Private and Public Banks - Background

The recent credit crisis shows the crucial role banks play in allocating financial resources and the dependence of companies, governments and the whole economy of the financial services provided by private and public banks. Apart from providing the base to keep the economy going, financial services may be used for activities, which are harmful to the environment, human rights and social equity. The number of private and public banks involved in financing very harmful and destructive oil and gas, mining or logging projects proves this. However, given their importance, banks may also be powerful agents of change towards sustainable development.

Over the past years some banks have made a shift towards addressing environmental and social impacts of their financial services, realising that ignoring social and environmental issues can considerably increase their exposure to credit, compliance and reputational risks. However, good intentions and even strong policies on paper aren’t enough as long as they don’t result in an improved performance of the bank and positive results on the ground in affected communities and environments.

In order to push banks into that direction, BankTrack was created, a network of civil society organisations and individuals, tracking the operations of the private financial sector (commercial banks, investors, insurance companies, pension funds) and its effect on people and the planet. BankTrack’s latest report “Bank to the future” issues a statement on banks and the financial crisis. Otherwise, BankTrack has published a series of reports and analyses of banks, their standards and their human rights obligations. It has also published a manual on “The dos and don’ts of Sustainable Banking” aiming at banks that are ready to improve their standards and performance. The manual stresses some crucial points to which banks need to commit if they are serious about doing sustainable banking. These are:

• Sustainability: which would include a redefinition of a bank’s mission following guidance of the Universal Declaration of Human Rights, the Agenda 21 and the Millennium Development Goals to start with. It would also include an evaluation of a banks portfolio in order to identify the potential environmental and social impacts of the financial services provided, leading to the development of sector and regional/country policies as well as issue policies such as human rights, climate change, tax evasion, corruption and governance.
  
  
• Do no harm:  this means prevent and minimise environmentally and socially detrimental impacts of their portfolios and their operations. For this the precautionary principle should be at the base of standards and procedures and needs to be implemented rigorously.
  
  
• Responsibility: which would include the acceptance of responsibility for indirect impacts by banks’ business activities and the development of responsibility guidelines. Thinking beyond the frame of the own bank, banks should accept their responsibility in their sphere of influence should support environmental and social liability legislation rather then lobbying to prevent them.
  
  
• Accountability: to their stakeholders. Especially accountability to those that are affected by the companies and activities banks finance. They must be given an influential voice in financial decisions that affect the quality of their environments and lives.
  
  
• Transparency: which would include annual sustainability reporting and transparency on policies and their implementation. Not like some banks, which insist they have good policies but aren’t able to publish them for confidentiality reasons. Disclosure of details of important clients would be part of this.
  
  
• Sustainable Markets and Governance: which would include such things as support for transparency within the extractive industries and the avoidance of tax havens.

“The dos and don’ts of Sustainable Banking”


Equator Principles

Given the enormous variety of banks, with most countries having a number of national/international banks, which differ according to their national framework and set-up, no real common standard, let alone a binding one exist. What comes probably closest to a common standard, are the so-called Equator Principles (EP). These were launched in June 2003 and are modelled on the International Finance Corporation’s (IFC) “safeguard policies”, which were set up to assess, mitigate and manage the social and environmental risks of IFC-funded projects.

They apply to project financing, one special financial instrument banks offer, under which the credits of a project are paid back through the revenues generated by the project. Those banks that sign up to the principles promise to consider the impacts of a proposed project on local environment and communities. They promise as well to make addressing negative impacts a condition of their lending money to the borrower or project sponsor. To date 61 banks and export credit agencies have signed up to the Equator Principles and are called Equator Principles Financial Institutions, EPFI, which are said to account for 85 per cent of global (cross border) project finance. 

