Last month, the Equator Principles Association (EPA) released the latest version of its sustainability risk framework for banks.
The publication of the fourth iteration of the Equator Principles followed a review process beset by delays, rumours of rifts between bank members and even a hoax by the Yes Men pranksters.
“A monumental waste of time and resources” – BankTrack
Stakeholders on the outside of that process describe it to Responsible Investor variously as “a mess”, “very opaque” and “a black box”.
Now that people have had a chance to appraise the text, both investors and civil society have expressed their disappointment at its lack of ambition – and expectation wasn’t exactly high following the release of the draft in the summer.
It was a “monumental waste of time and resources for everyone involved” says Johan Frijns, director of Dutch campaign group BankTrack.
Perhaps more concerning for the EPA is that even some of its own members are lukewarm. Robin Willing, Senior Sustainability Officer at NIBC, the Dutch merchant bank, described it as “not perfect” and a “compromise”.
He acknowledges, however, the difficult position the EPA is in; it has a global membership with a range of ambitions. This view is backed up by Jamie Bonham, Director of Corporate Engagement at Canada-based NEI Investments.
Currently, 101 banks from 38 countries are signatories to the principles.
Achieving consensus while remaining credible is a challenge; one that is faced by many sustainable finance initiatives.
But Bonham tells RI that what he has “less sympathy with” is the way the EPA handled the process; it didn’t need to be as opaque as it was, he says.
Carla Fredericks, Director of non-profit First Peoples Worldwide, for example, tells RI of the “serious irony” that stakeholders outside the EP membership, who fed back on the summer draft, weren’t allowed to see another draft before publication.
Many stakeholders also criticise the two months allocated to the public consultation when the review lasted nearly two years.
Amit Puri, Standard Chartered’s Managing Director and Global Head of Environmental and Social Risk Management who recently took over as Chair of the Equator Principles from Nigel Beck, disputes this characterisation.
“We have spent over two years since announcing this review in São Paulo in 2017, engaging with a number of stakeholders and consulting heavily amongst the Association and external parties,” he says.
“The intent of the Principles remains to set the financial industry benchmark for determining, assessing and managing environmental and social risk in Project Financing”, adds Puri.
It is important to understand the context in which the review was done.
Though never explicitly said, it was almost certainly the fallout from the controversial Dakota Access pipeline project (DAPL) that prompted the review.
Ten European member banks – including NIBC – wrote to the EPA in May 2017 in the wake of outcry over DAPL calling for “significant improvements” to the framework, which had last been updated in 2013.
Without referring to DAPL directly, they said that the framework had left them exposed to “reputational damage” as a result of an unnamed “recent project” where “consultation with indigenous community did not involve their free, prior and informed consent (FPIC)”.
Further pressure on the EPA was also brought to bear from investors and civil society.
All this persuaded the EPA, reluctantly, to undertake a “targeted” review of the framework to address areas deemed inadequate in the case of DAPL.
That process, which began in late 2017, was the first time a review had been undertaken outside of an update of the International Finance Corporation’s performance standards on which the Equator Principles are based.
Now we have the result of that review, is the financing of another DAPL by EP members any less likely?
NEI’s Bonham tells RI that he doesn’t see it. There is a path, he says, in the document to prevent it happening again but adds that there are “so many escape hatches” in the text that there is “no certainty that financiers or their clients would follow that route”.
A disappointed Fredericks highlights phrases like ‘as appropriate’, ‘at the EPFI’s discretion’ and ‘justified deviation’ that pepper the document.
Both the banks and investors had called upon the EPA to remove the distinction between ‘designated’ and ‘non-designated’ countries in the framework.
Projects in ‘designated’ countries, such as the US, were not held to the same standards as ones in ‘non-designated’ ones – which tend to be less economically developed countries. The assumption is that laws in the former match or exceed the IFC’s standards, an assumption the Dakota issue brought in to question.
That distinction remains in the new version, its removal was not considered “appropriate at this stage”, the EPA says.
The EPA did, however, introduce a requirement that even projects in ‘designated countries’ should be benchmarked against the IFC’s performance standards, which it described as a “substantial move forward”.
The lack of Free, Prior and Informed Consent (FPIC) of the Standing Rock Sioux people in the case of DAPL was a major source of unease – a United Nations special rapporteur even deemed the project to have been undertaken “without an adequate social, cultural or environmental assessment”.
Fredericks told RI earlier this year that any meaningful version of FPIC includes the right to “withhold consent, to say no”.
But the changes to the Equator Principles do not go this far.
Banks do not even have to fully meet the new IFC requirement. A caveat in the text (referring to IFC Performance Standard 7) states that if it “is not clear if FPIC has been achieved” during the consultation then it falls to the bank to determine, with supporting advice from a consultant, if this qualifies as “justified deviation” from the standard.
Fredericks put the cost to banks involved in DAPL – 13 of which were EP members – at around $4.5bn dollars; FPIC not only protects indigenous peoples, it also protects the banks, she told RI earlier.
Puri tells RI, however, that it is important to remember that the EP are a “risk management framework, not a risk appetite framework”.
“It is up to individual EPFI’s [Equator Principle Financial Institutions] to determine which projects they will or won’t participate in.”
Disagreements between members around FPIC caused delays in the publication of the draft in the summer.
In the end, that draft was released with two options on FPIC, with starkly differing levels of ambition, neither of which were included in the final document – a third option being preferred.
Bonham tells RI that despite the lack of transparency on the process you can see the “tension in the documents”. It shows, he says, that for the banks at the moment “you can talk around FPIC but never demand it”.
Fredericks also speaks of the diverging ambition among institutions when she described EP4 as “probably a very uncomfortable compromise”.
RI understands that North American banks were among the most resistant to more ambitious changes; NIBC’s Willing describes dialogue among the banks as “quite robust”.
He says: “I mostly agree with the critics on where it is at the moment. But on the other hand, I respect my peers and honestly this is far as we could push it at the moment. It is what it is.”
The lack of ambition among banks, generally, is something picked up in a recent report by SRI firm Boston Common, which found that the proliferation of sustainability initiatives in the last five years, gladly adopted by many banks, has had no real impact on their lending and investment practices.
But in the meantime, the imperative to ensure that banks’ internal risk controls are up to scratch will fall increasingly on investors, says Boston Common Managing Director, Steven Heim.
Fredericks agrees: “If I were an institutional investor focused on ESG, I would be writing a letter to those 10 [European] banks and members and I would be asking in light of the lack of commitment in EP4 what are the internal commitments of your institutions to address social risk.”
NEI’s Bonham says the framework gives investors something “tangible” to be used in engagements with the banks, a reference point.
EPA’s Puri tells RI that it will now be undertaking a “strategic review” and will publish an EP Strategy in 2020, which will include details of when the next comprehensive review of the principles will take place.