The Equator Principles: a milestone or just good PR?

Many of you will have seen the latest advertising campaign by the Westpac Bank telling us that 'every generation should live better than the last' and promoting the fact that they were Australia’s first bank to adopt the Equator Principles.

Many of you will have seen the latest advertising campaign by the Westpac Bank telling us that 'every generation should live better than the last' and promoting the fact that they were Australia’s first bank to adopt the Equator Principles.

In June 4, 2003, at the headquarters of the International Finance Corporation (IFC) in Washington, 10 international banks stepped forward to take a leadership role on global environmental and social issues.

The IFC and some of the world’s leading banks have voluntarily adopted common environmental and social standards in their financing of projects around the world. Is this just good PR? Do the so-called Equator Principles have teeth? Or is it a true breakthrough in terms of the financial community taking greater responsibility for the social and environmental consequences of its lending activities?

By adopting the so-called Equator Principles, these banks have agreed to use clear, responsible and consistent rules for environmental and social risk management in project finance lending. It is an unprecedented voluntary private sector initiative.

Their commitment underlines the change that has taken place within the financial community. From the "hands off" attitude of just a few years ago, these banks have come to recognize their role and responsibility for promoting sustainable investment.

With impressive speed, the Equator Principles have become the new market standard, thus transforming project finance.
 
How did this remarkable transformation come about? There are many who would like to take credit for having strategically planned and executed it, but it is more correctly characterised as an organic process. The conditions were right, the need was there, so the gap was filled. It was a coalescing of forces.

It has been a remarkable process characterized throughout by extraordinary trust and cooperation among the banks to achieve a common good. More than a declaration of intent, the Equator Principles have teeth.

From the preamble, the banks commit to "not provide loans directly to projects where the borrower will not or is unable to comply with our environmental and social policies and procedures". It will be up to each adopting bank to implement the necessary procedures to ensure that it is following the Equator Principles.

While we are seeing evidence of leading public companies adopting sustainable business practices in developed markets, there is still a long way to go to make sustainability fully integrated and therefore truly mainstream. A short-term focus still pervades both corporate and investment communities, which hinders long-term value creation. As some have said, "We are operating the Earth like it's a business in liquidation." More mechanisms to incorporate environmental and social responsibilities will be needed to enable capital markets to achieve their intended purpose - to consistently allocate capital to its highest and best use for the good of the people and the planet.

Today, there are over 40 signatories to the Equator Principles, which cover more than 80% of the global project-financing market. Of course, the devil is in the details. Adopting the principles is only the first step. But if the auspicious beginning is any indication, these banks are committed to making it work.