Copyright 2007. No quotation or citation without attribution.
1

IR/PS CSR Case #07-06

Investigating Compliance/NonCompliance with the
Equator Principles
To Comply of Not to Comply…That is the Question

By: Andrew Lee Nguyen

GRADUATE SCHOOL OF INTERNATIONAL RELATIONS AND PACIFIC STUDIESUNIVERSITY OF CALIFORNIA, SAN DIEGO
Prepared for Professor Peter Gourevitch
Edited by Jennifer Cheng, MPIA 2008
Corporate Social Responsibility
Winter 2007

Abstract:
While the number of banks who have adopted the Equator Principles is encouraging, actual
compliance with the voluntary code is more meaningful and important to note. Relying mainlyon theoretical models that explain how reputational risk and costs provide
incentives/disincentives for individual firms to adopt and/or comply with the EP, this paper
shows that compliance by banks who have adopted the EP is mixed. While some banks arecomplying with the EP’s provisions due to the high reputational risks they face, other banks findcompliance too costly, and choose to free-ride off others.

Copyright 2007. No quotation or citation without attribution.
2

Table of Contents
I. Introduction...........................................................................................................................3
II. The Birth of the Equator Principles....................................................................................3
III. The Equator Principles ......................................................................................................5
IV. Project Finance 101 ............................................................................................................7
V. Methodology.......................................................................................................................11
VI. Reputational Risk .............................................................................................................12VII. EP’s Structure and Requirements..................................................................................15
VIII. Economic Costs of Adopting and Complying with the EP...........................................18
IX. Motivation for Adoption...................................................................................................21
X. Incentives/Disincentives for Compliance..........................................................................27
XII. Case Study: The Baku-Tbilisi-Ceyhan Oil Pipeline.......................................................30
XIII. Establishing the Counterfactual and Investigating Alternatives .................................33
XIV. BankTrack .....................................................................................................................35
XV. Conclusion .......................................................................................................................38
XVI. Discussion Questions......................................................................................................39
XVII. Bibliography .................................................................................................................40
XVIII. Appendix .....................................................................................................................42

Copyright 2007. No quotation or citation without attribution.
3

I. Introduction
In June of 2003, ten financial institutions signed on to the Equator Principles (EP), a setof voluntary social and environmental guidelines governing global project finance transactions.
Today, there are forty-five banks who have adopted the EP, comprising over 80% of the project
finance market across the globe. While the number of banks who have signed on is encouraging,participation in this initiative is meaningless without credible assurances or visible signs ofcompliance. This report will seek to answer the question, “How do we know that EP banks arecomplying with principles?”This report is divided into three main sections. The first section attempts to introduce thereader to this paper’s topic and how the paper will proceed in answer the question above; thesecond section actually attempts to answer the question through utilizing theoretical models anda case study to explain the costs and incentives that influence a firm’s decision to comply; finally,
the last section briefly analyzes BankTrack (a consortium of NGOs) and puts a conclusion to thepaper.
II. The Birth of the Equator Principles
The story on how the EP was created begins as early as the 1980s, when large publicfinancial institutions were continually being scrutinized by non-governmental organizations(NGOs) for their role in financing large development projects in South America and Asia that
had negative environmental or social consequences. A decade later, it wasn’t just theInternational Finance Corporation, a branch of the World Bank, that found itself under the
microscope of NGOs worldwide – export credit agencies, who also financed development
projects, were also being watched closely. While these public financial institutions contributed

