre-funding and post-funding transaction reviews and data integrity re-verifications by qualified third parties (such as your firm/Reisurers/ Big Four Audit firms) to insure loan quality and adherence to EP/UN PRI codes”

  2. The EP III draft and associated communications were published this week (August 2012) and are now availble on the EP website at http://www.equator-principles.com/index.php/ep3. The Stakeholder Consultation and Public Comment period continues until Friday 12 October 2012.

  3. […] Are Equator Principles Still Relevant after Rio+20 and UN PRI? […]

  4. […] However, as some advocacy NGOs have pointed out, this does not mean that there will no longer be any fossil fuel or other projects they deem to be unfit for financing by Equator Banks (see also While BankTrack criticizes Equator Principles, IFC celebrates Community of Learning). More broadly, the Equator Principles also need to consider justifying their institutional existence (in light of competing standards and organizations), improve their approaches and consistency (given concerns about gap between leaders and laggards), and deal with growing transparency expectations (see also: Are Equator Principles Still Relevant after Rio+20 and UN PRI?). […]

  5. […] Are Equator Principles still Relevant after Rio+20 and UN PRI? […]

  6. […] Are Equator Principles Still Relevant after Rio+20 and UN PRI? […]

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