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Equator Principles: bankers + environmentalists together?

Bankers are learning that talking green doesn’t just mean greenbacks.

“A few years ago, if you spoke to an investment banker about environmental and social issues, they would have thought you were a hippie smelling of joss sticks. The environment is now a mainstream business issue.”- ” Chris Bray, head of environmental risk policy at Barclays. “ (Global Finance Magazine, January 2005)

“Just a few years ago, you would have been hard-pressed to find a banker and an environmental activist in the same room — much less agreeing on issues vital to the security and sustainability of our globe. Today you will find both.” – Charles Prince, CEO of Citigroup (Miami Herald editorial, July 31, 2006.)

Behind all this newfound wisdom and banker-activist chumminess are the Equator Principles (EP), a set of voluntary guidelines for financial institutions to manage environmental and social risk in financing development projects.

Since they were created in 2003, based on standards of the International Financial Corporation (IFC– the financial arm of the World Bank), they have been adopted by 41 international banks and most of the major players giving international loans.

Sound strange that banks would voluntarily adopt restrictive environmental rules? Blame it on the Rainforest Action Network (RAN) and Citigroup. In the late ’90s Citigroup’s investment in several large controversial international development projects put them in the center of a firestorm.

With media blitzes and boycotts, RAN launched an advocacy campaign against Citigroup’s environmental record and after three years of bad PR, Citigroup finally asked RAN for help.

The outcome were the Equator Principles: guidelines to help banks avoid exposure to controversial public works projects- projects potentially damaging to the environment and to their reputations. 

Since the guidelines were created, nearly all the major financial institutions have joined the club. According to the IFC, the signatories represent more than 80% of the global-project loan syndication market.

For many of these institutions, it’s a pre-emptive step to avoid negative publicity from environmental groups who have learned to target not just potentially-damaging projects, but their financiers.

Andre Abadie, head of sustainable business advisory at ABN AMRO describes his banks decision to join as good business. “Protecting our assets in a traditional sense is risk management and protecting shareholder returns.” (Financial Times’ The Banker- July 3, 2006) 

So are these principles binding or simply good for PR? NGO’s argue there are plenty of cases of greenwashing. Last spring environmentalists began to criticize EP members, BBVA and Calyon, for their involvement in financing two potentially contaminating pulp mills in Uruguay.

At the same time, the Rainforest Action Network, in a full-page Washington Post ad, condemned EP bank ABN Amro for “outstanding environmental hypocrisy” arguing that the bank’s potential financing of Shell’s Sakhalin II pipeline (an alleged threat to whale feeding grounds along the Russian coast) flout their commitment to the Equator Principles.  

Banks agree the principles have their limitations. When giving large unspecified corporate loans they don’t always know what the money will be used for and after financing a deal, they don’t have much control over the borrowers decisions, short of calling the loan. The guidelines are also limited as they only apply to public finance projects- just 10% of most bank’s lending activity. 

This summer the Equator Principles were revised to include stronger standards on labor and working conditions, and a new requirement to contractually obligate clients to host-country environmental and social laws.

Disturbing to critics, they failed to adopt new requirements for more transparency and made a substantial reversal from World Bank policy by no longer recognizing people without ‘recognizable’ land titles. Banktrack, a non-profit banking accountability group, argues that the revised principles are simply “a baseline, rather than best practice, in the field of sustainable financing policies”.

They argue that the guidelines should, at minimum, uphold international norms and laws, but that they fail to do so in some key areas. A recent Banktrack study found that while many banks have adopted environmental and social financing policies that go beyond the Equator Principles with issue-specific principles (Bank of America (fragile forests), HSBC (dams), Rabobank (human rights)), “with few exceptions, these policies are lagging significantly behind international norms, standards and best practices.”

This year when the Financial Times published their Sustainable Banking Awards (UK lender HSBC was named Sustainable Bank of the Year), Banktrack retaliated with a satirical newspaper which highlighted the banking sector’s involvement in controversial projects such as uranium mining in Australia and soy bean production in Brazil. 

Despite their disagreements, today banks and NGOs have established a dialogue that didn’t exist 10 years ago. EP banks all claim green issues are becoming increasingly important, but whether stockholder pressure on the bottom line outweighs the risks of bad environmental PR from NGOs may continue to be fought project by project.