Copyright 2007. No quotation or citation without attribution.
4

huge sums to finance projects around the world, the role of private banks in financing theseprojects was increasing. Suddenly, civil society groups realized that although they may havebeen successful in stopping a public financial institution from engaging in an environmentally
destructive project, there was still the possibility that a whole range of private sector banks could
easily finance the project themselves. And because a public financial institution’s stakeholders
includes individuals who are accountable to the general public, influencing these public
institutions to change their credit policies—reflecting civil society concerns—was easier thanchanging the private banking sector’s behavior in this field.
Consequently, finance projects like the Three Gorges Dam in China, which was rejected
for financing by the World Bank because of environmental and social concerns but financed
through private banks, suggested that while NGOs were successful in reforming the credit
policies and review processes of public banks, private banks had the power to undermine theirefforts at ensuring global sustainable development projects. Fully cognizant of this reality,
NGOs begin to target private banks in the late 1990s, such as the Rainforest Action Network’s(RAN) campaign against Citigroup’s old-growth logging and oil pipeline project in Ecuador.1
Other banks like WestLB, Morgan Stanley, and Westpac also felt the heat from NGOs for their
participation in financing projects that were deemed socially or environmentally destructive.2
Institutional investors like the Calvert Group and Insight Investment were taking notice
too, adding even more pressure to financial institutions to address this issue.3By October 2002,
the International Finance Corporation (IFC) was holding meetings with bankers from the world’s

1Richardson, Benjamin J. “The Equator Principles: The Voluntary Approach to Environmentally Sustainable
Finance”, European Environmental Law Review (2005): 280-290.
2
BankTrack (2004). “Principles, Profits or just PR? Triple P investments under the Equator Principles. An
Anniversary Assessment.” Amsterdam: BankTrack.
3
Richardson (2005).

Copyright 2007. No quotation or citation without attribution.
5

major private banking institutions, helping them create a voluntary set of codes that would
address environmental and social concerns that were present in project financing. Around thatsame time, Citigroup, which was also had a commercial banking entity, was now reeling fromthe media exposure lavished on celebrities like Susan Sarandon, Ed Asner, Ali MacGraw, andDarryl Hannah, who all cut their Citigroup credit cards as part of RAN’s advertising onslaught.
In early 2003, Citigroup actually engaged RAN for sit-down meetings, attempting to lessen any
further damage to their reputation.
The need for private banks to engage in a dialogue with NGOs and to appear as if
environmental and social concerns were being addressed was made explicitly clear on June 4th,
2003 when the EP, “the first collective norms addressing environmental and social issues,” waspublicly announced and adopted by Citigroup, Barclays, West LB, and seven other banks.4 This
rare occurrence of private banks uniting under one common framework that they had collectively
devised and agreed upon was a significant event, but perhaps not surprising to NGOs worldwide
who saw this event as a sign of their success in increasing public awareness about the project
finance sector and the application of environmental and social concerns into these banks’ lending
policies.
III. The Equator Principles
The Equator Principles are simply a set of voluntary guidelines relating to how a bank is
suppose to conduct its project financing with respect to meeting the social and environmental
concerns of stakeholders affected by the project. Collectively devised by private banks, the EP islargely based on the International Finance Corporation’s (IFC) Safeguard Policies. To adopt theEP, a bank can merely issue a press release stating its intention to follow these rules. There is no4

BankTrack (2004).

Copyright 2007. No quotation or citation without attribution.
6

official organizational body that certifies or monitors EP adoption or implementation – any bankcan choose to adopt the EP and comply or not comply with its principles. However, there is an
EP secretariat, who is an EP member bank, that assumes responsibility for maintaining the EP’s
official website (www.equator-principles.com) and helping new financial institutions withadoption of the principles.5 Currently, Mizuho Corporate Bank, Ltd., a Japanese financial
institution and one of the largest private banks in the world, is the EP secretariat. Beyond thesestated duties, the secretariat does not do much else, allowing EP member banks to apply all ornone of the principles as they wish.
According to the EP’s preamble, the purpose of the guidelines are as follows6:• ensure that the projects [the lenders] finance are developed in a manner that is socially
responsible and reflect sound environmental management practices• promote responsible environmental stewardship and socially responsible development• serve as a common baseline and framework for the implementation by each [EPmember] of its own internal social and environmental policies
In addition, the preamble underscores the responsibility of EP banks to “not provide loans
to projects where the borrower will not or is unable to comply with our respective social andenvironmental policies and procedures that implement the Equator Principles.”7 As to the scopeof the principles, the EP states that the guidelines are to be applied to all project financings withcapital costs of $10 million USD and above. Some of the main tenants of the EP, as written in its
2003 version, are as follows:5“Mizuho Corporate Bank’s Adoption of Equator Principles.” Mizuho Financial Group, Inc. Site accessed 3/1/07.
< http://www.mizuho-fg.co.jp/english/activity/environment/equator/adoption_eng.html#anchor_01>.
6“The ‘Equator Principles.’” The Equator Principles (official site @ www.equator-principles.com).
< http://www.equator-principles.com/documents/Equator_Principles.pdf>.
7
Ibid.

