THE WORLD BANK IS NOT ENOUGH BY Paul Q. Watchman Visiting Fellow, LSE; LSE Sustainable Finance Project 11.22.10

1. THE EQUATOR PRINCIPLES: THE WORLD BANK IS NOT ENOUGH BY Paul Q. Watchman Visiting Fellow, LSE; LSE Sustainable Finance Project 11.22.10

2. Perspectives on the Equator Principles: • “A few years ago if you spoke to an investment banker about environmental and social issues, they would have thought you a hippie.” Chris Bray, Head of Environmental Risk Policy Management, Barclays • “There is a spirit of collegiality about EPFI and their experiences.” Kim Brand, Senior Manager, Corporate Social Responsibility, Scotiabank • “The Equator Principles are now part of the lexicon of the financial world.” Chris Bray, Barclays • “The Equator Principles have done more sustainable financing in the banking sector than anything else.” Kirsty Jenkinson, F&C Global Asset Management

3. The Importance of the Equator Principles: • “It is amazing how few clients realise that not following the Equator Principles could lead to an event of default and acceleration of the loan.” Andre Abadie, Head of Sustainable Business Advisory, ABN Amro • “No one client and no one piece of business is worth damaging the reputation of the bank.” Jon Williams, Head of Sustainability, HSBC • “It is entirely appropriate that the EFFI support good projects. It is in the interests of all those concerned to abide by the Equator Principles” Charles Lawton, General Counsel, Rio Tinto • “Reputation, reputation, reputation! O! I have lost my reputation. I have lost the immortal part of myself, and what remains is bestial.” Othello

4. Which industries borrow from EPFI? • Telecommunications. • Water and sewage. • Mining. • Paper and Pulp. • Petrochemical. • Power. • Transport. • Oil & Gas.

5. EPFI and Investment Preferences: Ellis & Caceres, 'Equator Principles Financing: The International Fallout', Infrastructure Journal, September/October 2006, 74

6. Introductory Questions: • What are the Equator Principles (EP)? • What do they require of banks and financial institutions that adopt them (EPFI)? • Why have the EPFI have adopted the EP and why have other banks and financial institutions not?

7. Aims of this Presentation: • To suggest that: • While the EP have been a shining beacon for sustainable or ethical banking, there are a number of issues which need to be addressed if the EP are to deliver sustainable projects. • Non-financial considerations, such as environmental and social issues, have now entered the mainstream of investment decision-making. • To urge a degree of caution and scepticism about some of the claims made by EPFI as some do not “walk the walk”, some are free riders and some still behave in practice in unacceptable ways. 7

8. What are the Equator Principles? • A voluntary set of nine principles adopted by banks and other financial institutions (EPFI) for sustainable project finance. • A framework based on World Bank and International Finance Corporation (IFC) standards, for assessing environmental and social impacts of projects by way of assessment (ESIA) which are to be financed by project finance. • Objective – ensuring the projects that EPFI finance are developed and operated in a manner which: • Is socially responsible. • Reflects sound environmental management practices.

9. The Development of the Principles: • EP1 – Original principles: • Conceived in 2002. • Launched in 2003. • Adopted by banks and other financial institutions between 2003 and 2006. • EP2 – Revised EP1 which have been open for adoption from July 2006 onwards. • Revisions following IFC consultation to reflect: • New IFC’s Performance Standards. • Feedback from stakeholders over past three years.

10. What are the EP2 Principles? (1) • ESIA in accordance with compliance with applicable host country laws, regulations and permits and, in non-high income OECD countries, reference to IFC Performance Standards and applicable industry EHS guidelines (P2 & 3). • Mitigation and management measures to be addressed in the ESIA (P2). • Preparation of an Action Plan and Management System for all Category A and B projects in non OECD and non-high income OECD countries (P4). • Public consultation required in respect of all Category A projects but may be required for Category B projects located in non-OECD or non-high income OECD countries, if appropriate (P5).

11. What are the EP2 Principles? (2) • Grievance Procedures for all Category A and, if appropriate, Category B projects located in non-OECD or non-high income OECD countries (P6). • Independent Expert Review for all Category A and, if appropriate, Category B projects, (P7). • Independent monitoring of all Category A projects and, if appropriate, Category B projects (P9). • Limited Public Reporting Obligations (P10).

