Issue No. 27, October 2014
Equator Principles: Drivers of Sustainability in the Oil and Gas Industry?
The Equator Principles III (EP), currently adopted by 80 financial institutions, provide a set of leading voluntary good international industry practice standards to clients to identify, assess and manage environmental and social risks and impacts. The EP are based on the International Finance Corporation’s Environmental and Social Performance Standards and World Bank’s Environmental, Health and Safety (EHS) Guidelines. They are intended to provide standards around environmental and social protection for financial institutions that do not have their own established standards. This note introduces the EP and assesses whether they are a driver of sustainability or not.
Launched in 2003, the evolving EP were updated for the second time in June 2013; the resulting revisions expanded the scope to include human rights and climate change due diligence and to broaden transparency and accountability. In 2014 an Implementation Note on the EP was published to provide information structured around three modules to support the implementation of the requirements within the scope of the EP.
The ten EP principles are intended to be adopted by Equator Principles Financial Institutions (EPFIs) investing in all industry sectors, including the extractive and energy industries, for project advisory services, project finance, project-related corporate loans, and bridge loans.
Overall, the EP promote environmental and social performance practices that contribute to commercial success while facilitating sustainability in business practices via:
- Access to capital: 70% of project finance debt in emerging markets is covered by banks adhering to the EP.
- Tools for integration and efficiency: The EP now integrate human rights due diligence and expand stakeholder engagement expectations to a wider range of projects. Some may initially view these provisions as commercially onerous, but several longer term benefits exist such as advancing project schedule because a company engaging stakeholders early and with the intention of addressing potential grievances will have a greater likelihood of securing and maintaining social license to operate.
- Mitigation of adverse impacts: Environmental and social risks can quickly turn into financial risk. By managing environmental and social risks effectively, a corporation is more likely to mitigate adverse business impacts associated with corporate reputation, cost, and schedule.
- Reducing risk from regulatory gaps: Local environmental and social legislation is more or less robust depending on the specific countries in question. In countries where legislative systems and regulatory practices are weak, social and environmental risks are likely to be higher. In fact, the EP distinguish those countries who are “designated” to have advanced regulatory regimes that do not require EP compliance.
- Management of carbon risk: According to a 2014 study by CDP, corporations that integrate climate change risk management secure an 18% higher return on investment that companies who don’t, and 67% higher than corporations that do not report their emissions. The new requirements to mitigate climate change offer an incentive on energy-intensive projects to reduce GHG emissions.
- Supporting global portfolio improvements: The assessment of environmental and social risks and impacts for a single project encourages the implementation of a robust environmental and social management system that can be applied globally on future projects and help to reduce overall enterprise reputation as well as commercial risk (e.g. as mentioned above, mitigating delays due to environmental and social issues).
- Recruiting and retention: By following the EP, the energy industry will enhance its competitiveness in attracting and retaining recent graduates – particularly important given the “crew-change” that the industry is now experiencing.
Notwithstanding the preceding EP advantages, the EP continues to be scrutinized by business and stakeholders alike:
- EP compliance elevates expectations: Some projects financed by Equator Banks appear to have received greater public scrutiny from non-governmental organizations (NGOs) and stakeholders due to associated environmental and social concerns.
- Lack of transparency: According to a study by Olaf Weber, only 50% of EPFIs report annually according to EP guidelines and two Equator Financiers disclosed all the information required by the Equator Principles guidelines.
- Voluntary versus legally binding: Since the EP is not a legally binding instrument, some stakeholders assert that there is insufficient accountability for adverse environmental, social and human rights impacts and that the EP do not adequately allow affected stakeholders to file complaints for non-compliance. This leads some critics to view application of the Equator Principles to be “greenwashing” while others oppose the notion of introducing legal requirements that potentially supplant responsibilities of host governments.
- Level playing field and costs of compliance: Some businesses express concern that adherence to the EP creates a competitive disadvantage against those companies that have unconventional funding sources (such as state owned companies) who may be in a position to push forward on projects more rapidly without having to satisfy EP expectations.
- Implementation challenges: In non-designated countries, some companies have found themselves in the position of having met or exceeded local regulation that does not contain all of the requirements of the EP. While beneficial in the long-run, having to expand beyond local requirements and/or introduce new practices requires additional cost and resources as well as introducing possible political tension or security challenges particularly in conflict or post-conflict zones.
