Project financing

Project financing and the Equator Principles

 In 2000 a coalition of NGOs started campaigns against projects, primarily in the extractive industry sector, which had hugely adverse environmental and social impacts and were co-financed by private banks. Projects included the Chad Cameroon oil pipeline or the Camisea gas project in Peru. The informal network of NGOs adopted the Collevecchio Declaration in early 2003, which proposed the network’s vision for a sustainable banking sector. The declaration expresses the need for commitments to sustainability, accountability, transparency, the concept of ‘doing no harm’ and sustainable markets and governance.  Even today it remains the benchmark by which many civil society organisations measure the banking sector’s commitment to sustainable development. 

While being unresponsive to the NGOs’ demands at first, a group of major banks subsequently launched their own initiative. In June 2003 ten banks signed the Equator Principles. The Principles provide a coherent set of environmental and social policies and guidelines for banks to review, evaluate and ultimately mitigate environmental and social impacts associated with the projects they finance. They are based on the International Finance Corporation’s (IFC’s) environmental and social safeguard policies . After a revision of the IFC’s safeguard policies, the Equator Principles were revised in 2006. By then the number of Equator Principles Financial Institutions (EPFIs) had risen to over 40.

How do the Equator Principles work?

The Equator Principles require banks to categorise the potential social and environmental impact of the projects put forward for financing. If a project is categorised as having a high impact, the borrower has to conduct a social and environmental assessment of the project and compile an action plan. The assessment references compliance with relevant country laws and the IFC’s performance standards and is reviewed by an independent expert. Where local communities are affected consultation with the community has to take place. The bank’s clients have to provide regular reporting on compliance.

Achievements and shortcoming

The Equator Principles are fast becoming the standard for project financing. With more than 40 financial institutions subscribing to the Principles, they now cover over 80% of project lending worldwide. By providing a common framework and language for the project finance industry the Principles have created a platform on which project financing operations can be assessed and compared, and have therefore contributed to transparency and accountability in the industry. Yet, critics point to a number of weaknesses of the Equator Principles. First of all, the Principles cover only project finance, where a loan is given to one particular project, such as a paper mill or a pipeline, and the revenues generated by that particular project generate the repayment of the loan. As a result some environmentally sensitive sectors such as mining and forestry are not included as they are not project financed. Secondly no mechanism is in place which could ensure that banks complied with the Principles, this makes it difficult to scrutinise implementation. There is no central body or secretariat to set minimum accountability systems or to supervise and assist implemen.

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