12. What are the EP2 Principles? (3) • Covenants for all Category A and B projects to (P8): • Materially comply with applicable social and environmental laws, regulations and permits. • Materially comply with the Action Plan and Monitoring System. • Compliance and enforcement mechanisms (P8). • Decommissioning Plan required for all Category A and B projects, where appropriate (P8). • Compliance with Decommissioning Plans (P8).

13. EPFI GUIDANCE • 3 August 2009 EPFI Guidance on Incorporating Environmental and Social Considerations into Loan Documentation. • Increase transparency. • Share Best Practice with financial and legal communities active in project finance and with civil society stakeholders. • Guidance not prescriptive.

14. What changes did EP2 make? (1)

15. Consent and Consultation – A Qualification (1): • “Free, prior and informed consultation” is not the same as, or as demanding as, the established public international law concept of “free, prior and informed consent” contained in various legal sources. • International Labour Organisation’s Convention Concerning Indigenous and Tribal Peoples in Independent Countries – (No. 169). • Article 8(j) of the Convention on Biological Diversity. • The Cartagena Protocol on Bio-Safety. • Legislation of countries such as the Philippines, Venezuela, Malaysia or Peru. • The common understanding of “free, prior and informed consent" is that it gives local people a formal role in the consultation process and some form of veto power. It is intended to secure the rights of indigenous peoples and local communities. 15

16. Consent and Consultation – A Qualification (2): • “Whilst "free, prior and informed consultation" under the EP2 is not identical to that of “free, prior and informed consent,” several components of the IFC Performance Standards bear a strong resemblance to the consent concept: • For example: IFC Performance Standard 7 states the EPFI "will enter into good faith negotiation with the affected communities of Indigenous Peoples, and document their informed participation and the successful outcome of the negotiation”. 16

17. What changes did EP2 make? (2)

18. Why did Banks and IFI want the Principles? • Political risk. • Local bank of choice to Global EPFI. • Level playing field. • Damaging project affecting PR. • Leadership values. • Brand protection. • Reputation, reputation, reputation. • Damage to retail banking. • Access to cheaper funds. • Regulatory risk. • Financial risk. • Business as usual.

19. Why did NGOs want the Principles? • Banking on responsibility (2005). • Sustainable development. • Industry standard. • Collevecchio Declaration – statement outlining society’s vision of sustainability for the financial sector. 19

20. Core Principles of the Collevecchio Declaration: • A declaration made by civil society organisations, committed to ensuring sustainable and accountable banking. • Commitment to Sustainability • Commitment to ‘Do No Harm’ • Commitment to Responsibility. • Commitment to Accountability • Commitment to Transparency • Commitment to Sustainable Markets and Governance

21. Which banks adopted EP1 in 2003? • Credit Suisse First Boston. • HVB Group. • Rabobank. • Royal Bank of Scotland. • Westpac. • ABN Amro. • Barclays. • Citigroup. • WestLB. • Calyon.

22. EPFI by State as of 2010: Chile • CORPBANCA Argentina • Banco Galicia • Germany • • Dresdner Bank • • HVB • • WestLB • KfW IPEX-Bank • Norway • • DnB Nor • Eksportfinans ASA Sweden • SEB China • Industrial Bank Co. Switzerland • Credit Suisse • Australia • • Westpac • • ANZ • EFIC • National Australia Bank Nigeria • Access Bank • Italy • • MCC • • Intesa Sanpaolo • UniCredit Bank AG • U.K. • • Barclays • • HSBC Group • • Standard Chartered • Bank • • Royal Bank of Scotland • • HBOS • Lloyd’s Banking Group Columbia • Bancolombia Oman • BankMuscat Belgium • Dexia Group • Fortis • KBC Costa Rica • CIFI Portugal • Banco Espírito Santo Group • Millennium BCP Japan • Bank of Tokyo-Mitsubishi • Mizuho • Sumitomo Mitsui Banking Corporation Denmark • Eksport Kredit Fonden • Brazil • • Banco Bradesco • • Banco do Brasil • • Banco Itaú • • Unibanco • Caixa Econômica Federal • Spain • • BBVA • Banco Santander • Caja Navarra • La Caixa Uruguay • Banco de la República Oriental del Uruguay Egypt • Arab African International Bank Morocco • BMCE Bank U.S.A. • Bank of America • Citigroup • JPMorgan Chase • Wells Fargo • E+Co (Energy Fund) • Wachovia Corporation Finland • Nordea • Canada • • BMO Financial Group • • CIBC • • Manulife • • Royal Bank of Canada • • Scotiabank • Export Development Canada • TD Bank Financial Group • The Netherlands • • ABN Amro • • FMO (the Netherlands • Development Bank) • • ING • • Rabobank Group • ASN Bank • NIBC Bank • South Africa • • Nedbank • Itau Unibanco • Asba Bank • FirstRand Bank Ltd • Standard Bank Group • France • • Calyon • BNP Paribas • Crédit Agricole Corporate and Investment Bank • Societe Generale 22

