Equator Principles Adopts New Governance Guidelines

July 17th, 2010

On 1 July 2010, the Equator Principles Financial Institutions (EPIFs) introduced new governance rules to formalise its existing framework of policies and procedures.

The Equator Principles (EPs) is a voluntary standard for managing social and environmental risk in project financing, based upon the International Finance Corporation (IFC) performance standards on social and environmental stability and the World Bank Group’s environmental, health and safety guidelines. The standard was established in 2003 by ten global financial institutions, including Citigroup, Credit Suisse and The Royal Bank of Scotland (RBS), and has subsequently been adopted by over forty other companies.

The new governance rules are designed to enhance the Equator Principles by providing greater transparency of the management of the Equator Principles Association and greater clarity on the expectations of members, including annual public reporting requirements. It is hoped that this will strengthen recognition of the standard and attract new members, helping to extend its benefit.

Shawn Miller, Chair of the EPFI Steering Committee and Citigroup’s Environmental and Social Risk Management Director, said: “The Equator Principles have had a deep and lasting positive impact on the global financial services sector…The [Governance] Rules will make us more efficient as we continue to grow, and members will be held accountable to them. We believe that the Rules are an important step forward in a broader strengthening of the Association’s governance and EP implementation.”

Financiers of projects, particularly in developing countries, can be subject to social and environmental risks. These risks include complicity in human rights and labour standards violations, pollution, destruction of ecosystems and poverty. Standards of governance, like the Equator Principles, can provide guidance to investors and enable them to better manage their risk exposure. The EPs encourage investors to conduct careful assessment of projects to ensure that local and national laws and international standards are adhered to, stakeholders have been consulted and appropriate project management systems are in place.

Nevertheless, even firms that adopt governance principles can find themselves exposed to reputational risk. In February 2010, for example, RBS was criticised by NGOs for investing in projects that contributed to environmental degradation and adversely affected local communities (see our related article on NGO criticism of RBS). This demonstrates both the importance of corporate governance principles and the need to conduct careful due diligence to ensure that they are followed.