The Enguri river seen from the top of Jvari dam

A joint effort by banks across 37 countries to avoid social and environmental risks associated with their project finance exposures is breaking apart.

Early next week lenders will gather in Toronto for a final meeting on “equator principles” — standards financial firms have shared for 15 years to avoid lending to projects that might impede indigenous people’s rights. But the banks are quarrelling over the revisions, with some European lenders clamouring for the EPs to be strengthened following the controversial Dakota Access pipeline deal in the US.

A failure to agree on a new set of principles raises the prospect that the existing principles will become worthless in the eyes of investors just as banks are increasingly facing political pressures concerning their lending practices.

“They [the banks] are clearly not on the same page, and the worst-case outcome is that you get no revision,” said Jamie Bonham, manager of corporate engagement at NEI Investments, a Toronto-based asset manager overseeing C$7.8 billion. “The fear is that the equator principles as a brand become irrelevant.”

Investors view the EPs as a risk-mitigation tool that creates an expectation for banks in a lending consortium to adhere to an agreed set of social and environmental values, Mr Bonham said. The standards give assurances that banks’ deals “won’t blow up in their face and then become an issue for us as investors,” he added.

Pressure groups such as the Sierra Club have applauded the EPs and attacked banks when they participate in deals that appear to deviate from the standards. Big pension funds, such as US state of Connecticut retirement plans, will use their shares to vote for companies that sign on to the equator principles.

But the EPs drew criticism during a fight to stop Energy Transfer’s Dakota Access Pipeline in the US in 2017. More than a dozen banks that adhered to the principles proceeded to finance the deal despite concerns that the pipeline could poison the water supply for nearby native tribes.

Amid the public uproar over the pipeline, ING, a Dutch bank, sold a $120m loan for the project and divested from $220m of shares in Energy Transfer. BNP Paribas, a French bank, and DNB, a Norwegian bank, also severed ties to the pipeline project in 2017.

The Dakota Access Pipeline dealt banks a reputational blow, prompting some to call for a review of EPs. Lenders such as ABN AMRO, BNP Paribas and Société Générale have asked for the principles to be changed so that people in developed countries have “free, prior and informed consent” to a project before it is started. The existing version says people in mostly developing countries are entitled to free, prior and informed consent, but the protection does not extend to people in the US, for example.

Critics of the latest EPs draft say it is unclear how and when “free, prior and informed consent” would apply to people in developed countries. First Peoples Worldwide, an indigenous rights group, has said it “remains concerned about the lack of a human rights-based implementation of free, prior and informed consent” in the EPs draft and wants the distinction between developed and developing countries eliminated. Some banks have also criticised what they see as a lack of ambition in updating the principles.

After the Toronto meeting, the public will have an opportunity to submit final comments on the principles draft until August 9. Banks are expected to vote on the final version of the updated EPs later this year.

Get alerts on ESG investing when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article