January 22, 2019

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The New Equator Principles III Amplify CSR For Financial Institutions

The Equator Principles III set a precedent by applying UN Guiding Principles on Business and Human Rights.

Ariel_meyerstein

By Ariel Meyerstein, Esq., PhD

Last week, the Equator Principles (“EPs”), a private code of conduct adopted by 80 financial institutions globally, released a revised version – EPIII that significantly upgrades the banks’ commitments to corporate social responsibility, including human rights, climate change and transparency.

It also broadens their scope of application beyond the narrow confines of project finance structured loans to “project related” corporate loans of US $100 million or more (when certain conditions are satisfied). Significantly, the new EPIII may be the first corporate code to recognize the “responsibility to respect human rights by undertaking due diligence” in accordance with the UN Guiding Principles on Business and Human Rights.

The Principles were first introduced in 2003 by 10 banks in response to NGO campaigns criticizing their financing of controversial large-scale infrastructure projects like oil pipelines and hydroelectric dams. These projects can have tremendous impacts on economic growth, but more often than not also entail significant environmental and social impacts on local, often indigenous populations when they are built in countries with weak regulatory frameworks.

By adopting the Principles, Equator Principles Financial Institutions (EPFIs) commit that they will not finance projects where the project sponsor, their client, will not or is unable to comply with the Principles’ rigorous environmental and social risk management policies.

Widespread Impact, Perpetual Growth and Evolution

The EPs are particularly significant among other global codes of conduct because they target one of Equator Principlesthe key actors in the global economy – multinational banks – and apply to all of the most impactful industries, from agriculture to extractives. Indeed, at the time of their release, then-International Finance Corporation (IFC) VP Peter Woicke claimed the EPs were “far and away the biggest response by the private sector to the globalization debate.”

The EPs underwent a substantial revision in 2006 to keep apace with the IFC’s Environmental and Social Performance Standards (which the EPs incorporate) and respond to persistent NGO criticism.

In the ensuing years they have grown to encompass 80 institutions from 34 countries in North America, South America, Europe, Africa, Asia and the Middle East that lend to projects in over 100 countries, covering 70 percent of project finance in emerging markets. In the process, they have created a global standard applicable in both developed and developing economies, although they have had difficulty penetrating the BRICs (with the exception of 4 South African banks, only one Russian and one Chinese bank have adopted, and no Indian banks have adopted.)

Key Changes under the EPIII

After six years, a robust strategic consultation with is members in 2010-11 and a year-long update process in 2012-13 (including extensive consultation with stakeholders), the new EPIII have substantially enhanced the rules of the game again, although NGOs argue that they still have not gone far enough.

The revised Preamble to the Principles amplifies its previous statements on socially responsible development by making the “business case” for CSR more explicit, linking “sustainable environmental and social performance” with “improved financial, environmental and social outcomes.” The EPs now also ask borrowers to consider the full range of CSR and sustainability issues, referencing biodiversity, climate change and human rights for the first time.

Applying the UN Guiding Principles on Human Rights to Stakeholder Engagement and Grievance Mechanisms

Principle 2 now recognizes that some “limited high risk circumstances” may call for project sponsors to undertake and document “specific human rights due diligence” in line with the Guiding Principles’ Pillar Two, in addition to other impact assessments. Principle 6 also upgrades the grievance mechanism requirements to conform with the Guiding Principles’ Pillar Three on “access to an effective remedy.”

Principle 5 also enhances the previous stakeholder engagement criteria, tracking the IFC Performance Standards’ 2012 revisions. Notably, the new Informed Consultation and Participation process requirements pay special attention “the needs of disadvantaged and vulnerable groups” within local populations and requires that the process “be free from external manipulation, interference, coercion and intimidation.” 

Indigenous peoples are also designated for special treatment, requiring that consultation with these marginalized groups will need to comply with national laws implementing “host country obligations reconstructionunder international law,” which would include sources such as the International Labor Organization’s Convention No. 169 and the UN Declaration on the Rights of Indigenous Peoples. In certain high-risk projects, this may call for indigenous communities’ “Free, Prior and Informed Consent” (FPIC), although, as the EP III and the IFC Performance Standards themselves note, the precise contours of FPIC have not been universally agreed upon as a matter of international law.