Copyright 2007. No quotation or citation without attribution.
7• projects are categorized as A, B or C (high, medium or low environmental or socialrisk).
• for all Category A projects and some Category B projects, lenders ensure that theborrower consults with local people affected by project, and gives adequate public
notice• The borrower must demonstrate that the project complies with the World Bank
Pollution& Abatement Guidelines• If borrower isn’t complying with relevant environmental and social guidelines, lender
attempts to bring borrower back into compliance
Because the original EP in 2003 was based on the IFC’s Safeguard Policies, when thesepolicies were revised with new “Performance Standards,” the EP followed suit in 2006 and was
also revised.8 Some of these major new revisions, as currently found in the EP today, included
the following:• lowering the capital threshold from USD 50 million to USD 10 million• stronger consultation requirements, forcing the lender to engage with indigenous people
affected by the project• inclusion of labor and working conditions requirements for projects in low andmedium income countries• requirements for compliance with all applicable local, state, and host-country laws
• requirement that EP banks report publicly at least annually on their EP implementation
To view the complete guidelines as it is written, please see the appendix.
IV. Project Finance 101
One of the keys to understanding why some banks would want to adopt or comply with
the EP is found in the structural nature of the project finance market. This section will attempt toprovide an overview of the project finance market and its transactional dealings.

8

Id. at “Frequently Asked Questions about the Equator Principles.” Site accessed 3/1/07.
<http://www.equatorprinciples.
com/faq.shml>.

Copyright 2007. No quotation or citation without attribution.
8

According to the International Project Finance Association, the term project finance isdefined as “the financing of long-term infrastructure, industrial projects, and public services
based upon a non-recourse or limited recourse financial structure where project debt andequity used to finance the project are paid back from the cashflow generated by the project”(emphasis added). 9 Essentially, project financing differs from conventional financing in that
lenders have limited rights (meaning very little or none) to the borrower’s assets. This is apparent
in the figure above10: the borrower (in this hypothetical example) is Shell Oil, and the project
itself is their oil pipeline. Equity financing (or internal financing) is provided from Shell, giving
them control of the project once it is completed. If debt financing is provided by more than one
bank (as it is in our example), then the group of lenders is called a syndicate. In a syndication,
there will be an arranger, who we will assign as Citigroup in this example, whose responsibility
is taking a lead role in negotiating and coordinating financing among the different lenders.
Because they are financing the project directly and not relying on the credit risk of the borrower,
properly screening the project’s risk and forecasting its future cash flow is crucial. Again,
everything relies on the project. However, through syndication, banks decrease their exposure to
the project’s risk by allocating an amount less than they would if they financed the projectcompletely.

9“Project Finance.” Investopedia. Site accessed 3/1/07. <http://www.investopedia.com/terms/p/projectfinance.asp>.
Although the diagram was made by myself, it is based on information and other diagrams in the following:“Project Finance, the added value of insurance.” Swiss Reinsurance Company (Zurich). Nov. 1999, 3000 en.
<http://www.swissre.com/INTERNET/pwswpspr.nsf/alldocbyidkeylu/MBAR-4UZHCB?OpenDocument>. Also thefollowing: ”Project Finance.” Wikipedia. Site accessed 3/1/07. < http://en.wikipedia.org/wiki/Project_finance>.
10

