Thursday, December 07, 2006

Equator Principles

Westpac bank is currently engaging in a high-profile campaign highlighting its environmental credentials. Its ads take great pride in pointing out the fact it is the only major Australian bank to sign up to the Equator Principles. Westpac are clearly seeing the advantage of being seen to be green. But what exactly are these principles and is this something Westpac should be proud of?

The Equator Principles are a set of voluntary environmental and social guidelines for so-called “ethical project finance”. The principles commit the signatory banks and finance companies to avoid financing projects that do not meet the guidelines. The driving force behind the principles was the International Finance Corporation (IFC) which is a subsidiary of the World Bank. The IFC is the largest multilateral source of loan and equity financing for private sector projects in the developing world.

The IFC convened a meeting in London in 2002 of a small group of banks to discuss issues related to environmental and social policies and guidelines. The Banks present decided jointly to try and develop a banking industry framework for addressing environmental and social risks in project financing. This led to the drafting of the first set of Equator Principles by these banks which were then launched in Washington, DC in June 2003.

According to its own website, the principles define a “financial industry benchmark for determining, assessing and managing social & environmental risk in project financing” (though it messes it up somewhat by putting in the definition twice). The key principles provide guidance to project risk assessment based on environmental and social indicators. If a project is defined as medium or high risk, the sponsors must complete an Environmental Assessment report. The report should address environmental issues, applicable laws and treaties, health and safety, pollution, waste management and any other consequential impact. The Equator banks will then manage the risks through a binding 'Environmental Management Plan'. The project threshold was initially set to all projects over $US 50 million.

Westpac was one of nine banks from seven countries that immediately adopted the Principles. Now 43 financial institutions have signed up which cover more than 80% of the global project-financing market. But the initial set of principles were criticised for allowing banks to finance projects that violate the standards, and for a lack of transparency about implementation. Banktrack, a consortium of global NGOs tracking the operations of the private financial sector, released a report in 2004 cited specific projects that contravened multiple standards, such as the $3.6 billion Baku-Tbilisi-Ceyhan (BTC) oil pipeline from the Caspian Sea in Azerbaijan to the Mediterranean in Turkey. The report says the bankers failed to insist on minimum standards, do not insist on good design and performance, and did not hold BTC accountable for meeting environmental and social performance standards.

The report also criticised a letter from the Equator bank to the World Bank on environmental grounds. The banks opposed the World Bank proposal to withdraw from lending to coal immediately and to oil by 2008, arguing that these extractive activities provide developing countries with the revenues necessary to alleviate poverty.

Earlier this year, the signatories announced the launch of a revised set of principles. The threshold was lowered to $US 10 million and now cover upgrades to existing projects. The institutions were also charged to report on the Principles’ implementation on an annual basis. Critics have welcomed the tightening up of standards but some say the revised Equator Principles do not go far enough. Banks still do not have to publish information on their risk assessments of specific projects, instead hiding behind commercial confidence considerations.

Another major issue is the lack of involvement of China in the initiative. In October this year, World Bank president Paul Wolfowitz criticised China and its banks for not respecting the Equator Principles and for ignoring human rights and environmental standards when lending to developing countries in Africa. Wolfowitz said his organisation had held frank talks with the Chinese about the issues but implied there had been no meeting of minds. “I hope in time our viewpoints will converge,” he said.

On balance it looks as if Westpac are on the right track although significant issues remain about the rollout of the program. Since they engaged on the program, Westpac say all the projects they have been involved with have achieved a B (medium) rating and they rejected transactions for reasons including “non-compliance with environmental risk consideration”. Though Westpac did not identify any of these transactions, it would be interesting to note if the offending companies eventually sought out and received finance from any of the other non-complying Australian banks.

No comments: