After a barrage of press releases in the afternoon of 3 June 2003, ten of the biggest international lenders announced on 4 June that they would be adopting the ‘Equator Principles’, a voluntary set of project finance guidelines related to managing social and economic issues.

The ten banks involved, ABN-Amro, Barclays, Citigroup, Crédit Lyonnais, Credit Suisse Group, HVB, Rabobank, Royal Bank of Scotland, WestLB and WestPac, are a veritable project finance "A" list. Together, these banks underwrote more than a third of project loans in 2002, with Citigroup arranging US$5,490 million or WestLB arranging US$3,760 alone, according to IJ's 2002 League Tables.

The momentum for this declaration had been building up over years, with sustained NGO pressure on some projects almost jeopardising their financing, as in the case of the BTC pipeline. This time the impulse came from the banks themselves, as they try to convince the world that they will go all the way down the ethical route.

Changing the rules?

Peter Woicke, executive vice-president of the IFC, said that this move by the banks will "change the rules of project finance for around US$100 billion worth of investment over the next ten years." Woicke also praised the banks for "doing something that financial institutions rarely do; stepping forward to take a leadership role on environmental and social issues."

"The Equator Principles will go on to affect project finance for dozens of industries, and represents the biggest response by the private sector in the globalisation debate," Woicke said in a press conference in Washington D.C.

"The banks will apply the Equator Principles to all loan projects with a capital cost of US$50 million or more, and will use a screening process for projects based on the IFC’s environmental and social guidelines. However, there won’t be any penalties should banks not adhere to the guidelines."

"The public arena will be the judge," said Woicke in an IJ interview. "In the future, if an Equator bank avoids the Equator Principles, then there is the very real possibility that there will be an uproar from stakeholders, NGOs and press alike."

However, Woicke told IJ that in the long run the banks would "need a mechanism which will act as an auditor of these principles."

Citigroup would rather act as its own auditor. Chris Beale, head of business management at the banking giant explained: "We will publish a portfolio summary which demonstrates how we deal with the Equator Principles. For example, if we have three Category "A" (high-risk) environmental assessments, which all, under Equator, require independent reviews, we will disclose whether or not they had environmental review. We may not be perfect at the outset, but we want to demonstrate to outside stakeholders and people with outside interests that we are implementing these practices."

"It is the right thing to do from a client point of view. If you get it right first time, you are going to save yourself time and money in the long run."

The fact that the Equator Principles are not statutory, leaving banks able to flaunt the principle because of lack of punishment was seldom addressed at the DC press conference. "There are no hard and fast rules in deciding how bad a project is environmentally. The Equator Principles will be applied to each transaction on its merits, and the banks will make their decision, said Berndt Schanzenberger, head of environmental affairs at the Credit Suisse Group, to IJ. Chris Beale added that IFC guidelines are not statutory either, and that the World Bank and the IFC face no penalty for not meeting their own guidelines. "The 'penalty' will be that the project will not get financed by the banks," says Beale.

All the projects, reviewed under the Equator Principles have a bottom limit of US$50 million. There are those who wanted every project scrutinized. According to a source at Barclays, a limit was set because "nearly all the projects that require financing cost over US$50 million."

The details of the ‘screening processes’ and the publicity of the decision making process within each banks calls for further explanation by the Equator Ten.

Beale says: "We propose the ABC rating. We categorise whether a project is high (A), medium (B) or low (C) risk and look at each one of its merits. A new 'environmental unit' will be created, and they will review our Category ‘B’ projects, because sometimes the categories will need upgrading or downgrading."

Beale went on to say that some banks would look at outsourcing assessors, whilst some might look at keeping Equator in-house. "In this present climate, not all banks can afford to recruit."

Credit Lyonnais is one of them. Peter Goodall at the French bank feels that structure will need to be put in place around the Principles. "[At Credit Lyonnais] we fully expect to have people placed in the commercial front office. It will be about dedicating people’s time." Goodall would not elaborate on how much the training and implementation would cost.