Copyright 2007. No quotation or citation without attribution.
9

The diagram also shows the role of the government and civil society, which can be
described as being outside of the financing process. In truth, if there is no public financial
institution involved in financing the project, then the government does not intervene in theprocess unless the project violates local, state, or federal laws. As for civil society, although they
have an interest in the project, they mainly rely on public knowledge and information to assess
the project and its social and environmental effects. Because many of the details that civil society
groups like NGOs are interested in (i.e. whether the pipeline may be susceptible to leakage in the
future due to improper or weak coating) are not legally required to be disclosed, they must relyon disclosed government documents, news articles from the press, or information that cannot be
kept private between the lender, borrower, and project’s staff, contractors, or consultants (such as
big cloud of smoke emanating from the project site). It should also be understood that projectCopyright 2007. No quotation or citation without attribution.
10

finance largely deals with huge infrastructure projects, such as an oil pipeline, power plant,hydroelectric dam, or major transportation road.
The controversy concerning such projects has to do with the social and environmental
consequences of such a huge undertaking. For example, building an oil pipeline in parts ofSouth America may include cutting down numerous forests to connect the pipeline to parts of thecountry. Or a hydroelectric dam could negatively influence a community’s natural ecologicalprocess, whereby wildlife species die off as a result of changing water levels.
Lastly, lenders will take note of any risk that threatens potential cash flow. However, if acountry levies few or no penalties/fines for any negative environmental or social effects from the
project AND the project’s cash flow still stays consistent, then a “tragedy of the commons”
problem becomes present. For many NGO groups, because developing countries lack strong
political and legal institutions necessary for effective social and environmental protections andenforcement, they believe it is their responsibility to ensure that unsustainable projects areprevented from getting off the ground. Accordingly, they have found that one way to do this isthrough attacking the lenders who are financing the project; for without any financing, a projectof such magnificent scope would not be possible.

Copyright 2007. No quotation or citation without attribution.
11

V. Methodology

To assess compliance with the EP, this paper will rely on theoretical models and an actual
case study. Mainly though, this paper will rely on theoretical models that attempt to explain
private banks’ incentive for compliance. Due to a lack of transparency and disclosure by EPbanks in this area of project financing and because language in the EP can be consideredextremely subjective, a theoretical approach should suffice in illustrating what is at stake foreach bank by complying, and how this decision is arrived at with consideration to economic
costs and reputational risks.
One case study on a specific project, namely the Baku-Tbilisi-Ceyhan (BTC) oil pipeline
project, will also be explored. The project was well-documented in the press because of its sheer
size in crossing national boundaries, especially in locations without much political stability.
Moreover, violations of the EP in this study are so blatantly obvious that it would be difficult forsomeone to use the EP’s structural weakness to make a case that EP banks actually compliedwith its EP requirements. For these reasons, the BTC case study is excellent for satisfying thepaper’s focus on EP bank compliance.

Copyright 2007. No quotation or citation without attribution.
12

VI. Reputational Risk
Before launching into a full discussion of why banks choose to adopt or comply with theEP, this section introduces the idea of reputational risk. Reputational risk is an important idea inthis paper because for most banks, it helps them determine whether to adopt and/or comply with
the EP. This paper will use the following definition to describe reputational risk: “the probabilityof being a target of a public campaign multiplied by the cost for the bank of such a campaign.”11
In contrast, reputation will merely refer to how individuals, groups, and organizations view thefirm’s ability to manage its product, employees, and operations. While the concept of a firm’s
brand and reputation can be argued to be explicitly different, because many people (including
authors on this topic) have intertwined the two, this paper will do the same for simplicity andclarity. Additionally, it is safe to assume that a stronger reputation among different individuals
and groups will lead to reduced reputational risk (i.e. if an NGO views a certain firm in favorable
terms, then there should be less inclination to launch a public campaign against it).
Basically, firms worry about their reputational risk because it affects the following: the firm’s
ability to retain and recruit talent; customer, supplier, and even market perceptions about thefirm’s brand and its value; the firm’s relationship with its customers, partners, and suppliers; andthe firm’s sales and revenue (measured quarterly or annually). All of these things have an effecton the firm’s bottom line, which is why firms seek to reduce reputational risk when it is possible
and cost-efficient to do so.
Because banks differ due to a number of factors, they face dissimilar levels of
reputational

11“Project finance: a sustainable future?” Ethical Investment Research Services (EIRIS). SEE Risk briefing: July
2006.

