The IFC and some 20 leading banks have voluntarily adopted common environmental and social standards in their financing of projects around the world. Is this just good PR? Do the so-called Equator Principles have teeth? Or is it a true breakthrough in terms of the financial community taking greater responsibility for the social and environmental consequences of its lending activities? Suellen Lazarus reports

In June 4, 2003, at the headquarters of the International Finance Corporation (IFC) in Washington, 10 international banks stepped forward to take a leadership role on global environmental and social issues.

In the few short months that followed, an additional nine banks have made the same commitment. By adopting the so-called Equator Principles, these 19 banks have agreed to use clear, responsible and consistent rules for environmental and social risk management in project finance lending. It is an unprecedented voluntary private sector initiative.

Their commitment underlines the change that has taken place within the financial community. From the “hands off” attitude of just a few years ago, these banks have come to recognize their role and responsibility for promoting sustainable investment. The framework of the Equator Principles is based on the environmental and social standards used by IFC, the private sector lending arm of the World Bank Group, in its investments in emerging markets.

With impressive speed, the Equator Principles have become the new market standard, thus transforming project finance. The 19 Equator banks – based in Europe, North America, Japan and Australia – arranged over 78% of project finance lending for the year through October 2003, according to Dealogic ProjectWare.

As more financial institutions adopt the Equator Principles in the coming months, the coverage will be truly global. Meanwhile, some banks that have not formally adopted the principles are following its procedures, knowing that this is the new standard by which they will be evaluated.

Project sponsors planning to raise funds in the project finance market are anticipating and preparing to meet the requirements of the Equator Principles. With the current range of coverage, successful loan syndications are likely to depend on the extent to which projects are Equator Principles compliant.

How did this remarkable transformation come about? We would all like to take credit for having strategically planned and executed it, but it is more correctly characterized as an organic process. The conditions were right, the need was there, so the gap was filled. It was a coalescing of forces.

In the spring of 2002, an executive responsible for risk management at a major international bank approached Peter Woicke, IFC’s executive vice-president. This senior banker recognized the growing pressure on his bank and its clients on environmental and social issues, and had been impressed with the approach that IFC developed to manage environmental and social risk in the Chad-Cameroon pipeline project.

He felt that his bank needed a method for evaluating environmental and social issues in the projects that it financed, but could not do it alone. Too often when he asked questions about environmental or social issues in individual projects, the answers were not good enough.

Yet, his staff always noted that if they did not finance the project, it would be done by the competition next door, and the bank would unnecessarily lose the business. This banking executive had concluded that a common approach was needed among the banks, and he suggested that IFC convene a meeting with a small group of banks to explore whether others shared his concerns.

Recognition, then responsibility
In October 2002, IFC and ABN Amro hosted an executive workshop in London to discuss experiences with environmentally and socially complex investments in emerging markets and to explore approaches for better managing the issues raised.

The objective was to consider the potential for enhanced cooperation, leadership and convergence within the international finance community on these issues. Little did we anticipate that this ambitious goal would be realized in such short order.

Senior executives responsible for project finance and risk management were invited from a small group of the world’s leading international banks. Banks were invited based on their role in the project finance market and to reflect geographic diversity and a broad range of coverage of industry sectors.

Those institutions that had expressed strong commitment to a sustainability agenda were also included. In the end, nine banks accepted the invitation and, together with IFC, were represented at that meeting.

The discussion at that October meeting progressed quickly. It moved from reluctance to take responsibility for environmental and social risks, to recognition that they were increasingly inescapable, to agreement that the banks cannot continue to expect others to handle these issues.

War stories were shared, and the banks found greater commonality than they expected in facing these issues. Not fully knowing the consequences of investments was no longer good enough.

The banks agreed that they must have their own opinion on environmental and social risk management in the projects they are financing. Each bank had its own reasons for coming to this position: some felt public pressure, others were concerned about reputation risk, while others were positioned as leaders in sustainable investment. Shareholder expectations, financial loss, the need to attract talented young staff to their organizations, and increased client receptiveness to engaging on these issues were all important considerations. The banks wanted to be associated only with responsible development.

It was agreed that there was a need to consider levelling the playing field among the banks on environmental and social issues. Environmental “shopping” by clients, whereby clients might exert pressure to negotiate their preferred standards, was not acceptable. Consistent rules were required for environmental compliance. It was time for action. Four banks made presentations that day in London – ABN Amro, Barclays, Citigroup and WestLB. These banks formed a core working group, with help from IFC, and were given the task of considering common standards and rules for engagement, particularly in the oil and gas industry.

The four banks went off and did their homework. While talking with colleagues responsible for oil and gas financing in their institutions, they quickly concluded that any approach could not cover only this one industry.

