10 Years’ Equator Principles: A Critical Appraisal

cp. EPA (2013b).

cp. EPA (2013a).

The following quotes refer to the third generation of the EPs (EP III): cp. EPA (2013a: 5).

cp. International Finance Corporation (2012a, b).

This includes Scope 1 and Scope 2 emissions: Scope 1 emissions are direct GHG emissions from the facilities themselves while Scope 2 emissions refer to the indirect GHG emissions associated with the off-site production of energy used by the infrastructure or industry project (cp. EPA 2013a: 19).

cp. for more information on E(S)MS: Wood (2003a, b), Wood and Johannson (2008).

cp. Meyerstein (2013: 26).

Interestingly, the new IFC Performance Standards require annual reports for projects emitting over 25,000(!) (and not 100,000) tonnes of CO₂ equivalent annually. The EPs’ threshold is much higher than the one on the IFC Performance Standards. Thus, the EPs fall behind the commitments made by the IFC Performance Standards. ‘EP III does not contain any commitments on issues that are beyond what is included in the IFC Performance Standards. In some cases the commitment in EP III is even below what is required in IFC PS (such as reporting requirements on CO₂ emissions)’ (cp. BankTrack 2012: 8). The EPs should ideally go above and beyond the IFC Performance Standards and not fall behind.

cp. Andrew (2009: 306).

On the other hand, the still ongoing trend towards privatisation of state-owned enterprises and the deregulation of state monopolies and key industry sectors (e.g. electricity and telecommunication sectors) in developing countries and emerging markets in combination with the overall trend towards globalisation boost the project finance sector (cp. Scholtens and Dam 2007).

cp. Lazarus and Feldbaum (2011: iii).

EP I was solely restricted to project finance. EP II included advisory services related to project finance. EP III goes one step further and incorporates project-related corporate loans and bridge loans. EP IV ideally extends the scope and goes beyond project finance including all forms of corporate financing, export financing, etc.

cp. BankTrack (2012: 8).

One noteworthy exception is Brazil. Here, five financial institutions joined the EPA. Another exception, although the country is not part of the BRIC countries, is South Africa. Here, three financial institutions have adopted the EPs.

Other global players which have not yet joined the EP club are the Deutsche Bank, Morgan Stanley and the Swiss UBS.

cp. Meyerstein (2013: 20).

Most of the member institutions are from high-income OECD countries such as Australia (4 EPFIs), Canada (7), France (4), Germany (4), Spain (5), the Netherlands (6), the United Kingdom (5) and the United States (5). One reason is that Western European and North American financial institutions face strong reputational pressure to become ‘green’ and to behave in a socially responsible manner.

cp. Thomson Reuters (2012), Lazarus (2014).

cp. Hardenbrook (2007: 212).

The EPs as an industry-wide standard theoretically help to prevent ‘environmental shopping’ by creating a level playing field. The greater uniformity and commonality among project financiers make it harder for corporations to pit one financial institution against the other and to negotiate or water down environmental and social standards (cp. Hardenbrook 2007: 211). Yet the missing global coverage and outreach to BRIC countries impedes the (entire) abolition of ‘environmental shopping’.

cp. Lazarus (2014).

cp. Lazarus and Feldbaum (2011: 6), Conley and Williams (2011: 557/566).

cp. Lazarus and Feldbaum (2011: iii).

BankTrack (2012: 4) criticises the EP III (draft) for being a ‘watered down compromise between parties with a widely divergent view on matters, with those Equator banks aiming for a more ambitious new “gold standard” clearly loosing the debate from those who are fine with a little tinkering on the edges’.

On the one hand, breaches of client confidentiality ‘can entail civil or criminal sanctions and damage relationship between a lender and its client’ (Richardson 2005: 287). On the other hand, ‘NGOs have complained that this caveat [appropriate confidentiality considerations] is a hindrance to disclosure and transparency. They have found that banks are characterising many relevant issues as “commercially sensitive” and, as such exempt from disclosure for reasons of confidentiality’ (Mikadze 2012: 1406).

cp. Wright (2012: 64).

cp. EPA (2011).

cp. BankTrack (2011, 2012).

cp. the 1989 ILO’s Convention No. 169 on Indigenous and Tribal Peoples, the 1992 Rio Declaration on the Environment and Development, the 1998 Aarhus Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters as well as the 2007 UN Declaration on the Rights of Indigenous Peoples.

cp. Lazarus and Feldbaum (2011: 10), BankTrack (2011: 10), BankTrack (2012).

cp. Schepers (2011: 101).

cp. O’Sullivan and O’Dwyer (2009: 556).

cp. Haack et al. (2010: 23), O’Sullivan and O’Dwyer (2009).

The Alien Tort Claims Act in the United States allows US companies to be sued by foreigners from the host country in US courts for torts committed abroad. Domestic courts become increasingly aware of human rights abuses committed on foreign soil and the need to grant legal standing for the victims. More and more litigations are brought before domestic courts for distant human rights violations perpetrated by governments or private actors such as multinational companies (cp. Imai et al. 2007: 137; Imai et al. 2012; Zumbansen 2004, 2005, 2006).

cp. Marco (2011).

If a lawsuit could be brought against an EPFI for violating the EPs, this would have significant consequences: EPFIs would have an increased incentive to strictly screen and monitor financed projects in order to avoid lawsuits (as well as the fines for violating environmental and social laws, the court fees for defending against these lawsuits and the damage to the brand reputation). Yet this possibility would also create a large disincentive for other banks to join the EPA, and already members of the EPs could leave the association to avoid being sued (cp. Hardenbrook 2007: 218). Nevertheless, accountability, liability and transparency are indispensable aspects of an effective governance regime: Global environmental, social and human rights standards can only be established and effectively monitored when the relevant actors can be held accountable for their practices. Moreover, third-party beneficiary rights and the possibility of lawsuits could also help to separate free-riders that are merely interested in gaining reputational benefits from those EPFIs that are truly committed to the ‘spirit of the EPs’.

cp. the 1789 US Alien Tort Statute/Alien Tort Claims Act: ‘The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States’ (28 U.S.C. § 1350).

cp. Supreme Court of Canada (2013).

cp. Marco (2011), Hardenbrook (2007: 218).

cp. Sarro (2012: 1542).

cp. O’Sullivan and O’Dwyer (2009).

The IFC has already established an ombudsman and compliance officer; cp. IFC Compliance Advisor Ombudsman (2013).

These third-party complaint mechanisms on the associational level could complement client’s project-level grievance mechanisms. These mechanisms ideally help to enhance corporate credibility and reputation by fostering lender and client compliance. They also help to overcome the problem of freeriding (due to the fact that the detection of freeriding and cheating is more likely) and help to avoid collective-action problems (among EPFIs and within the EPA) and principle-agent problems [between lenders (EPFIs as principals) and sponsors/clients (as agents)]. Interestingly, EPFIs play a double role: They function as self-regulators and regulators; the EPs regulate Equator banks (being part of the regulating EPA) as well as EPFIs’ clients via loan documentation and covenants (i.e. hierarchical relationship) (cp. Flohr 2014).

So far, a delisting is possible according to the EPA Governance Rules if an EPFI fails to report publicly within 18 months or if it does not pay the annual fee. Only in these cases will an EPFI be removed from the list and, thus, be no longer a member of the EPA (a read option, however, is still possible). Yet it is not planned to delist a company due to noncompliance.

cp. Lazarus and Feldbaum (2011: iii).

cp. Marco (2011: 453).

Dirty projects are those projects that involve one or more of the following socio-environmental and human rights standards violations: environmental degradation; community health risks; destruction of community livelihoods, especially those of indigenous peoples; forced resettlements and displacements; forced labour/child labour; poor working conditions/violation of labour rights; unfair terms of employment; trade union intimidation and suppression; discrimination due to gender, race, nationality, ethnicity, religion, disability, age or sexual orientation; use of coercion, intimidation and violence; obstruction of justice and intimidation of the free press; production of and trade with illegal and/or controversial weapons; trade with countries that abuse human rights; pervasive tax noncompliance; speculative investments, especially investments in food commodities; corruption, bribery and fraud; contribution to war crimes; collaboration with security forces/paramilitary groups; and human rights violations committed by subsidiaries and (sub-)contractors along the labour and supply chain. By providing financial support to their clients (i.e. provision of corporate loans as well as managing, underwriting and/or assisting with the issuance of shares and bonds; financial institutions (FI) are also significant shareholders in many of the companies), FIs tacitly condone, promote and profit from the controversial business operations of their business partners—some of these harmful investments contribute directly to serious breaches of human rights and social and environmental regulation. FIs, thus, play a key role in determining the future existence of the aforementioned detrimental business practices: Through their investment and business decisions, they co-determine whether or not financial resources are used in an ethical and sustainable manner (cp. Facing Finance 2012, 2013: 4).

cp. BankTrack (2011: 13), BankTrack (2012: 10).

cp. Lazarus and Feldbaum (2011: 8).

cp. Lee (2008: 362).

cp. Sarro (2012: 1549).

