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Global standard for managing environmental and social risk in project finance transactions

The Equator Principles, a comprehensive framework of voluntary standards for financial institutions to manage environmental and social risk in their project finance transactions (e.g. pipelines, dams and gold mines), were formally adopted in Düsseldorf in May 2003. The founding banks were ABN AMRO, Barclays, Citigroup and WestLB. These banks, together with Calyon, Credit Suisse First Boston, HVB Group, Rabobank Group, The Royal Bank of Scotland and Westpac Banking Corporation, were the first signatories to the Equator Principles. Five years after the launch of the Equator Principles, sixty of the world´s leading financial institutions in the field of project finance, many large international banks as well as insurance companies, bilateral development agencies and export credit agencies, have joined this initiative.

The Equator Principles have become the global standard for project finance. The participating institutions have agreed to lend only to those projects where the borrower provides evidence of compliance with the environmental and social standards of the Equator Principles.

The Equator Principles have transformed the funding of major projects globally. Elements of a substantial and detailed environmental and social management have become the rule, for example to avoid and minimise the impact on flora and fauna, public hearings with the local population and independent inspection agencies. The framework is based on environmental and social standards of the International Finance Corporation (IFC), a World Bank subsidiary, and applies to projects with capital costs above US$ 10 million. In 2007, of the US$ 74.6 billion total debt tracked in emerging markets, US$ 52.9 billion was subject to the Equator Principles, representing about 71 per cent of total project finance debt in emerging market economies, according to Infrastructure Journal.

The Equator Principles were revised in June 2006 to reflect current implementation experience and to carry out further improvements, including a public reporting requirement for the participating financial institutions.

The success of the Equator Principles lies in the cooperation and trust among the participating financial institutions and with environmental and development organisations working to achieve a common good. Institutions implement the Equator Principles independently, always maintaining client confidentiality, while sharing best practice to ensure an evolving and improving standard.

Although limited to project finance, the Equator Principles have helped spur the development of other responsible environmental and social management practices in the financial sector and banking industry. Other business areas have benefited from the established standards and adapted them, improving environmental and social awareness throughout the banking industry.