The Equator Principles were revised in 2006, lowering the threshold triggering the use of the EP from US$ 50 million to US$ 10 million. Other changes were that the EP apply as well to project advisory companies like accounting firms, not only the direct project promoter. The need to obtain “Free prior informed consultation” of local people as required in the IFC performance standards has been strengthened. This goes for projects in low and medium income countries. Following fierce criticism on the lack of transparency around the EP the revised principles ask EP banks to report publicly at least annually on how they are implementing the principles.

The assessment of the EPs vary from claims to have created a gold standard in project finance and having transformed the finance industry, to the criticism that the EP banks still have to prove their claims of improvement as the continuing lack of detailed disclosure gives civil society no possibility to scrutinise the claims.

One important concern of civil society is that project finance is a niche market in international financing and that the Equator banks do stick to business as usual in other sectors, financing the same destructive projects under corporate finance schemes.

Other concerns exist around the question of “free-riders”, those adopting the EP on paper without actually implementing them into their banking praxis. As Johan Frijns, coordinator of BankTrack puts it: “For example, the ease with which banks can adopt the EPs – merely issuing a press release will do – is not matched by a rigorous requirement to report in detail on implementation, or the existence of a mechanism to remove institutions from the ranks of the EPFI in the case of continuous non performance. The result is an increasingly watered down ‘standard’ where a dozen well-meaning banks rightly fear for reputation damage caused by free-riders – banks that sign up to the initiative but do not fulfil their commitments under it. The EPFIs now seem to be beginning to address the need for increased governance, but what is proposed so far is far from sufficient.”

On the positive side, defenders of the principles explain that the EPs are a Trojan horse that has “brought into the world’s leading banks a first squadron of sustainability specialists. And what has emerged since then in bank after bank, from HSBC to ABN Amro to Mizuho RBS is that those specialists have then pioneered and supported a range of innovations in banking” as Leo Johnson, director of Sustainable Finance explains. The publication “Ethical Corporation” has published a debate between these two experts on the Equator Principles at the event of the fifth anniversary of the principles. 

Banks and Human Rights

The Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, presented his report “Protect, Respect and Remedy: a Framework for Business and Human Rights” in April 2008 and was given a new mandate to deepen his research.

Following this, five NGOs, Center for International Environmental Law (CIEL), Bank Information Center, BankTrack, Oxfam Australia and World Resources Institute, made a submission to the Special Representative on “The International Finance Corporation’s Performance Standards and the Equator Principles: Respecting Human Rights and remedying violations?” (pdf).

In the submission they consider the extent to which the Performance Standards/Equator Principles (PS/EP) provide sufficient guidance for project sponsors to manage the human rights risks of their operations and find that the framework for meeting their responsibility to respect or remedy human rights is not robust enough. The submission identifies three critical areas:

• “Substantive Standards: The PS/EPs do not address many critical human rights issues, and address others only partially or in ways that do not meet international norms and standards.
  
  
• Due Diligence Procedures: The PS/EPs do not provide an adequate procedural framework for conducting human rights due diligence. Although the PS/EPs require a comprehensive environmental and social assessment for high-impact projects, they do not require explicit assessment of potential impacts on human rights.
  
  
• Grievance Mechanisms: While the PS/EPs require project sponsors to implement project-level grievance mechanisms, these mechanisms are not required to meet any minimum due process standards.”

The submission draws the conclusion that the PS/EPs must be significantly amended in order to provide project sponsors with appropriate guidance to meet their human rights responsibilities and to minimise human rights-related risks. The groups ask the Special Representative to address in the new phase of his mandate the question of how the PS/EP could be harmonised with international human rights norms. Their concrete proposals are:

• “Assessing potential approaches for IFC, Export Credit Agencies (ECAs) and Equator Principle Financial Institutions (EPFIs) to embed human rights standards and rights-compliant procedures and accountability mechanisms into their financing requirements;
  
  
• Facilitating a dialogue between civil society and the relevant decision-makers at IFC, ECAs and the EPFIs to explore improvements to current practice;
  
  
• Reporting on these issues in subsequent reports to the Human Rights Council.”