What happens if ‘encouraging’ and ‘awareness rising’ do not lead to anything? Which formal sanctions exist?

For example, the alternatives analysis requires ‘the evaluation of technically and financially feasible and cost-effective options’ leaving enough discretionary leeway for the involved EPFIs and their clients.

cp. Marco (2011: 470).

cp. Haack et al. (2010: 21), Wright (2012: 68).

The main motives for financial institutions to adopt the EPs include the following ones: (1) level the playing field, (2) managing financial risks/credit risk mitigation and (3) reputational risk management/managing nonfinancial risks. Besides these economic and self-interested rationales for EP adoption (i.e. EPFIs are regarded as private profit-seeking entities that try to minimise financial, legislative and reputational risks and/or try to follow a differentiation-based strategy that allows them to achieve competitive advantages), altruistic motives also seem to play a (minor) role: Among them are good corporate citizenship, environmental consciousness, public goods preferences (i.e. CSR and environmental protection/sustainability as public goods), social preferences or warm-glow preferences of employees, investors and consumers, etc. (cp. Chan 2012; Conley and Williams 2011: 550; Kulkarni 2010; Macve and Chen 2010: 894).

cp. for an opposing view (Scholtens and Dam 2007: 1308): ‘We do not find support for the view that adoption of the Equator Principles is merely window dressing, since there are at least some costs involved’ (e.g. larger operational, screening and implementation costs; EP compliance might also lead to a delay in project completion due to the time-consuming requirements). The costs, however, might be outweighed by the potential benefits of signing up (e.g. reduced reputational risk/better reputation, positive impact on (financial) risk profile, better market access, charging of premium prices, enhanced possibilities to recruit high-quality employees, etc.).

cp. O’Sullivan and O’Dwyer (2009: 566).

Due to a lack of adequate enforcement, monitoring and sanctioning mechanisms, the EPs (in their current version) seem to exist only on paper.

cp. Wright and Rwabizambuga (2006: 90), O’Sullivan and O’Dwyer (2009).

cp. Conley and Williams (2011: 564).

‘Adverse selection results from corporations joining the collective, gaining the benefits of the collective, while at the same time negatively affecting the collective by lowering the standards of the code […]. As the number of adoptees increases, the newer members are more likely attracted by the benefits while at the same time decreasing the level of compliance. Adverse selection reduces the incentive of strong performers to join or remain as members’ (Schepers 2011: 94).

cp. Wright and Rwabizambuga (2006: 91), Macve and Chen (2010: 895), Schepers (2011: 93).

cp. Sarro (2012: 1532).

Such a two-tiered membership structure is de facto already in place. The so-called Thun Group of Banks consisting of seven leading international banks (Barclays, BBVA, Credit Suisse, ING Bank, RBS Group, UBS and UniCredit) recently published a working paper on banks and human rights (cp. Thun Group 2013). The paper is the result of 2 years of deliberations among the Thun Group members and provides a (first) guide to the banking sector for operationalizing the UN Guiding Principles on Business and Human Rights. The paper recognises that the UN Guiding Principles apply to all parts of a bank’s business segments, including asset management, corporate and investment banking. The paper has been welcomed by BankTrack as a significant step towards recognising the relevance of human rights to banks’ core business (cp. BankTrack 2013); yet the paper has also been criticised for its limited scope: the main problem is that it focuses solely on Principles 16–21 of the UN Guiding Principles (which are related to the corporate responsibility to respect human rights) leaving aside the foundational Principles 11–15 as well as all those principles devoted to operational-level grievance, complaint and remedy mechanisms (cp. Principles 22 and 29 of the UN Guiding Principles).

