This article is drawn from the Mexico Energy & Sustainability Review 2014, to be released on February 20, at the Mexico Energy Forum 2014 (www.mexicoenergyforum.com).
Sustainable banking is not a concept with a long and storied history. While different sectors of industry came to sustainable practices through the 1990s and 2000s, the banking sector remained mostly on the outside until June 2003. That month, 10 banks, including international heavy-hitters such as Barclay and Crédit Suisse, vowed to throw their support behind a new vision of financing. This vision would seek to fight against climate change, promote biodiversity, and seek to alleviate or offset negative impacts of projects on ecosystems, communities, and the climate, thus, the Equator Principles (EPs) were born. In their first iteration, the EPs were limited in several ways that sparked concern among NGOs over whether the EPs would have any bite at all. As they were initially devised, the EPs were only applied to project finance for infrastructure plans within the countries the signatories were based in. This covered such developments as power plants and pipelines. Secondly, the EPs were not binding. In lieu of any real enforcement, the signatory banks allowed for a rule by consensus, under which they would pledge to follow standards set by the International Finance Corporation (IFC), the private-sector lending arm of the World Bank.
In 2006, the IFC improved its standards lifting the limitation on project finance to cover banks’ project advisory services while the investment barrier for projects was lowered from US$50 million to US$10 million. This was a commitment that was met by the EP members who followed suit in strengthening their pledge in order to broaden the scope of the EPs to supervise a far wider range of potential deals.
In the summer of 2013, after the EPs underwent their second alteration, the number of Equator Principles Financial Institutions (EPFIs) had reached 78 members across 35 countries, covering over 70 percent of international project finance debt in emerging markets. If followed, this would mean that EPFIs would reject offers to finance projects that would result in significant environmental damage, or even pose the potential for such damage, as well those that would significantly alter the nature of an already existent to the impact of the environment.
Criticism of the EPs started almost as soon as they were born, especially among NGOs and social groups that were skeptical of banks voluntarily taking on socially responsible measures. An early flaring point was the Baku-Tbilisi-Ceylan pipeline running from the Caspian Sea to the Mediterranean. In 2004, eight EPFIs and the IFC itself supported this project despite NGOs reporting a great number of breaches, which proved to be a stern test for the EPs public reputation. Another concern that the EPFIs might press the IFC to water down its standards to benefit them was met with a stern response from member banks. Many of the larger EPFIs have taken their own measures and begun publicizing their own compliance with the EPs, showing how many projects have been accepted and rejected under EP regulations, as well as the positive ecological impact of already financed projects.
Two wholly Mexican banks, CIBanco and Banorte, have joined so far, both of them doing so in early 2012. BBVA Bancomer is also in but its Spanish owner, BBVA, joined way back in 2004. Mexico has not been the only Latin American country whose banks have seen the EP light. Brazil has five members, while Argentina, Chile, Colombia, Costa Rica, Peru and Uruguay each have one. The traction the EPs have gained in Latin America and Africa has seen them obtain more credibility as a global initiative, given the Western-centric nature of the 10 originators.
The EPIII (third version of the EPs adopted in April 2013) now place far more stringent demands on clients seeking to gain loans from EPFIs, as well as on the banks themselves. The EPIII added two measures to the portfolio of EP solutions. These two are: project-related corporate loans with a tenor of at least two years where the loan is dedicated to a single project over which the borrower has control, and bridge loans with a tenor of less than two years that are intended to be refinanced by project finance or project-related corporate loans.
After a transition period in 2014, EPFIs will need to require from clients regular reports about the emission levels of greenhouse gases in the operations of projects that emit over 100,000 tons of carbon dioxide equivalent. Such potentially polluting projects will also be required to provide a detailed analysis of alternatives that would result fewer emissions. Such an analysis cannot be provided for operations alone, as it must detail feasible options through which to reduce greenhouse gas emissions during a project’s various stages, including design, construction, and operation. The more strict rules for loans under the EPs were not developed by the EPFIs themselves but were part of an upgrade in the IFC Performance Standards, which govern much of the content of the EPs.
The scope of the EPFIs and the commitment that member banks have shown toward them has been reflected in changes to banks’ internal processes and beyond. The roster of a bank’s staff now includes trained staff that can plan environmental impact assessments or advise on whether loan proposals are viable under the EPs. In the broader financial world, development banks and export credit agencies have cottoned on to the idea and are using standards that are closely based on their EPs, providing a continuity of requirements that spreads outside the current roster of EPFIs. Furthermore, the concept of the EPs has trickled down to companies seeking loans. Financial consultants report being increasingly approached by clients wanting advice on how to ensure their projects meet the Equator Principles.
But there are those who would like the EPs to go further include some of its own members. There has been widespread criticism that the EPIII makes no mention of climate change, with rumors swirling that careful lobbying made sure of that. The more ambitious of the member banks have stated that the EPs should seek to break free of the confines of the IFC and let the EPFIs set the course of further improvements by themselves. The response to this has been that the EPs consensus-based plan would prove to be a hindrance, allowing banks with lesser sustainability goals to set further action.
While the EPs could see improvement in a number of areas, their influence is now such that any companies seeking financing in the areas they govern simply cannot ignore them. Most banks working in Mexico, either domestic or international, have signed up, securing the EPs as an indelible part of the country’s sustainable banking future.