Should Equator Banks use Assurance?

Given trust deficit highlighted by Occupy Wall Street movement, should Equator Banks develop and adopt assurance standards, a recommendation emerging from the Strategic Review of the Equator Principles?

In 2002, ABN Amro, Barclays, Citigroup Inc. and WestLB AG spearheaded the development of a banking industry framework – now known as the Equator Principles - to address environmental and social risks in project financing. This framework adopted the standards used by the International Finance Corporation (IFC), the private sector arm of the World Bank Group.

By October 2011, the Equator Principles had been adopted by over 70 financial institutions. These are designated as Equator Principles Financial Institution – but are perhaps better known as Equator Banks. They include major project finance banks from around the world but also Export Credit Agencies (ECAs) such as Export Development Canada, the US Ex-Im Bank and Germany’s KfW IPEX-Bank GmbH.

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 risk management standard that is applied in the process of financing these deals.

On adoption, Equator Banks commit to report annually about the number of transactions screened and how these were categorized (“high” (A), “medium” (B) and “low” (C) with regard to the potential risks and impacts of the projects). A “Guidance to EPFIs on Equator Principles Implementation Reporting” is also available to assist Equator Banks with their reporting process. In appendices and footnotes, this guidance also highlights opportunities to demonstrate reporting and transparency leadership.

Good practice examples mentioned in the Guidance include integrating reporting on Equator Principles into overall CSR, Corporate Citizenship or Sustainability reports. However, the guidance note is silent about use and application of independent third party assurance. This could not only scrutinize and improve internal systems, but also materially boost the credibility of Equator Principles reporting. The latter may be particularly important given current trust deficit experienced by many financial institutions as evidenced by the Occupy Wall Street movement. In fact, one of the recommendations emerging from the Strategic Review of the Equator Principles was the need to develop an assurance standard to use for third party auditing of Equator Bank’s internal implementation processes.

The latest Equator Principles reporting of Equator Banks can be accessed here. I can think of several (good) examples, such as Citi or WestLB that already integrate their Equator Principles reporting into their overall Citizenship and Sustainability Reports, respectively. However, neither report is assured. Other examples, such as HSBC Holdings, include a limited assurance (in this case by PWC) that reads: “In our opinion nothing has come to our attention to indicate that for the year ended 31 December 201, the Selected Information has not been fairly stated in all material respects in accordance with HSBC’s Reporting Guidance”.

What has been your assurance experience relating to the implementation and reporting of the Equator Principles in your organization? Given worries about costs, do you think that assurance adds sufficient value? And should Equator Banks simply be required to adopt assurance to protect the reputation of the organization and its members in line with an approach adopted by the International Council on Mining and Metals (see my earlier blog here)?

About the author: Mehrdad Nazari (MBA, MSc, LEAD Fellow) is a Corporate Responsibility, Sustainability Reporting & ESIA Advisor, and Director of Prizma. He was previously an environmental consultant with Dames & Moore, Principal Environmental Specialist at the EBRD and CSR Research Director at CoreRatings. Mehrdad is a GRI-approved trainer on GRI's sustainability reporting framework and a licensed AA1000 Assurance Provider. Access Prizma’s latest newsletters here