Copyright 2007. No quotation or citation without attribution.
13

risk. Some of the more well-known factors they have been identified as differentiating the levelof reputational risk between banks that engage in project finance include the following:12






% of revenue from the firm’s project financing activities
firm’s size (book or market value)
public recognition of the firm’s reputation or brandthe level of civil society scrutiny in the firm’s country(s) of operation
whether the firm has commercial retail banking activities
There may be other factors that influence a bank’s reputational risk also, such as whether

a bank operates in a strong or weak regulatory environment. The idea that a weak regulatoryenvironment would increase a bank’s reputational risk seems counter-intuitive but is rational andplausible. In countries with lax regulations on the environment, for example, banks may choose
to neglect the project’s environmental impact, which could increase NGO activism against thefirm. However, in a strong regulatory environment, banks choose to abide by all laws to prevent
project delay and costly penalties; not doing so would warrant more attention on the firm by civilsociety groups. Whether this idea is correct or not isn’t too crucial; the main idea is simply thatbanks that engage in project finance face different reputational risks because of a number offactors that may or may not be applicable to them.
The relationship between some of the factors listed above and a bank’s reputational risk
is fairly obvious. The last factor, whether a bank has retail banking activities, is a factor in
determining a bank’s reputational risk because those banks that issue credit cards and checking
accounts must worry about the effects on their commercial banking revenue as a result of
campaigns against their project financing. The case of Citigroup and RAN illustrates this idea
well, as Citigroup faced higher reputational risks relative to other banks involved in project
12

Ibid.

Copyright 2007. No quotation or citation without attribution.
14

finance because they had to worry about how receptive commercial banking clients would be to
RAN’s campaign against them. Taken all together then, a bank should have higher reputationalrisk if it depends mostly on its project financing activities for revenue, has a highly visible andrecognizable brand name (or reputation for that matter), operates in a country where civil society
scrutiny is very high, and has commercial retail banking activities.
The connection between a bank’s reputational risk and the EP is that adopting the latter isassumed by banks to reduce the former. This paper will explore the strength of this assumption
in a later section. But for right now, it’s important to note that most EP banks view the EP as way
to reduce their reputational risk. Wright and Rwabizambuga (2006), in discussing why banks
would adopt the EP, suggest that “adopting a particular code of conduct, and thereby signaling
an intention to conform to recognized industry practice, primarily reflects a strategic desire
among firms to maintain or acquire a positive reputation within their institutional
environment.”13 And in surveying executives from 31 EP banks, Freshfields Bruckhaus Deringer
found that banks who adopted the EP were motivated by the desire to enhance things like theirreputation and dialogue with stakeholders such as NGOs.14 A stronger reputation is assumed toresult from adoption because banks now appear to include environmental and social concerns intheir lending policies, whereas before, many of them were attacked by NGOs exactly because
their policies lacked to consider this issue. So many banks who adopt the EP are hoping that such
positive effects like a stronger reputation will decrease the likelihood that they will be a target of

13

Rwabizambuga, Alexis and Wright, Christopher. "Institutional Pressures, Corporate Reputation, and Voluntary
Codes of Conduct: An Examination of the Equator Principles". Business and Society Review, Vol. 111, pp. 89-117,
March 2006.
14“Banking on responsibility, Part 1 of Freshfields Bruckhaus Deringer Equator Principles Survey 2005: The
Banks.” Freshfields Bruckhaus Deringer. July 2005

