The Equator Principles

The Equator Principles are a collection of 10 different principles focused around assessing the environmental and social risks in large infrastructure projects. These principles are utilized by the financial industry to classify the risks for different projects that are under review. Currently, over 80 financial institutions in more than 30 countries utilize this framework for evaluating infrastructure project financing (Equator Principles 2020). The framework leads to evaluating projects as category A, B, or C. Category A projects have significant adverse environmental or social risks or impacts that are irreversible or unprecedented. Category B have limited adverse effects, and some can be reversible or mitigated. Category C projects have minimal or adverse risk or impacts (Equator Principles 2020). This framework, while useful in categorizing projects at a high level by their environmental or social impact, has no real enforcement mechanism and is more of a framework that financial institutions can use to evaluate projects if they choose to do so. The principles can be helpful in determining environmental and social impacts, and ensuring projects are evaluated for those items, but they appear to be more of a greenwashing method than a strong push towards sustainable projects.

Lloyd’s Banking Group is one of the financial institutions that have adopted the Equator Principles. In 2018, they reported that of the six major infrastructure projects they had financed, five were category B and one was category C (Equator Principles 2019). These principles seem genuinely effective at moving financial institutions away from category A projects that are extremely damaging but does little to impact the volume of category B and C projects. Most projects still fall under the category B evaluation, which means they still have adverse environmental and social risk or impacts. While these principles do start to include environmental and social aspects to evaluation, they do very little in shifting behavior.

While it is a good start to develop a high-level framework that begins to consider environmental, social, and ethical behavior, the Equator Principles fall short on leading to more sustainable projects. The large, and vague, scope of the categories does very little to cause a significant shift in projects. Most projects fall into category B, so this framework only helps avoid the most egregious environmentally or socially destructive efforts. These principles are still primarily focused on shareholder wealth and checking some boxes to indicate that the projects are not highly destructive. A more detailed evaluation framework, similar to the United Nations Sustainable Development Goals, would be more appropriate where there are still high-level categories reported for a project, but within those categories there are specific scores for each environmental or social aspect for that project to truly identify the risks and impacts of the proposed projects. With a more granular risk and impact framework, projects could be evaluated with better transparency and with methods that allowed for enforcement of more specific impacts.

Author: Logan Callen

References

Equator Principles. 2019. “Lloyds Banking Group Plc (2018).” The Equator Principles Association. Accessed August 12, 2020. https://equator-principles.com/reporting-lloyds-banking-group-plc-2018/.

Equator Principles. 2020. “The Equator Principles.” The Equator Principles Association. July 2020. Accessed August 12, 2020. https://equator-principles.com/wp-content/uploads/2020/05/The-Equator-Principles-July-2020-v2.pdf.