By joining the Equator Principles, banks now have to put in place internal policies and processes consistent with them. "If we couldn’t do this, then we wouldn’t have gone into it because of the attention that pressure groups give to large project financing", says the spokesperson at Barclays.

Lessons learned

Peter Woicke remembers how, four-and-a-half years into his mandate at the IFC, he was told by NGOs to "go and preach on Wall Street about the [environmental] principles. A year and a half ago the private sector became very interested in the IFC guidelines, [because they were] under pressure from NGOs."

In October 2002 Peter Woicke, at the request of Dutch banking giant ABN-Amro, convened a meeting at the IFC with a number of other banks, all of whom were to eventually get involved with the Equator Principles, led by a core group of four : ABN AMRO, Barclays, West LB, and Citigroup.

"You are going to save yourself time and money in the long run." (Chris Beale)

"We wanted to increase awareness of the particular roles that the banks play," said Peter Mudde, head of reputation management and sustainable development at ABN-Amro. "The banks have learned lessons. There has been a sincere internal drive within organisations. We believed we had to do something about sustainability. It was a joint effort."

At the meeting, there was a discussion as to whether the oil and gas industry should be the only industry ‘governed’ by these principles. Then, according to Beale, it was decided that all the industries should be affected.

The decision was then made by the banks, after consultation amongst each other, to go by the IFC and World Bank guidelines, which had been in use at the IFC for the past 12 years.

"The key thing," Corrie Shanahan, spokesperson at the IFC said, "is that the top operational guys from risk management and project finance were there. They get things done. It wasn’t led by the corporate social responsibility directors. Everyone was buying the idea that something needed to be done. The commitment was made from the highest level, and that transcended through all levels of the organisation," Ms Shanahan said to IJ.

Citigroup went to NGOs in Amsterdam and Washington with proposals for the Equator Principles, and the reaction was very positive.

In April 2003 17 banks met in Dusseldorf, where the Equator Principles were drafted. Six people from the environmental department of the IFC were invited, and after vigorous debate, a deadline was reached.

"We decided to launch it at IFC and the banker’s meeting. We wanted a deadline," said Beale, "we wanted it signed ahead of time and we wanted press there."

Paul Mudde at ABN-Amro said that he hopes to get multilateral companies, ECAs, as well as banks on board too. "It is very important they all communicate with each other," he said.

International lenders are not just resting on their laurels. According to the IFC, they now want to get all their competitors involved in the Equator Principles.

Three banks- Norwegian bank Nord LD, Dutch bank ING, and Australian ANZ are all slated to come on board, according to Shanahan. "The banks didn’t realise what the effect of the announcement would be. The atmosphere is euphoric here at the IFC."

Chris Beale said that he hopes that six more will sign up to the Equator Principles in 4-6 weeks, and predicts that 25-30 banks will sign by June 2004.

It’s good for business

Chris Bray, head of Environmental Risk at Barclays, insists all banks believe it is good for business. "[The banks] believe that having a framework for the industry will lead to greater learning amongst project finance banks on environmental and social issues… in other words, they believe it is good for business."

Peter Woicke agrees with Bray. "The banks with the Equator Principles will have the advantage." Beale says: "The growth in project finance could go up again."

At CSFB Berndt Schanzenbaecher feels that banks will look at changing their stance vis-à-vis environmental projects. He is quick to remind IJ that CSFB have been spending money on geothermal plants for years. "I expect Banks adhering to these principles will look at the projects mentioned that are better for the environment."

In the far-reaching future, the IFC’s spokesperson hopes that the banks will be so socially responsible that her organisation won’t have to work in emerging countries anymore. "In theory this could make us defunct. It would be wonderful."

Woicke says that with the banks that signed up, it’s more than a "public relations exercise. It seems to be a true commitment," said Woicke.IJ

Alex Ferguson