Many major oil and gas players do not often seek investments from EPFI for a variety of reasons including a historical preference for self-financing as well as due to some of the barriers noted above. Banktrack’s website, a worldwide network of NGOs tracking activities from private sector banks, tracks only seven oil and gas companies. However, even if not frequently seeking formal external financing, large O&G companies do integrate environmental and social stewardship approaches through their own corporate processes that are similar to, or modeled on, the EP, drivers of sustainability.
31 Designated Countries: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Korea, Rep., Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom, United States.
Note: Contact Acorn International for further information on additional guidelines to manage EHS risks.
Cfi.co, 2013, The Equator Principles: Banking on Sustainability. Available at http://cfi.co/asia/2013/08/the-equator-principles-banking-on-sustainability/, last accessed October 1, 2014.
GreenBiz.com, 2013, 5 things every energy company should know about the Equator Principles. Available at http://www.greenbiz.com/blog/2013/08/21/5-energy-companies-equator-principles, last accessed October 2, 2014.
Ian Mathews, Sustainable planning and Financing: The Equator Principles. Available at http://www.mrcsummit.org/1stmrcsummit/Presentations/3-2_Ian-Mathews-equator-principles.pdf, last accessed October 2, 2104.
CDP, 2014, CDP S&P 500 Climate Change Report 2014. Available at https://www.cdp.net/CDPResults/CDP-SP500-leaders-report-2014.pdf, last accessed October 1, 2014.
Mehrdad Nazari, 2014, Equator Princicipal (EPIII) Implementation Note. Available at http://prizmablog.com/2014/09/10/equator-principles-epiii-implementation-note/, last accessed October 2, 2014.
Osgood Hall Law School, York University, 2013, 10 Years “Equator Principles”: A Critical Economic-Ethical Analysis. Available at http://www.academia.edu/4681496/10_Years_Equator_Principles_A_Critical_Economic-Ethical_Analysis, last accessed October 1, 2014.
Banktrack, 2013, New Equator Principles to have deeply underwhelming impact on people and planet Available at http://www.banktrack.org/show/news/new_equator_principles_to_have_deeply_underwhelming_impact_on_people_and_planet#tab_news_main, last accessed October 2, 2014.
Banktrack, 2014, Companies. Available at http://www.banktrack.org/, last accessed October 2, 2014.
Issue 26 -The Transparency Tightrope: Examining UNEP’s New Access to Information Policy
Issue 25 -July 2014: Bouston
Issue 24 - July 2014: Land Tenure and Property Rights - Where Legal Compliance May Not Be Enough
Issue 23 - May 2014: 3 Things I Learned in Mexico - Non-technical Risks in the Oil Industry
Issue 22 - April 2014: Capacity Building on Stakeholder Engagement
Issue 21 - March 2014: Above-ground Facilities and Stakeholder Engagement: Deploying the 'CAC'
Issue 20 - March 2014: A Starting Point for Shared Equity
Issue 19 - March 2014: What It Takes to Run a Great Consulting Firm
Issue 18 - February 2014: Considering Human Rights - Trends and Lessons in Oil and Gas Impact Assessments
Issue 17 - June 2013: Managing Environmental Health in International Development Projects
Issue 16 - January 2013: Integrating Environmental and Social Performance throughout the Project Lifecycle
Issue 15 - January 2013: The State of Shale Play in 2013
Issue 14 - August 2012: Building Environmental and Social Governance in Host Countries
Issue 13 - May 2012: Human Rights and Business: A New Era
Issue 12 - February 2012: Extractive Industries Confront Pressure for Greater Transparency
Issue 11 - January 2012: Key Updates to the IFC Sustainability Policy and Performance Standards
Issue 10 - June 2011: Oil & Gas and NGOs: New Rules of Engagement?
Issue 9 - February 2010: Annual Study of Sustainable Development Priorities
Issue 8 - January 2009: Annual Study of Sustainable Development Priorities
Issue 7 - May 2008: Top Ten Lessons Learned About Health Impact Assessment
Issue 6 - January 2008: Annual Study of Sustainable Development Priorities
Issue 5 - September 2007: Results of web forum with our International Partners
Issue 4 - January 2007: Annual Study of Sustainable Development Priorities
Issue 3 - May 2006: Suggestions and tips for safe international travel
Issue 2 - January 2006: Annual Study of Sustainable Development Priorities
Issue 1 - November 2005: The Top 10 “unspoken" criteria for determining the success of EIAs