The UN Guiding Principles on Business and Human Rights is the first global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activities. It encompass three principles: (1) ‘the state duty to protect against human rights abuses committed by third parties, including business, through appropriate policies, regulation and adjudication’; (2) ‘the corporate responsibility to respect human rights […] acting with due diligence to avoid infringing on the rights of others, and addressing harms that do occur’ (i.e. need for a human rights due diligence process that enables corporations to be aware of, prevent and address their adverse human rights impacts); and (3) ‘access by victims to effective remedy […] through judicial, administrative, legislative or other appropriate means’ (United Nations 2011b; cp. UN 2011a).

A huge problem in this regard that has to be tackled is the problem of illiteracy in developing countries.

This idea of inclusion (in the sense of Teilhabe and integration) bears some remarkable resemblances to the works of the Nobel Prize laureates Amartya Sen (2009) and Elinor Ostrom (1990) as well as to Kantian philosophy—including Kant’s notion of positive freedom, autonomy, human dignity and the categorical imperative which demands that people are treated as ends in themselves and never merely as means to an end (cp. Kant 1797/2013; 1785/2002; 1781/2011).

Haack et al. (2010: 33) speak of ‘legitimation as deliberation’ and the ‘communicative sources of legitimation’; see also Scherer's and Palazzo's (2007) interpretation of Habermasian discourse theory.

cp. Wright and Rwabizambuga (2006: 92), Andrew (2009: 302), Matten and Crane (2005), Moon et al. (2005).

Human rights due diligence requires (1) the development of a human rights policy statement, (2) periodic assessments and reports of actual and potential adverse human rights impacts of corporations’ activities and (stakeholder) relationships, (3) the integration of commitments and assessments into internal control and monitoring systems, and (4) reporting and tracking of human rights performance (cp. Torrance 2012).

Principles 7 and 9 (on independent review and monitoring) as well as Principles 9 and 10 (on reporting) can be easily combined, thus creating space for a separate principle solely devoted to human rights issues. This principle should then precede all others and serve as an anchoring or guiding principle (cp. BankTrack 2012: 11; BankTrack 2011: 16).

cp. Wood (2011a, b, 2012).

cp. Ruggie (2007, 2008, 2009, 2013).

cp. Wettstein (2009a, b, 2010a, b, 2012a, b), Wettstein and Waddock (2005).

cp. Scherer and Palazzo (2008), Scherer et al. (2009).

‘… lenders, owing to their expertise in the project finance sector and their understanding of existing norms on managing environmental and social risk […] are relatively well-placed to set effective standards and to effectively monitor their borrowers’ conduct. […] [yet] lenders are currently not well-placed to enforce the [EPs]. Their short-term interest in the completion of the projects they finance impairs their ability to credibly threaten to withdraw financing in the face of persistent non-compliance by borrowers’ (cp. Sarro 2012: 1524).

This ‘post-Westphalian world order’ (Kobrin 2009) is characterised by the following characteristics: shift from government to governance (Foucault 2008); erosion of the regulatory power of the nation state; fragmentation of legal-political authority and power; existence of regulatory or governance gaps; increasing ambiguity of borders and jurisdictions; blurring of the separation between private and public spheres; and politicisation of non-state actors such as transnational corporations, civil society and nongovernmental organisations (cp. Kobrin 2009: 5; see also Jessup 1956; Zumbansen 2006, 2010a, b; Baur 2011: 21).

cp. Conley and Williams (2011).

cp. Conley and Williams (2011: 565).

By reducing various forms of economic and noneconomic risks, the EPs can also help to make a project a more secure investment and a safer loan.

cp. Conley and Williams (2011: 546). Whether such a change in organisational culture has already started remains doubtful as recent financial market crises, the EURIBOR and LIBOR scandals and other corporate governance scandals (especially in the investment banking sector) have shown.

cp. Chan (2012: 1345).

EP III has to be considered as an improvement over EP II (cp. EPA 2006), but bigger steps must be taken by the EPFIs to further strengthen the EPs. Reform measures to fight global warming (climate change) and to fully realise corporate human rights responsibilities are important issues. Further fields of necessary reform include the extension of scope, an increase in transparency and accountability (see also BankTrack 2012).

cp. EPA (2010).

cp. Conley and Williams (2011: 565).