Last month the long-awaited fourth draft of the Equator Principles – the banking sustainability risk management framework — was finally put out for public consultation.
It had been delayed by “differences in views” between member banks over its wording.
Matters weren’t helped when spoof group the Yes Men released a fake update.
But, more seriously, the new actual text has come in for criticism from some of the people it most impacts, with indigenous rights advocacy group First Peoples Worldwide calling it a “flawed” draft.
The group said that, if it’s not revised, it would “proceed as a flawed framework that perpetuates – and perhaps tacitly endorses – the types of human rights violations and high risk financing scenarios that occurred in DAPL”. This is a reference to the Dakota Access Pipeline, the controversial project which was one of the reasons behind the update.
First Peoples Worldwide, which met with Equator Principles Association (EPA), the body which oversees the principles in May 2018, criticised the “lack of a human rights-based implementation of free, prior and informed consent (FPIC)” in the draft and the retention of the “distinction between Designated and Non-Designated countries”.
This latter point is key as it was this distinction that prevented the application of the principles to the DAPL project.
As it stands, projects in ‘designated countries’ – i.e. high-income OCED ones like the US – rely on the host country’s laws and regulations as a substitute for the principles, on the assumption that they will be more robust.
Therefore when 17 banks – 13 of which were signatories to the Equator Principles – invested $2.5bn in DAPL, there was no obligation to apply them.
But in March 2017, United Nations Special Rapporteur Victoria Tauli-Corpuz deemed the project to have been granted “without an adequate social, cultural or environmental assessment”.
Later that month, Dutch bank ING announced that it had sold its $120m loan to the pipeline, following what it described as “constructive dialogue” with representatives from the Standing Rock Sioux Tribe, whose land the pipeline traverses.
Then in May 2017, 10 European banks wrote to the EPA calling for “a significant improvement” to the framework, to avoid risks from projects where the principle of indigenous peoples informed consent has not been applied.
They said the Principles’ reputation as a “gold standard” was at stake.
The letter cited “a recent project located in a Designated Country” – widely interpreted as being the DAPL – and bemoaned the lack of “leverage” offered by the Equator Principles to challenge the project, as there was “no breach with the applicable environmental & social standards being used”.
In other words, the Equator Principles offered no recourse.The banks called for the “same environmental and social standards” to be applied to all countries in the framework.
This call for uniformity in application was echoed by over 90 investors in a statement convened by US SRI firm Boston Common a few months later.
In response to the pressure, the EPA announced an unprecedented review in November 2017.
Traditionally the Principles have been updated in line with International Finance Corporation’s standards, which underpin the Principles.
That 18-month review resulted in the current draft, which will be out for consultation until the end of August.
The retention of designated countries in the next draft was also criticised by Steven Heim, Managing Director at Boston Common.
He said the “Equator Principles need to apply north of the Equator…member banks should not rely on governments to protect the rights of indigenous peoples”.
RI understands that North American banks have been the most resistant to changing the designated country rule in the consultation.
Heim added he is currently working on another investor statement to the EPA and will also participate on a webinar on the draft hosted by the Human Rights Resource Centre with Carla Fredericks, the Director of First Peoples Worldwide.
The EPA draft also includes two possible options on FPIC.
One is described as “grossly insufficient” by First Peoples while the other is seen by the non-profit as “more protective”. But it added that neither version includes FPIC as a “right… as enumerated in the United Nations Declaration on the Rights of Indigenous Peoples and other international instruments”.
“Free Prior Informed Consent not only protects indigenous peoples, it also protects the banks,” Fredericks told RI.
“If they go through a robust due diligence and risk management that is grounded in Free Prior and Informed Consent, they won’t incur the types of loses the banks had with the [DAPL] pipeline.” She puts the losses at around $4.5bn dollars.
But Fredericks added that FPIC must include the right to “withhold consent, to say no”.
EPA Chair Nigel Beck told RI in June that disagreements on FPIC was the reason the draft had been delayed.
Ninety-six financial institutions in 37 countries have adopted the Principles, covering over 70% of international project finance debt in emerging markets, so achieving consensus is no mean feat.
Despite their criticism of the principles in the May 2017 letter, ABN AMRO, Natixis and Société Générale declined to comment on the draft for this article.
Other signatories including BNP Paribas, Credit Agricole, Intesa San Paolo, NIBC and Rabobank had not responded at the time of writing.
Dutch bank ING, which is coordinating the EPA review along with US giant JP Morgan, also declined to comment.
Johan Frijns, Director at Dutch finance campaign group BankTrack, told RI that he was “sure that some banks would be disappointed, almost embarrassed” that this is the draft after nearly two years. On Twitter BankTrack stated: “If adopted, they basically mean business as before, with EP banks continuing to finance the very same disaster projects.”
Beck, who is also Group Head of Environmental & Social Risk and Finance at Standard Bank Group, did not respond specifically to the First People’s criticism that the new draft is a “flawed framework”.
He said: “The draft of EP4 takes important steps forward in addressing topics such as climate change, human rights and Free, Prior and Informed Consent, while staying true to its original purpose as a risk management framework.”He added that the “draft presented is a result of an extensive period of reflection and consideration, involving a broad strategic review with our stakeholders, expert advice and legal review, and the applied effort of a number of member-led working groups involving the diversity of EPA membership”.
“The Association welcomes all feedback from stakeholders during the public consultation”
“The Association welcomes all feedback from stakeholders during the public consultation, which will only serve to strengthen the final document.”
Over the next two months the EPA will conduct a series of face-to-face meetings as well as webinars to gather feedback on the detail of the draft text before it is finalised and launched.