As part of my internship at STR-RS this summer, I conducted a survey of the reporting undertaken by Equator Principle Financial Institutions (EPFIs) for FYs 2007 and 2008. My research revealed that the majority of EPFIs have been complying with the bare minimum for implementation reporting.
The Equator Principles are a set of benchmarks for managing social and environmental issues in project finance. In terms of numbers the initiative has been successful. Nearly 70 financial institutions have adopted them since they were launched in 2003, and the IFC estimates that the Principles currently cover approximately 90% of global, cross-border project finance. But the picture is not so clear in terms of true implementation, mainly because reporting is limited at best.
In response to criticism from NGOs and other civil society organizations, the most recent revision of the Principles in 2006 introduced a new Principle on reporting. It 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.” The new Principle’s language is blatantly vague. For example, what are “appropriate confidentiality considerations”? Perhaps that is why it’s accompanied by a Guidance Note entitled “Guidance to EPFIs on Equator Principles Implementation Reporting.” This document makes suggestions as to how signatory institutions should report on their implementation methodology. It also discusses some good practice approaches for those “seeking to go beyond the requirements of Principle 10.”
Even though EPFIs now have access to detailed recommendations for reporting, most institutions simply state that they have signed onto the Equator Principles. They choose not to enter into detail regarding their implementation processes and experience. This is a shame, especially because the minimum requirement for discussion on implementation doesn’t ask for much to begin with. The Guidance Note says that EPFIs should describe how the Principles have been incorporated into policies and procedures, discuss who is responsible for overseeing their implementation, and describe how the Principles have been adopted internally in terms of training. In my opinion these requirements are superficial, especially when it comes to reporting on “experience.” The requirements on reporting do not stipulate the inclusion of case studies, for example. Including case studies is considered going beyond the requirements.
The EPFIs that do disclose a bit more have strictly adhered to the template suggested by the Guidance Note. This includes a table indicating the number of projects that were reviewed under the Principles as well as which category (A, B or C) these projects fell into. Level A is for projects with significant environmental and social impacts, level B for projects with limited impacts, and C for projects with minimal or no impacts. A handful of institutions have also reported “beyond the minimum” because they have disaggregated the projects by sector or region. Why disclosure of what sector or region a project pertains to is considered reporting beyond the minimum evades me. It seems like this should be considered basic information.
While there are some exceptions (like HSBC, which has published an entirely separate document detailing the way in which it applies and reports on the Principles), it is clear that the majority of signatory institutions are reluctant to fully disclose how they have applied the Principles. This is because reporting is a delicate matter for banks. The large number of stakeholders involved in complex infrastructure projects makes it difficult for financial institutions to legally disclose details of the projects they finance, and legal obligations to their clients inevitably take precedence over a voluntary agreement.
But publicly reporting on implementation is an essential part of the EP process because it holds the signatory institutions accountable. It also lends credibility to the initiative. Moreover, civil society needs to have access to information on specific cases in order to assess the validity and success of the Principles. Information on loans being suspended or projects being rejected on the grounds of environmental or social concerns should be uniformly disclosed.
Finally, determining exactly what socially responsible behavior is and what it isn’t is a tricky task. As a result it’s normally defined by best practices. Since most financial institutions are only willing to do what other institutions are doing and nothing more, it’s imperative for large banks to set high standards for themselves so that other banks will feel obligated to follow suit.
The Equator Principles have had a positive impact on international project finance, but more stringent reporting requirements are necessary if they are to maintain their credibility and effectiveness. Without improved reporting, the Principles run the risk of being perceived as yet another ineffective voluntary initiative. That’s a risk that the international community shouldn’t be willing to run.
By Davina Wood, Master of International Affairs Candidate at Columbia University