The Equator Principles

In July the Equator Principles signatories published Equator II. The Equator Principles basically involves private sector banks adopting the International Finance Corporation’s (IFC) environmental and social guidelines for project finance. The goal is to establish a set of best practices for project finance. The IFC had updated its own internal standards, so the Equator Principles also needed to be updated.

What are some of the changes? The most important important is the lowered project size threshold from $50 million to $10 million. This means that smaller projects, e.g. hotel and real estate projects, will be subject to the guidelines.

The second important change to the Principles is the application of the Principles to project advisory work. Under Equator II, banks commit to making their clients aware of the Equator guidelines before the financing stage.

In 2005, $49 billion in cross-border project finance fell under the umbrella of the Equator Principles, and the number of supporting financial institutions is now 41. 80% of all project finance is now subject to the guidelines, i.e. the Equator Principles have become the de facto standard for project finance.

The NGOs involved in pressing for adoption of a code of conduct coordinate themselves through BankTrack. BankTrack members see the Equator Principles as a “baseline”, not a set of “best practices”.

What are some of the risks involved for the participants? For the participating banks, an obvious risk is involvement in a project that clearly violates Equator Principles. For a signatory to be involved in a dubious project and be found out could do a lot of damage to the institutions’s reputation.

For the NGOs, there will be a conflict between being outside agitators and being inside negotiators. NGOs can’t afford to be too involved in activities that lead to decreased fundraising, recruitment, and publicity. It will be a fine line to tread, and it will be interesting to see how they handle it.

For an earlier post on project finance, read here. Read also Building sustainability into syndication (pdf file) from Environmental Finance magazine.

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