It would be seen as unfair treatment within their institutions – and by their oil and gas clients – when there were also complicated issues in other industries, including power, mining, infrastructure and agribusiness.

The working group began to consider applicable environmental and social standards to guide their effort. They quickly concluded that it would take far too long and be too cumbersome to develop their own standards.

And, if one bank created its own standards, it would be difficult for the other banks to follow it. After all, these banks are competitors. So they began to search for neutral standards that they could take off the shelf.

They wanted standards that had been time tested and proven to mitigate risk, had broad industry coverage, and were credible, widely understood and used. They concluded that the IFC environmental and social policies and guidelines fulfilled these requirements. While recognizing that IFC standards were not perfect, they agreed that they were the best available.

A second meeting of the bankers was held in February 2003, again in London, this time hosted by Citigroup. A few banks dropped out of the process, but more came to participate. But again, nine banks and IFC attended. At this meeting, the then titled “Greenwich Principles” were unveiled. They were called Greenwich because meetings were held near Greenwich in London, yet the term London Principles had already been used, and Greenwich, as the prime meridian, circled the globe.

The principles provided for categorization of projects according to IFC’s procedures, and followed with general application of IFC’s environmental and social policies and guidelines. The principles would be applicable to all project finance business with a capital cost over $50 million.

After some discussion on that cold, rainy day in London, the banks concluded that they broadly supported the principles, but needed to consult internally, with clients and with civil society, to see how they would be received.

Over the next few months, client consultations and meetings with the NGO community were held in the US and Europe. Throughout the process, the banks received strong support for the principles, and consensus continued to build. Meanwhile, as feedback came in and discussion among the banks continued, the principles evolved accordingly.

In May 2003, a third meeting of the bank group was held in Dusseldorf, at WestLB’s headquarters. By this time the Greenwich Principles had become the Equator Principles. Why the name change? The banks wanted this to be a global initiative, not just a northern hemisphere one. The equator seemed to represent that balance perfectly.

At that meeting, IFC carefully explained its categorization process and its environmental and social policies and procedures. IFC also committed to provide training to the banks, should they adopt the Equator Principles. This training was an important consideration for the banks since they would each need to develop their own implementation plan.

Initially, the Equator Principles were to be applicable only to emerging market project finance. At this meeting, it was agreed that the principles would apply globally to project finance.

There are two technical components to the environmental and social policies and procedures that IFC applies to its projects.

First, the IFC and World Bank industry standards are a series of environmental, health and safety guidelines each designed for a specific industry, and providing detailed applicable standards for that industry.

Second, there are IFC safeguard policies that cover environmental and social issues such as indigenous peoples, natural habitats and resettlement, and are designed to improve project sustainability.

The approach that was ultimately agreed by the banks was that the IFC/World Bank industry standards would be applied to all projects throughout the world, whereas for emerging markets, where regulatory frameworks were often not well developed, IFC’s safeguard policies would also be applicable.

The banks concluded the meeting with the agreement that they were ready to move to adoption of the principles. The target date was June 4, 2003, at IFC’s annual bankers’ conference in Washington.

If there were at least six banks, preferably from a broad range of countries, ready to commit by that time, then they would proceed to each adopt the Equator Principles. The day before, the roll call was still being taken. Each bank needed senior management and, in some cases, board level approval.

But, when all the approvals were in, there were 10 banks that stood up that day in Washington and announced that they were adopting the Equator Principles. Those 10, from seven countries, were – ABN Amro, Barclays, Citigroup, Crédit Lyonnais, CSFB, HypoVereinsbank, Rabobank, Royal Bank of Scotland, WestLB and Westpac.

Since that time, an additional nine banks, representing four more countries, have joined. In order of their joining they are – ING, Royal Bank of Canada, MCC of Italy, Dresdner, HSBC, Standard Chartered, Dexia, Mizuho and CIBC. Clearly, there is momentum. It has been a remarkable process characterized throughout by extraordinary trust and cooperation among the banks to achieve a common good. More than a declaration of intent, the Equator Principles have teeth.

From the preamble, the banks commit to “not provide loans directly to projects where the borrower will not or is unable to comply with our environmental and social policies and procedures”. It will be up to each adopting bank to implement the necessary procedures to ensure that it is following the Equator Principles.

Of course, the devil is in the details. Adopting the principles is only the first step. But if the auspicious beginning is any indication, these banks are committed to making it work.

Suellen Lazarus
Suellen Lambert Lazarus is the senior adviser to the vice-president of operations at the International Finance Corporation. From 1997 to 2003, she was director of IFC’s syndications and international securities department. She has been with the World Bank group since 1983, and joined IFC in 1994. For further information about the Equator Principles see www.equator-principles.com