23. Map of EPFI by State as of 2010: 23

24. What does EP2 require?

25. Categorisation of Projects

26. Requirements ofCategory A and Category B Projects: Key: * Non-OECD countries and non High-Income OECD countries. # Considered appropriate to subject the Category B project to the requirement. 26

27. ESIA(Evironmental and Social Impact Assessment): • Category A or B projects only. • Address, to the satisfaction of the EPFI, relevant social and environmental impacts and risks which may include, if relevant, illustrative list of issues: • Feasible preferable alternatives. • Protection of human rights, cultural property and heritage. • Impact on indigenous people. • Pollution prevention and waste minimisation. • Adequate, accurate and objective evaluation. • May be prepared by borrower, consultants or experts.

28. Baseline Standard for ESIA

29. Top Non-EPFI Project FinanceBanks in Equator Principles • Japan Bank for International Cooperation (JBIC). • Public Investment Fund. • Saudi British Bank. • Gulf International Bank. • Saudi Hollandi Bank. • China Development Bank. • China EXIM Bank. • Islamic Development Bank. • Kfw. • Bank of China. • Banque Saudi Fransi. • Saudi American Bank. • Qatar National Bank.

30. Why have some banks not adoptedthe Equator Principles?

31. Top Non-EPFI Project FinanceBanks in Equator Principles • Typically, these NON EPFI banks have a high standing as robust financial institutions which rigorously assess the environment and social impacts of projects they consider financing. • JBIC, for example, is a responsible lenders: • JBIC to some extent, exceeds the requirements of the EP. • Some Middle Eastern banks and Chinese banks have or are developing good reputations in this field of lending activity. • Notwithstanding Fray Bentos, where ING was replaced by Calyon, and some evidence of a greater appetite for risk amongst state lenders than EPFI, fears about bottom feeding and the development of secondary local or regional projects sponsored by local, rather than blue chip, sponsors and funded by less environmentally or socially aware lenders do not appear to be based on the evidence so far. • Equally, however the need or desire to syndicate the funding of major projects may be having a virtuous effect outside the circle of EPFI and have an influence on the Non EPFI banks?

32. Equator Principles – Success?... • If the EP are properly implemented, this will represent a major commitment to project assessment, management and monitoring. • For some EPFI, commitment to EP flows from top to bottom of the organisation and is embedded in practices and policies: • Barclays, HSBC, WestLB, Mizuho, Westpac and ABN Amro are all recognised as delivering the spirit and letter of the EP. • Banco Itau and Banco Itau BBA exceeds EP2’s requirements by applying social and environmental criteria to all projects with capital costs of more than $5M R ($2.3M US). 2006: Watchman,Deflino & Adisson (London: Le Beouf Lamb)

33. Equator Principles - ... Or spin? (1) • Regrettably some EPFI “talk the talk” but do not “walk the walk”. • The WWF study indicates that, for some EPFI, and not just small regional EPFI, the EP appear to be a public relations veneer and little has been done or achieved to deliver EP values. • “Principles are only as good as the commitment behind them...” • Focus on Finance, Global Policy Form (June 2003)

34. Equator Principles - ... Or spin? (2) • Examples of behaviour which still prevails in some EPFI (given in confidence) includes: • Poor judgement on environmental and social issues. • Attempted bullying or blackballing advisers and consultants by threatening not to instruct them where: • EP issues have been raised but not satisfactorily addressed by EPFI. • Project sponsor or the consultant or adviser has called for public disclosure of faults or limitations. 34

35. Equator Principles - ... or spin? (3) • Lack of transparency apparent. • Accountability to third parties affected by projects or policy development. • Dissonance between what is said in public and done in private: • Financing projects which breached multiple EP: • $3.6B Baku-Tbilisi-Ceyhan (BTC) oil pipeline from Azerbaijan to Turkey. • 9 out of the 15 lending banks for project were EP1 signatories. • Independent NGO assessed there were 30 breaches of EP.

