The new governance rules for the Equator Principles that are adopted today by the Equator Principles Association may improve the cooperation and decision making amongst Equator Principles financial institutions, but contain no new commitments on transparency and external accountability.[1]

BankTrack -the international NGO network closely monitoring the Equator Principles since their inception in 2003- therefore considers the adoption of this particular set of governance rules a missed chance for EPFIs to take the ‘Bold Steps forward' [2] that civil society expects from them.

The new ‘Rules' formalise a number of existing ad hoc arrangements within the group of financial institutions that have adopted the Equator Principles. They serve as basis for the newly established "Unincorporated Association of Equator Principles Financial Institutions and Associates" (‘the Association'). The Association claims that the Rules bring a number of improvements to the workings of the Equator Principles:

1.        Greater clarity on annual public reporting requirements

BankTrack considers the current reporting ‘requirements' [3] deeply unsatisfactory in the light of what affected communities and the public should be able to learn about the implementation of the Principles in concrete transactions. The new Rules contain no change in these requirements, and the claimed transparency increase remains far below what may be expected from institutions that make a public commitment towards sustainability, yet refuse to share with the public how they intend to achieve this.

Adopting banks should move beyond the current meager requirements of merely listing the number of transactions per category and providing a few lines on implementation, and commit themselves to much higher levels of transparency and information disclosure, right down to the project level.[4]

2.           Introduction of an ‘Associate' category for financial institutions who do not undertake project finance, but may want to use the EPs as a source of good practice and knowledge for other transaction types beyond project finance.

BankTrack welcomes any step that leads to the expansion of the scope of the Equator Principles beyond project finance, covering all transaction with a potential negative impact on people and planet. But such a scope expansion must be a binding commitment, incorporated in the Principles itself, and not left to the good intentions of individual adopting banks, let alone associates.

BankTrack fears that by creating the new category of ‘Associates', institutions that are ‘interested in discussing sustainability issues', the Equator Principles run a severe risk to turn into the ‘Equator Flexibles'; a sustainability bazaar where every bank can pick what it suits them, rather than the ambitious standard setting initiative that the Principles should aim to be.

3.        A newly introduced process for delisting non-compliant institutions

BankTrack welcomes the introduction of criteria to enlist and delist mal performing banks from the Equator Principles. It is disappointing that the Association has decided to choose ‘meeting extremely limited reporting requirements' and ‘dutifully paying the membership fee' as the only two criteria for such a decision.

To effectively deal with the reputational risk of ‘free riders', a decision on delisting (as well as enlisting) should include a thorough assessment of the implementation of the Principles in concrete transactions and a convincing roll out within the institution itself (capacity, staff, procedures). This requires stronger peer review procedures and a formally established channel through which grievances of communities affected by projects financed ‘under Equator' can reach the Association and may trigger such a review.[5]

4.        Greater transparency in the management of the Equator Principles Association

This may well be the best result of the new structure; for too long, progress with the Principles has been paralyzed by the lack of an effective decision making structure for the EPFI group. The new structure paves the way for bold steps forward on pressing matters related to transparency, accountability, scope extension and dealing with risks associated with human rights and climate change. The upcoming revision of the Equator Principles in 2011 provides the next opportunity for dealing with these issues.

"We congratulate the EPFIs on adopting the new governance rules. They will hopefully allow the EPFIs to further develop the initiative" said Michelle Chan, private finance coordinator of Friends of the Earth US, "At the same time it is deeply disappointing that a two year drafting process leads to such a mundane outcome. When reading the rules it is clear that the liability concerns of bank lawyers have clearly prevailed over the urgent need to open up to the public and to project affected communities."

"Rather than diluting the Equator Principles, by adding a new category of vague ‘associates', EPFIs should strive to create a bold ‘Coalition of the Willing', a cohort of banks ready to make a substantial sustainability commitment, instead of just having interesting conversations about it with fellow banks," says Johan Frijns, coordinator of BankTrack: "To rescue the reputation of the Equator Principles as an initiative that matters, EPFIs should display ambition and be ready to incorporate new commitments on transparency and accountability in the next revised version of the Principles in 2011.

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Notes

[1] For the new rules and more information on the Equator Principles see here. For BankTrack opinion on the principles -including background documents and correspondence with banks see here.

[2] In January 2010, BankTrack submitted a letter to the EPFIs, signed by over hundred civil society organisations, calling for ‘bold steps forward' with the Principles on transparency, accountability, scope extension and climate change. See here.

[3] Equator Principle 10 states:

Each EPFI adopting the Equator Principles commits to report publicly at least annually about its Equator Principles implementation processes and experience, taking into account appropriate confidentiality considerations. Such reporting should at a minimum include the number of transactions screened by each EPFI, including the categorisation accorded to transactions (and may include a breakdown by sector or region), and information regarding implementation.

For the reporting requirements of adopting banks see here.

[4] The Bold Steps Forward document calls upon EPFIs to:

• list the names of all projects that are being financed ‘under equator' on EPFIs website or on the official Equator website. Every deal signed under the Principles should be publicly identified as being governed by the Principles;
• covenant with project sponsors that all projects financed ‘under Equator' are publicly identified as such on the project sponsors website, and that client confidentiality be limited to information directly related to the project sponsor itself.
• identify a minimum level of project information disclosure that all project sponsors must abide to, that should include all documents relevant for affected communities and other stakeholders to engage in consultation and monitoring processes; demand active dissemination of this information amongst all stakeholders
• come up with a stringent set of reporting obligations for adopting banks that include public targets for implementation.
• introduce mandatory external, third party verification of compliance with these reporting guidelines
• exclude all banks from the Principles that do not meet these requirements.

[5] The Bold Steps Forward document calls upon EPFIs to establish an accountability/compliance/ombudsman mechanism for the Principles, along the lines of similar mechanisms that are in place with multilateral development banks but suited to the specific needs of private sector banks.