Blog: In 2020, the Equator Principles struggle to remain relevant
Hannah Greep, firstname.lastname@example.org
Hannah Greep, email@example.com
In a year in which the Covid-19 pandemic tore through our society, the importance of carefully assessing the impact of proposed infrastructure projects on communities, the environment and climate prior to a decision to proceed has never been clearer. However, although the Equator Principles (EPs) have been in place for seventeen years now, our research this year has shown there is still much work to do to improve their effectiveness in protecting the rights and interests of communities and preventing adverse environmental impacts.
This year saw the launch of the newest iteration of the Principles, EP4 - the result of a review process which BankTrack, along with many other organisations that made up the ‘Equator Banks, Act!’ campaign coalition, pushed hard for. However, the revision made only minor improvements, falling far short of our vision of an EPs that finally deliver on protecting human rights and the climate. Since nobody will be contemplating drafting EP5 any time soon, in 2020 we refocused our efforts on assessing whether the Principles in place are effectively implemented, and what changes can be made within the scope of EP4 to make sure they meet the promise of ensuring large-scale project finance takes place with respect for the rights of affected communities.
“Trust Us, We’re Equator Banks” Part I & II
Our research focused on two of the most significant commitments in the Equator Principles for safeguarding project-affected communities: ensuring they are adequately consulted (following Principle 5); and ensuring their grievances can be adequately dealt with through an appropriate accountability mechanism (following Principle 6). Both these commitments are incredibly important to ensure that affected communities get a decisive say in how projects financed ‘under Equator’ are designed, or in certain cases whether they proceed at all. However, to our knowledge, there has never been a systematic evaluation of whether these Principles are being implemented on the ground. This is what we have endeavoured, on a small scale, to do this year.
First, we looked into the documented stakeholder engagement processes and project-level grievance mechanisms for a set of 37 energy and extractive sector projects financed ‘under Equator’ in 2017/18. While we intended this to be background research to help us identify interesting case studies for a second stage, we were surprised by the number of projects for which we could find no evidence of either process, leading us to publish these findings as a first phase of the research.
Before publishing, we checked our results with the banks financing these projects, and although in a few cases they were able to point us to documentation we had missed, in most cases they had nothing to add. In several instances, banks told us that stakeholder engagement or grievance processes are in place, but they could not provide any evidence to support this, including for reasons of ‘client confidentiality’ (although their finance for the projects were disclosed on the EPs website). With this, banks are in effect asking observers to take it on trust that the Principles are being properly implemented.
In November, we published the second instalment of this research, which looked in more detail at the effectiveness and adequacy of stakeholder engagement and project-level grievance mechanisms for a subset of seven of these projects, as well as two projects financed in earlier years. When we spoke with affected communities, we found that they often had no access to assessment documentation, such as Stakeholder Engagement Plans, which set out agreements or promises made to them during consultations. Where project-level grievance mechanisms were in place, a number of community members told us that they did not trust the company enough to believe that such a mechanism would bring about any resolution. For other projects, community members had simply never heard of the mechanism.
These findings point to the urgent need for the Equator Principles Association (EPA) and signatory banks to ensure that compliance with the EPs no longer needs to be taken on trust. We want to see each project financed ‘under Equator’ accompanied by a ‘compliance report’ which shows how the EPs have been met, including what community consultation has been done and how financiers are ensuring that grievance mechanisms are not just in place but also an effective mechanism for remedy.
Imposing greater transparency on the Equator Principles
This kind of research is only possible because we now know the names of most projects financed under Equator. This is thanks to the requirement for banks to publicly disclose the names of projects receiving project finance loans under Equator; an important development in the last update of the Principles, EP3, back in 2013.
However, project names reporting in the EPA website is on a bank-by-bank basis, making it impossible to search which banks financed a particular project. In addition, only data from the most recent two years is kept on the website; after that, the information goes ‘down the memory hole’.
We have called for this data to be presented in a more accessible format, but the EPA has not yet made improvements. In response, this year we launched our own Equator Principles project database, searchable by bank and project, and including previous years’ data that has been deleted from the EPs website (but diligently archived by us).