36. The Bottom Line:To what extent can the EP be enforced? Are EPFI over-reliant on sponsors’ experts? Quis custodiet ipsos custodes? Query: To what extent does this matter? 36

37. How should we measure the success of the EP? • Greater Transparency? • Greater Accountability? • The number of Category A and B projects being pursued? • Whether there are more Category A and Category B Projects but Less Social and Environmental Impacts? • Greater involvement of civil society and NGOs? • Human Rights Initiatives? • Stabilisation Clauses Limited to Exclude Human Rights and Health & Safety? • Replacement of EPFI with Sovereign Funds and National Corporations in Africa and elsewhere? 37

38. Beyond the Equator Principles? (1) • “EQUATOR LITE”: A number of EPFI has extended an EP-type approach to other areas of banking activity: • HSBC to export credit and commercial credit. • ABN Amro, Bank of America, JPMorgan Chase, Citigroup, WestLB and Westpac either extended an EP approach to other areas of banking activity or have subsumed the EP under sustainable banking as a general approach to all lending. • Some EPFI apply Equator Lite on an ad hoc basis, such as HSBC and Barclays notwithstanding Barclays (and other EPFI) general opposition to the extension of EP on technical grounds beyond project finance which is seen by some EPFI as the ideal vehicle for EP.

39. Beyond the Equator Principles? (2) • DISCLOSURE • EPFI tend to defend their unwillingness to disclose on grounds of client and commercial confidentiality. • Both these are valid grounds except disclosure must be limited to the concerns of ESIA under EP, namely the assessment of environmental and social impacts by the proposed project. • There is no reason to expect the EPFI to breach client or commercial confidentiality but it may be worth considering if their present position is defensible. • Like EBRD and ECGD, it would be possible to adopt the OECD Common Approaches Policy of favourable disclosure except in respect of commercial confidentiality, state security and highly sensitive information?

40. Beyond the Equator Principles? (3) • FINANCIAL THRESHOLD: Some EPFI, such as ABN Amro, have abandoned the $50M US threshold prior to its reduction or did not apply it to specific industries, such as mining. • TRANSPARENCY: HSBC and ABN Amro provide general information on categorisation of projects considered by them, value of the transactions, number of projects considered and type of facilities. • POLICY VACUUM: HSBC was awarded Sustainable Bank of the Year by FT and came out top of the WWF study on policy implementation, albeit with a D+. 33 of 39 EPFI and other financial institutions surveyed were shown to have little or no policy guidance in critical areas such as human rights where only Rabobank had a credible human rights policy. • ACCOUNTABILITY: The failure to provide a grievance mechanism or external auditing of the EPFI under EP on a model similar to Compliance Adviser Officer (CAO) employed by the IFC has led to grievances spilling over into national and international courts. BTC, Sakhalin II and Fray Bentos, for example, all experienced serious delay due to third party legal challenges.

41. BANKTRACK: What is it? • A global network of civil society organisations and individuals. • Committed to monitoring the private financial sector to ensure sustainability, transparency and responsibility. • Priorities: • Educating civil society on the social and environmental impacts of the financial sector. • Organising NGOs into a network capable of effectively lobbying financial institutions. • Researching and communicating issues of sustainable finance.

42. BANKTRACK on the EPs: Publish all project environmental and social reports. Create EP portfolios for each EPFI. Require projects to have clear complaints procedures. Place less responsibility in the hands of project sponsors.

43. Outstanding Governance Issues: • Policy vacuum amongst banks on vital EP issues. • Awareness and training. • Lack of lender influence of projects. • Lack of expertise on social assessment. • Lender knowingly permitting pollution. • Lack of awareness as to who are the experts in these areas and which of them are reputable and robust experts and not “yes men”. • Lack of objectivity on the part of sponsors and their consultants and advisers in carrying out due diligence on behalf of sponsors and lenders. • Accountability. • Transparency. • Free riders. • Hypocrisy. • Consultation and prior informed consent. • Emphasis on risk and performance standards – not compliance with global or public international law norms.

