Next month marks 12 years since a group of nine commercial banks came together in Washington DC in association with the International Finance Corporation (IFC) to launch the Equator Principles (Principles). Today that figure has grown to 80 (including my own, SMBC) and it’s hard to imagine the world of project finance without the kind of careful social and environmental screening that the Principles involve.
It’s easy among all the paper shuffling to forget what the Principles are there for, so let’s take a step back and remind ourselves. The Principles are not a box-ticking exercise to keep head office happy. Infrastructure can have a massively positive effect on the environment and the lives of people living near it – or in the worst cases, a massively bad one. The Principles are there to encourage project owners and authorities to develop their projects sustainably and sensitively, so that, ideally, they do not leave the land and its population worse off overall than how they found it.
With the latest version, EP III, published last year, the Principles now go further than ever before to try and deliver real results in the form of responsibly procured projects. EP III makes explicit the need to address the human rights of affected populations, and extends its scope to include project-related corporate loans.
But for all our progress, support for the Equator Principles seems to me to be running out of steam as they enter their teenage years. In the first three years, over 40 banks joined the initial nine; in the last three years, according to the Principles’ official website, the number was just three.
Project finance is not – despite reports of its demise – dead by any stretch; in fact, it looks set to expand considerably in developing markets in coming years. Yet backing for the Principles is not keeping up: 53 of the 80 current members are in Europe, North America or Australia. China, whose role in financing African infrastructure (to say nothing of its own) is so crucial, has only one EP-compliant bank.
We need to do better. The weight of concern and protest for human rights, social justice and environmental standards is only getting heavier. Non-governmental organisations (NGOs) are increasingly shifting their focus from the builders and procurers of controversial projects, to their investors – and why not? We, as lenders, have a role to play to ensure our projects are a benefit to the environment as well as to investors.
If we had to think about it, none of us would want to damage our bank’s reputation just for the sake of one more deal or one more client relationship. The Principles are the best tool we have to mitigate this risk. In my personal view, we should therefore agree to exclude projects not compliant with the Principles from project finance awards and league tables.
We could find excuses not to act. The Principles have been criticised for not going far enough, and some banks may argue that they operate to a higher standard. There would also be issues around Principles certification to iron out.
Solutions, not excuses
But we should be looking for solutions, not excuses. That is what project finance is all about. Individual banks can overlay their own rules, but the Principles should be our minimum standard. Enforcing them in awards and league tables would be fairly straightforward: applicants can certify their own deals and review panels can be set up to screen and challenge projects.
Nobody would argue that we should finance projects that don’t meet even the most basic social and environmental criteria, so why do we allow such projects to win awards and recognition? I don’t argue that enforcing the Principles will win us more business or better projects necessarily. But I do think the moral argument is unanswerable. Infrastructure is in the ground for a long time. In most cases longer than our lifetimes.
In time we will be judged for our actions and their consequences. Don’t we want to be on the right side of history?
*Tylor Hartwell is an assistant general manager and head of transport and telecommunication at Sumitomo Mitsui Banking Corporation Europe. This article represents the views of the author and not necessarily those of his employer.