Anyone seeking a grounding in the basics of sustainable finance needs to know The Equator Principles. So what are they?
Sustainable finance, to either the newcomer or even the seasoned veteran, can be complex. It’s evolving constantly and the demands of the financial landscape change as the takeup and the challenges of both sustainable business and climate change hasten.
Therefore, it’s essential to have some knowledge of the key instruments that control investment and the flow of finance through this growing sector of global money.
The Equator Principles (EP) are one among many instruments designed to streamline and maximise the take up and flow of green money worldwide. They have become the financial industry standard for environmental and social risk management in projects.
The logic runs that financial institutions adopt EP to ensure that the projects they finance are developed in a socially responsible manner and therefore reflect sound environmental management practices. By doing so, negative impacts on ecosystems and communities should be avoided. If unavoidable, these negative impacts should be reduced, mitigated or compensated for appropriately.
Additionally, Equator Principles Financial Institutions (EPFIs) believe that the adoption of and adherence to the EP offers significant benefits to them, their borrowers and local stakeholders through their borrowers’ engagement with locally-affected communities. Adopters should be able to better assess, mitigate, document and monitor the credit and reputational risks associated with financing development projects.
So fundamentally, EP are all about sound governance and ensuring that green money does its best work.
The 10 Principles
There are in total ten principles. They include stakeholder engagement, independent monitoring and reporting and grievance mechanisms. Additionally, and very usefully for those corporates at the start of the learning curve, there is also a host of guidance available. This covers everything from climate risk assessment to human rights.
Right now, over a hundred financial institutions across some 38 countries have officially adopted the Equator Principles, self-evidently a membership with clout – and these must supply numbers to back up their green intentions. ‘First Year Grace’ refers to new members who are in their first year of adopting the EP and are not required to report publicly. In the first year after their adoption date, new EPFIs are not required to include transaction numbers and project names in their public reporting. These reports are referred to ‘First Year Implementation’ reports.
It should be noted that EPFIs report at different times in the calendar year (based on their institution’s reporting period) and the EP Association’s reporting web pages are updated regularly. This is all vital because it means that working with institutions aligned with EP also brings transparency to partners through this reporting.
Some familiar names aligned with EP include Barclays PLC, BNP Paribas, Credit Suisse and JP Morgan. That’s a big raft of money committed to the best green practice. These are, clearly, big players in global green finance.
Ongoing EP Adoption
Encouragingly, EP adoption continues to expand at pace. Siam Commercial Bank (SCB) joined the Equator Principles (EP) Association in January 2022, saying it embraces EP principles in promoting environmental and social risk management for Project Finance, supporting Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Change.
SCB is the first Thai commercial bank to join. This is noteworthy because on balance, environmental practices and principles tend to be less established in developing parts of the world like SE Asia or Africa. Therefore when Thai banks step up, that’s a good indication that environmental criteria are starting to impact on investment in important, developing global supply chains, where transparency or human rights have in the past been less than sound.
Siam Commercial Bank CEO and Chairman of the Executive Committee Arthid Nanthawithaya said, “SCB is convinced that the banking and financial sector is critical to the development of a sustainable society and environment.
“Implementing the Equator Principles will assist the Bank in managing business risks in a more inclusive manner, allowing the Bank and its clients to collaborate on assessing and formulating guidelines for mitigating environmental and social risks, all while adhering to world-class standards and procedures. This is a collaborative effort to improve the standard of Thai banking while also pushing Thailand towards becoming a significant player in the ASEAN green business market.”
The Real World
Of course, all the paper, agreement, guidance and principles have to stand up in test cases in real world business scenarios. Fin24 is reporting on an ongoing case where the principles are under tough scrutiny.
Of South Africa’s five major banks, the reporting explains, Standard Bank has been singled out by critics for considering funding an oil pipeline project in East Africa. The project, known as the East African Crude Oil Pipeline (EACOP) is a collaboration between French energy company TotalEnergies, the China National Offshore Oil Corporation (CNOOC) as well as the Uganda National Oil Company (UNOC) and Tanzania Petroleum Development Corporation (TPDC).
In the controversy, an alliance of activists known as #StopEACOP has warned that the pipeline would displace communities and have a severe impact on climate and wildlife. The alliance is made up of organisations such as human rights and environmental lawyers Natural Justice, environmental activists 350Africa.org and activist shareholder group JustShare.
According to #StopEACOP, a $2.5 billion loan is being sought from the world’s largest commercial banks to support the project. Specifically, it argues the project threatens to displace thousands of families and farmers from their land. It poses significant risks to water resources and wetlands in both Uganda and Tanzania – including the Lake Victoria basin, which over 40 million people rely upon for drinking water and food production.
The pipeline, says #StopEACOP, would rip through numerous sensitive biodiversity hotspots, and risk significantly degrading several nature reserves crucial to the preservation of threatened elephant, lion and chimpanzee species.
It will increase the severity of the global climate emergency; transporting oil that will generate over 34 million tons of carbon emissions each year. The pipeline would open up critical ecosystems in the landlocked regions of Central and Eastern Africa to commercial oil exploitation
Those are some big accusations. So what’s the financiers’ response?
In response to questions from Fin24, Africa Business and other media outlets, Standard Bank said its participation in the funding of the project, “Remains subject to the findings of environmental and social due diligence assessments,” as well as it meeting the Equator Principles requirements.
Standard Bank explained that Equator Principles Project Finance deals are subject to due diligence assessments that inform decision-making and cover various areas such as legal, technical, security, market as well as environment and social risks.
“Financial advisors, including Standard Bank and potential lenders retained the services of an independent E&S advisor. As part of this process, the advisors have visited the project area and will issue a full due diligence report in the coming months, at which time potential lenders will make a decision on the way forward,” the bank said on February 8, 2022.
Open and Transparent
Given the open nature of the proceedings, it’s inappropriate to comment further until the due diligence report is released. At that stage, it should be evident whether the EACOP project is worthy of green investment and a decent illustration available of recent EP intervention in the real world.
Yet, what matters to this discussion is that the principles are being invoked in real world cases where billions of dollars are involved. This speaks of the importance of the principles and that they are ready for testing in scenarios where vast good, or indeed bad can be leveraged by the correct application of finance.
To summarise, Forbes intelligently notes that many corporations are now adopting principles related to governance. And that many banks have adopted EP for navigating social and environmental issues related to financing large infrastructure and development projects.
However, it says, activists’ interpretation of these principles is far different than the banks’ more balanced approach to supporting important projects across economies.
And there you have it. What’s essential for the true green money of tomorrow is pragmatism. Africa needs investment, energy and jobs. The climate needs protecting. Vested interests on either side will by definition have skewed viewpoints.
The Equator Principles, and other instruments we will examine in these pages, have the job of mediating these. If done successfully, business, climate and EP can cooperate.
SEE ALSO: Understanding SDG Investing