Another problem with reporting of project names is that it is subject to several caveats, most notably the need for client consent to be obtained. Our analysis shows almost half of banks did not report all project names in the most recent year, and 11 reported no project names at all. This led us to launch a new table tool allowing easy identification of which EPFIs are fulfilling their reporting requirements under the EPs and which are not. We’ll continue to engage with the EPA on improving transparency, and we will update both the database and table tool on a quarterly basis.
Covid-19 and the need for an expanded concept of risk management
It is impossible to review what has happened in 2020 without reflecting on the huge impact that Covid-19 has had on every aspect of our lives. This is no exception when looking at the Equator Principles. In June this year the EPA issued guidance on how to implement the Principles during Covid-19. We were pleased the guidance provided detailed analysis of how the EPs can continue to be implemented during the current pandemic, whilst also indicating the need for pandemic risk management to extend beyond Covid-19 to potential future pandemics.
However, the guidance provided by the EPA is still limited in its consideration of pandemic risk management. A broader view of such considerations, which includes the impact of projects on the risk of future pandemics emerging and spreading, as well as the impact of pandemics to the projects financed, should now form part of any environmental, human rights and social due diligence. Additionally, the requirement to develop a broad pandemic risk management plan should be included in all impact assessments for Equator projects.
This highlights another broader issue with the EPs: its narrow concept of risk management. The ‘comprehensive risk management’ process at the core of both EP3 and EP4 focuses on managing risks posed by external circumstances, such as climate change, to a project. This must be changed to focus on risks that the project will pose to communities, nature and climate, both locally and globally.
Just as the EPs cannot meet their stated objective of adequately managing risk whilst allowing the financing of projects which significantly contribute to climate change, they also cannot perform their function whilst allowing projects which increase the risk of future pandemics through destruction of nature. Shifting to a more comprehensive understanding of risk would exclude finance for projects which pose significant climate and pandemic risks that cannot be managed or mitigated.
The ‘designated country’ exemption has got to go
A major disappointment with EP4 was that it maintained the distinction between ‘designated’ countries - those presumed to have “robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the environment”, typically high-income OECD member countries including the US - and ‘non-designated’ countries – typically poorer countries that are presumed to lack such systems, where projects need to comply with IFC Performance Standards. The assumption that in designated countries, local or national laws would ensure compliance with the highest social and environmental standards was shown up as a fiction by the complete risk management failure at the heart of Equator bank finance for the Dakota Access Pipeline in 2016.
When an Executive Order was issued by President Trump in the United States in June this year allowing federal agencies to waive or entirely bypass environmental review requirements for development projects, this showed beyond a shadow of a doubt how far past its sell-by date the ‘designated country’ distinction had become. (There remains some hope that the new President-Elect will reverse this reckless order.) We joined 27 other civil society organisations to call on the EPA to ensure projects in all countries are benchmarked against and in compliance with the IFC Performance Standards, at least during the current global pandemic. Disappointingly the EPA has not yet made any concrete actions on this matter in response to our letter.
The Equator Principles Association’s release of its first Strategy statement in October this year – devoid of concrete commitments or time-bound targets – was a missed opportunity to address some of the problems observers have identified with the Principles; for example by setting out concrete measures to improve transparency; applying consistent requirements globally; evidencing proper implementation, and commit to creating an effective initiative-level accountability mechanism.
On this last measure, ensuring affected stakeholders have access to effective remedy when they have been harmed or their rights have been violated is a crucial part of respect for human rights. We’re encouraged by the establishment of an Operations Working Group to further consider improving accountability under Equator, although little news of its progress has emerged to date. Considering that we have been asking for some kind of accountability mechanism since the inception of the Principles in 2003, it really is time for some concrete actions from the EPA on this.
Our message to the Equator Principles for 2021 is to pick up the pace to ensure the Principles become a risk management framework which is fit for purpose in the post-Covid world. BankTrack will continue working to track both the impacts of individual Equator projects on the environment and human rights, and the transparency and accountability of the Principles at a high level, to keep pushing towards this goal.