Project Finance and the Equator Principles

Project finance—the funding of major infrastructure projects such as dams, oil wells and pipelines, and mines—is one of the most significant investment strategies driving a top-down integration of sustainability principles. Because these projects have such high-profile environmental and social impacts, they expose companies to community and NGO opposi-tion—which has in turn driven corporations to pay more attention to social and environmental management in project finance.

For example, the Rainforest Action Network hounded Citi beginning in late 1999 over its financing of projects considered socially and environmentally destructive, such as the Three Gorges Dam in China. In January 2003, more than 100 NGOs signed the Collevecchio Declaration on Financial Institutions and Sustainability (named after the town in Italy where it was signed), which

Investing for Sustainability called on banks to make six commitments, including "doing no harm," sustainability, accountability, and transparency.25

A half-year later, 10 financial institutions (including Citi) from seven countries launched their own series of commitments, the Equator Principles (EPs), a voluntary set of guidelines promoting social and environmental responsibility in project finance, particularly in emerging markets. The initiative exemplified a trend in corporate social responsibility toward voluntary action to supplant government regulation, and it showed great promise.26

NGOs pragmatically gave their stamp of approval to the principles while maintaining healthy skepticism of the degree of substantive progress that companies can make outside binding mandates. For example, socially and environmentally destructive projects can do an end-run around the Equator Principles by seeking funding from more lax financial institutions—notoriously, banks in China. (See Box 13-2.) By 2007, NGOs were starting to lose patience waiting for companies to deliver on their promises of comprehensive (instead of selective) sustainability. Yet companies defend the EPs, claiming they do have real bite.27

The member banks' external commitment to the Equator Principles on a voluntary basis makes them mandatory to implement internally, according to Pamela Flaherty, head of global community affairs at Citi. And when banks incorporate EP guidelines into contracts with clients, the voluntary nature disappears altogether, replaced by legal obligation.28

Ironically, financial institutions claim that client confidentiality precludes them from disclosing details on compliance to EP social and environmental covenants, frustrating NGOs who consider this an end-run around transparency and accountability. However, some commentators maintain that NGO

scrutiny of the EPs, coordinated by the BankTrack consortium in Amsterdam, functions as de facto accountability, given the absence of enforceable mechanisms.29

The EPs—now with 54 signatory banks, representing over 85 percent of global private project finance capacity—were revised in July 2006 in conjunction with the updating of the social and environmental performance standards of the International Finance Corporation (IFC—the private finance arm of the World Bank) that provided the basis of the EPs. NGOs welcomed some of the revisions as improvements—for example, the lowering of thresholds of projects covered from $50 million to $10 million. But they lambasted the revised guidelines and the underlying IFC standards for retaining significant loopholes.30 Take, for example, the issue of the role of communities in approving projects that significantly affect them. NGOs support the right of affected communities to give or withhold their free, prior, informed consent, a concept enshrined in Article Six of the International Labour Organization's Convention 169 concerning indigenous and tribal peoples' rights. The World Bank infamously shifted this concept to free, prior, informed consultation in 2004, and both the IFC and the revised Equator Principles followed suit. Consent and consult may sound very similar, but there is a profound difference in meaning between the two words—a difference with significant human rights implications.31

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