From January 2014 financial institutions that have adopted the Equator Principles, a risk management framework for determining, assessing and managing social and environmental risks in project finance, will have to implement a new iteration of the framework. Even though action would be much needed and the revisions are relevant in Asia, the impact is sadly likely to be limited.
Of the 78 financial institutions that have committed to the Equator Principles, only five are from Asia, one each from China and India and three from Japan (Industrial Bank Co. Ltd, IDFC Limited, Bank of Tokyo-Mitsubishi UFJ, Mizuho Bank Ltd. and Sumitomo Mitsui Banking Corporation.
Many of the Equator Principle Financial Institutions operate globally and do invest in projects in Asia. But very often large infrastructure investments in the region do not meet key criteria stipulated in the Equator Principles. Conflicts and project delays are a common issue across Asia and an especially hot topic in the Mekong countries where the social and environmental risks of dams, mines or pipelines are notorious for being poorly managed.
We are seeing investor pressure becoming an increasingly important driver for CSR in Asia and Stock Exchanges across the region are putting in place guidance and recommendations or even mandating improved environmental, social and governance (ESG) disclosure of listed companies. Sustainability Indices and socially responsible investment (SRI) portfolios are gaining traction. Both will be important topics at the upcoming CSR Asia Summit, where the President and CEO of the Stock Exchange of Thailand, Mr. Charamporn Jotikasthira will be giving a keynote address.
But the majority of Asian financial institutions that finance major infrastructure projects like dams and mines in the Mekong region do not apply due diligence criteria to the level of those established in the Equator Principles. The focus of the Equator Principles on project finance is of course relatively limited in scope, it is however an important entry point to what time and again proves to be a change agent: access to finance. As social and environmental externalities are increasingly unacceptable and covering them up increasingly difficult, the business case for banks will be strengthened as commercial risks from social and environmental impacts increase.
So far, much of the protest against mines, pipelines, dams or similar projects focuses on their operators or the governments that support them. But banks and other investors who bankroll them may find themselves not only shouldering increasing commercial risks, but also increasingly at the center of stakeholder critique if due diligence frameworks and accountability are not significantly improved. The Equator Principles are one tool that should gain a lot more traction in the region to help financial institutions manage that risk, meet stakeholder expectations, and leverage improved performance in project implementation.
In many cases, human rights, especially related to land rights, are particularly contentious. Addressing human rights is one of the areas where there have been additions in the Equator Principles III (EPIII), which came into effect in June 2013 with a transition period until December 2013. Other changes include the addition of project related corporate loans and bridge loans to the scope of the EPs (in addition to project finance and project finance advisory) and additional reporting requirements.
EEP III has also been more closely aligned with the updated IFC Performance Standards. Additions include human rights due diligence, and emphasis on free prior and informed consent (rather than formerly consultation) as well as reference to the UN Guiding Principles on Business and Human Rights and the implementation of the UN Protect, Respect, Remedy Framework that has been gaining increasing attention in Asia. In addition, climate change and related issues have been updated.
As with most voluntary commitments and principles-based frameworks, there is some concern over lack of rigor or recourse in the implementation. But in the absence of political will and effectiveness of government action, they provide an entry point to improving performance as well as a reference point for best practice. In the case of ongoing contentious issues around infrastructure projects in the Mekong region, improving due diligence and accountability of investors may be one more piece in the puzzle towards much needed change.
Photo credit: Marcus Rhinelander, Oxfam Australia