Enhancing Project Level Disclosure Requirements

After considerable pressure from the NGO community from the EPs’ inception, the EPIII also substantially enhance project level disclosure requirements by requiring as part of the stakeholder engagement process that the relevant project assessment documentation is released to the affected communities in a culturally appropriate manner and in a local language “early in the Assessment process,” but in any event before project construction begins. Project sponsors must now also ensure that “at a minimum, a summary of the [environmental and social impact assessment] is accessible and available online.”

EPFIs themselves also now face enhanced and more systematized annual reporting requirements, including the release of the project name prior to financial close for project finance projects (subject to client consent and local laws.)

NGO network Banktrack finds these enhancements not quite enough, however, as they fail to empower project-affected communities as “rights holders” capable of vetoing project plans, but rather, appear to assume that projects ultimately will proceed in spite of any opposition.  As an example, they point to the infamous Belo Monte dam in Brazil, which has been protested by indigenous communities and held-up in Brazil’s courts for nearly a decade. 

The NGOs may have a point, but focusing on Belo Monte highlights that banks are not the only actors implicated in these major project decisions and that national development agendas (read: politics) frequently trump, no matter what the banks do. Brazil has moved forward with the project despite binding provisional measures issued against it by the Inter-American Commission on Human Rights for failures to apply FPIC and similar recommendations against the project from the International Labor Organization.

What the NGOs overlook, however, is that Belo Monte is now being financed exclusively by Brazil’s National Bank for Economic and Social Development (BNDES) and Caixa Econômica Federal, a Brazilian public bank that is an EPFI, precisely because a coalition of NGOs successfully scared-off several other potential EPFI funders in 2011 due to concerns they raised over the inability of the project consortium, Norte Energia S.A., to meet EP II requirements.

Climate Impact Alternatives Analysis and Reporting

For any project where the Greenhouse Gas (GHG) emissions are anticipated to be more than 100,000 climate changetons of CO2 equivalent per year, the EPIII now require project borrowers to do an “alternatives assessment” and provide evidence of pursuing “technically and financially feasible and cost-effective options” to reduce GHG emissions during the design, construction and operation of the project.

Borrowers now must also annually report on these emissions during the operational phase (and are encouraged to do so for all projects with over 25,000 tons of C02 releases), which can be done through national regulatory processes or through voluntary mechanisms, like the Carbon Disclosure Project.

Banktrack is not impressed, however.

They complain that borrowers remain free to not adopt the least GHG intensive alternative and that the mandatory threshold of 100,000 tonnes is higher than the IFC’s Performance Standards.  They also argue that the EPFIs ignored their calls to include financed emission reduction targets and to adopt a categorical exclusion of “high impact” sectors, such as coal mining and tar sands, and project types, such as coal power plants. 

Enforcing the EPs

On the whole, the new EPIII are a substantial upgrade, but as with all voluntary regulation, enforcement will remain a major question.  Banktrack is dissatisfied that the EPs have still resisted the call for a global, industry-wide private enforcement mechanism, such as those now in place at many multilateral development banks and some export credit agencies.

Such a mechanism seems difficult to achieve in practice, however, to be effective, it would need to have enforcement powers across multiple legal jurisdictions and incorporate diverse sources of both hard law and “soft law,” as well as industry standards. 

In light of these and other obstacles, the EPFIs have always preferred not to sit in judgment of one another but to rely instead on market mechanisms to keep their competitors in check: simply put, a bank that gets a bad reputation for EP compliance will find it harder to bring projects to international markets in the future.

Nor has the lack of an industry-wide complaint mechanism actually prevented efforts at enforcement, NGOs representing local communities have ingeniously created their own mechanisms for filing “Complaints” against banks for financing particular projects, such as the Uruguay Paper Pulp Mills and the Pascua Lama gold mine

Enhanced project-level transparency will likely lead to an increase in the number of such complaints, and while they can be a public relations disaster for implicated banks and their clients, such complaints will no doubt help refine global best practices not only for environmental, social and human rights due diligence, but also for implementing stakeholder engagement and grievance mechanisms in contexts other than infrastructure development.

Of course, the best way to avoid such public advocacy is to implement the Principles properly in the first place.

About the Author:

Ariel Meyerstein is a lawyer at Chadbourne & Parke specializing in international dispute resolution and the intersection of business and human rights, particularly in the financial and extractive sectors. Between 2009-2010, he conducted a global survey of implementation of the Equator Principles.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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