44. Outstanding obstacles andpossible extensions of scope: • Lack of application of public international law norms. • Inadequacy of host country laws. • Bullying and blackballing by sponsors and lenders of consultants, advisers, regulators and governments. • Circumvention of EP by using other forms of finance or self-finance followed by general borrowing to meet general debt or expenditure. • Legal challenges in multiple legal fora: Human Rights Commission, IFC CAO, national courts, US courts. • Staged and phased projects. • Project in pipeline. • Human rights, climate change and biodiversity – EP2 weakness. • Lack of transitional provision for EP1 and EP2 projects. • Stabilisation clauses in host country and intergovernmental agreements. • Omits differences in environmental, social and governance standards.

45. Sample ‘Problem Projects’ (1): • Tangguh LNG (top right). • Katanga Mine (bottom right). • Sakhalin II (bottom left). • Thai-Malaysia gas pipeline.

46. Sample ‘Problem Projects’ (2): • KKR and TXU coal fired power stations (top right). • US Coal mining and non-removal of Appalachian mountain tops (bottom right). • Abandonment of Sakhalin II by EBRD and EP. • Tesso nilo forest. • Camisea gas pipeline. • Marlin Gold. 46

47. Sample ‘Problem Projects’ (3): • Shell flaring gas in Nigeria (top right). • North Sea Oil Companies gas flaring in North Sea (bottom right). • BP, Shell and others Tar Sands Oil Extraction in Canada and Africa (bottom left). • Statoil and others North Sea  carbon capture, storage and sequestration in sea bed and rock strata. 47

48. Case Study: Fray Bentos (background) • October 2003: Spanish company ENCE received permission from the Uruguayan government to build a pulp mill in Fray Bentos, on the Uruguay River. • 30th April 2005: 10,000-20,000 people, including environmental groups from Argentina, blocked the international Libertador General San Martín Bridge (between Gualeguaychú and Fray Bentos) protesting the installation of the pulp mills. • September 2005: The Center for Human Rights and Environment (CEDHA), filed a complaint to the Compliance Advisory Ombudsman (CAO) of the World Bank. The CAO released an audit, critical of the procedures the IFC followed pertaining to the project. • 19th December 2005: A draft cumulative impact study of the mills by IFC was released. According to it, the technical requirements of the mills had been fulfilled and the quality of the water and the air in the region should not be harmed. The IFC said it would wait for further consultations to be made before finalizing the study and thus before financing the projects. 48

49. Case Study: Fray Bentos (escalation) • Ongoing protests from December 2005, culminating in the construction of a concrete block wall in November 2006. • 12th October 2006: IFC and MIGA released the final cumulative impact study for the two proposed pulp mill projects. Both institutions were confident that the findings demonstrated that the mills will comply with IFC and MIGA's environmental and social policies, while generating significant economic benefits for the Uruguayan economy. • 17th October 2006: IFC and MIGA announced that they would ask their Boards of Directors to approve IFC financing and MIGA guarantee support the pulp mill. According to the IFC press release, "the decision to proceed was based on an extensive due diligence process, which included the conclusive and positive findings of a cumulative impact study and a subsequent review of the study undertaken by independent experts". • 21st November 2006: IFC and MIGA approved a $170 million IFC investment and a guarantee of up to $350 million from MIGA. The press release from the IFC stated that "the two organizations, after completing a thorough review of the facts, are convinced that the mill will generate significant economic benefits for Uruguay and cause no environmental harm.“ • The Argentinean president reacted to the news by attacking what he considered to be a victory for international interests that wanted the region to be ‘a global waste dump’. 49

50. Case Study: Fray Bentos (ICJ litigation) • 3rd May 2006: Argentina sued Uruguay in the International Court of Justice, arguing that it had breached a treaty obligation to consult before doing anything that might affect the river. • July 2006: The court rejected its request for an injunction to stop construction of the mills. Uruguay took its case to Mercosur, arguing that Argentina had failed to take action to ensure the free circulation of goods and services. • 13th July 2006: ICJ ruled that Uruguay's actions were not enough to grant a provisional measure halting the construction of the two pulp mills. This did not settle the question of whether Uruguay ultimately breached its Treaty obligations to Argentina, but held that no imminent danger of irreparable damage existed at the time, and that Uruguay might still have been liable to Argentina if it was later found in the final judgment that Uruguay was indeed in breach. Judges at the ICJ voted 14–1 in Uruguay's favour. • 23rd January 2007: The ICJ rejected, by 14 votes against one, Uruguay’s request for “provisional measures” against Argentina —a form of injunctive relief—aimed at putting an immediate end to blockades of bridges and roads. 50