Financial Times: Banking: Whales hold key to fate of voluntary guidelines: “Top executives at some of the world’s biggest banks have spent a good deal of time recently pondering the fate of 100 grey whales. The whales, which live off Russia’s Pacific coast, are threatened by Shell’s huge Sakhalin II oil and gas project, according to environmental campaigners who have been lobbying banks to withdraw funding from the scheme.”: Saturday 26 November 2005

By David Wighton and Andrew Balls

Published: November 25 2005

Top executives at some of the world’s biggest banks have spent a good deal of time recently pondering the fate of 100 grey whales.

The whales, which live off Russia’s Pacific coast, are threatened by Shell’s huge Sakhalin II oil and gas project, according to environmental campaigners who have been lobbying banks to withdraw funding from the scheme.

Activists claim that Sakhalin II breaches the Equator Principles, a voluntary set of guidelines for assessing the environmental and social impact of projects, which several of the banks involved have adopted.

Drawn up in 2003, the principles have become a “shining beacon for responsible banking”, according to Paul Watchman, a partner at Freshfields Bruckhaus Deringer, the law firm.

“They have had a positive effect not only on the attitude of lenders to social and environmental considerations in project finance, but also in other areas of banking.”

However, some of the world’s leading banks have failed to sign up and even some of those that have are privately sceptical about their real value. Some environmental groups say there is little evidence that any controversial schemes have been dropped as a result.

Mr Watchman, who conducted a study of the operation of the principles earlier this year, says that while few projects have been walked away from there is evidence that many have been “cleaned up” thanks to Equator banks.

Pam Flaherty, head of global community relations at Citigroup, one of the banks involved in drawing up the principles, says they have made a “substantial” difference to the way the bank operates. She points to the example of one, anonymous, client which, because of the principles, held a public consultation on a project for the first time ever in that country.

Some critics complain it is hard to tell whether the principles are working because banks are so reluctant to give details. “A number of financial institutions are taking it very seriously. But they need to demonstrate how they are doing it,” says Mr Watchman.

The principles are based on the environmental and social standards set by the International Finance Corporation, the World Bank’s private-sector lending arm. The IFC is currently updating its policies on environmental and social assessments, in part to make them better suited to the needs of commercial banks that have adopted the principles.

The safeguards include environmental assessments, pollution abatement, land acquisition and involuntary resettlements and indigenous people. The new approach will focus on project outcomes and the setting of objectives and monitoring performance, rather than the application of the cumbersome safeguards used across the World Bank with government clients.

But the IFC has faced some criticism – including from other parts of the World Bank – raising concern that the protections are being watered down.

Lars Thunell, who takes over as head of the IFC in January, says he supports the “general direction” of the new approach, which he characterises as moving away from “box-ticking” and towards focusing on principles and outcomes based on best practice.

“You have to have a certain amount of process and procedures regulation built in, but it is an attempt to focus on what is really the output,” he says. “The idea is not to make them any more lax in any shape or form.”

Mr Thunell adds that while there will be an assessment of the new approach, to check for omissions or anything that is not working, there will not be regular updates. “The point of predictability is what we should respect. We should not have change for change’s sake.”

Mr Thunell, who has experience in project finance from a long career in the financial services industry – most recently as chief executive of SEB, the Swedish corporate bank – has inherited the new approach developed under the leadership of his predecessor at the IFC, Peter Woicke. The document is scheduled to go to the World Bank’s board on January 26, a week after Mr Thunell starts at the IFC.

Since their launch in 2003, the principles have not only become an industry standard in international project finance, they also seem to have promoted a broader trend towards “responsible” banking. Some banks are adopting the principles, or a cutdown version Mr Watchman dubs “Equator-Lite”, in other areas of banking.

This trend has its critics among the strongest supporters of the principles. Chris Bray, head of environmental risk policy management at Barclays, has expressed concern about extending application of the principles to less structured areas than project finance.

But JPMorgan Chase announced in April it would adopt the principles not just to project finance but also to all loans, debt and equity underwriting, financial advisories and project-linked dervative transactions where the use of the proceeds is designated for potentially damaging projects. For transactions in the mining, forestry, oil and gas industries it will use the principles for amounts over $10m, against a $50m threshold in the principles agreement.

JPMorgan’s move followed a campaign against the bank co-ordinated by the San Francisco-based Rainforest Action Network. The bank was accused of capitulation by some pro-business activists but it said it was “committed to establishing a significant leadership position on the environment”.

Mr Watchman says that some of the founder Equator banks, including Barclays, Citigroup, HSBC and ABN Amro, take the issue very seriously and see it as part of a broader commitment to sustainability.

But he adds there are a wide variety of motivations among the banks and many see signing up to the principles largely as “good public relations” or a way to boost market share. In contrast, some of those who have not signed up also believe it will allow them to pick up more business, says Mr Watchman.

Some 35 institutions have now adopted the principles including, most recently, Nedbank, the first African bank. Nedbank said the move was in line with its existing policies but would also make it “the partner of choice” for other Equator banks in African deals.

Those signed up account for over 80 per cent of project finance but there are prominent absentees including Deutsche Bank, BNP, Societe Generale, HBoS and most large Japanese banks.

A number of NGOs that were initially sceptical of the principles have become more supportive but many activists say it is still too soon to say how much difference they will make in practice.

Some say Sakhalin II and the fate of the grey whales will be the crucial test.

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