Copyright 2007. No quotation or citation without attribution.
15

a public NGO campaign against them. In essence then, many banks who adopt the EP areattempting to reduce their reputational risk.
VII. EP’s Structure and Requirements
In deciding whether to adopt a voluntary initiative like the EP, banks will closely
consider the costs of adoption and compliance. These costs of adopting and complying with theEP, however, are based on its structure and requirements. An examination of the EP reveals that
there are major weaknesses or structural deficiencies that undermine what NGOs consider to be
the main purpose of the EP: ensuring that all applicable environmental and social concerns areaccounted for in the process, and preventing unsustainable or environmentally damaging projects
from being financed. For example, Richardson and Thomas (2004), two lawyers who dissected
the full text of the EP, found that the EP was “so fraught with ambiguity, subjectivity, andvoluntarism that [it] may accomplish little more than establishing an ephemeral goal that will
not, as a practical matter, be reached.”15 A review of the academic literature on this topic
illustrates that the EP falters in these main areas: its requirements on transparency and implementation are weak there is a lack of accountability because there are no requirements on independent monitoring, or any other compliance mechanism (so free-riding is entirely possible)
 the EP’s scope is limited; it only applies to “project finance” loans, which is lesscommon than development loans
 if the principles are not followed, there is little recourse for communities affected by aproject the wording in the EP is too loose and ambiguous, creating subjective interpretations andnumerous loopholes

15

Lawrence, Robert F. and Thomas, William L. “The Equator Principles and Project Finance: Sustainability in
Practice?” Natural Resources and Environment (American Bar Association), Fall 2004.

Copyright 2007. No quotation or citation without attribution.
16

Richardson and Thomas (2004) even argue that “the lack of specificity and clarity in the
Equator Principles could mean that, for virtually any individual project, opponents can credibly
claim that the lender has violated the Equator Principles, and the lender can simultaneous claimthat it [has] applied them to its satisfaction.”16
Most of the academic literature that criticized the EP’s weakness was written before theEP was revised in 2006, such as Richardson and Thomas’s (2004) study. Nevertheless, most of
the same problems that were found in the earlier version of the EP can still be found in the newrevised one. BankTrack, which represents a consortium of NGOs dedicated to monitoring
compliance with the EP, argues that “one of the most significant problems is that the Equator
Principles lack mechanisms to ensure that endorsing banks properly integrate the EP
requirements into their operational systems, creating an incentive to adopt the Principles without
any oversight or consistency in how these policies and systems are being implemented from bankto bank.”17 While BankTrack acknowledges that the revision included a few notable
improvements, such as expanding the EP’s scope to now include projects with capitalrequirements of $10 million USD and above, it points out the existence of words like “mayrequire,” which allows lenders to selectively apply the EP’s criteria where they see fit. Now to
be fair, BankTrack’s criticism over the proposed revision of the EP was published before the2006 version was finalized. The actual 2006 version corrects a problem where BankTrack had
previously noted contained the words, “EPFIs may require appointment of an independent
environmental and/or social expert.”18 The actual and final version (as it can be found now),states “EPFIs will, for all Category A projects, and as appropriate, for Category B projects,
16

Ibid.
“Equator Principles II, NGO comments on the proposed revision of the Equator Principles.” BankTrack. April 26,
2006.
18
Ibid.
17

Copyright 2007. No quotation or citation without attribution.
17

require appointment of an independent environmental and/or social expert . . . .”19 While thecorrection here makes this requirement seem much stronger, the rest of this sentence reads, “. . .
or require that the borrower retain qualified and experienced external experts to verify its
monitoring information which would be shared with EPFIs” (my emphasis).20 A critic may
argue that this last line, instead of putting the burden of monitoring on the lender, allows theborrower – who has hid in the shadows while lenders have bared the brunt of NGO activism – tohire their own cronies to perform an environmental evaluation on the project. So again, apparent
weaknesses haven’t been fully corrected in this new version of the EP.
Before ending this section, to fully demonstrate all the problems and weaknesses in theEP, one last example will be given. In Principle 10, which is the last principle in the 2006
version of the EP, the full text reads as follows: “Each EPFI adopting the Equator Principles
commits to report publicly at least annually about its Equator Principles implementation
processes and experience, taking into account appropriate confidentiality considerations.”21First, what exactly should an EPFI, Equator Principles Financial Institution (or EP bank, the term
this paper prefers to use), detail in its report on the EP implementation process and experience?
The footnote in the official EP guidelines suggests that “such reporting should at a minimum
include the number of transactions screened by each EPFI, including the categorization accorded
to transactions (and may include a breakdown by sector or region), and information regarding
implementation.”22 Again, the word “should” weakens this principle because it allows EP
adopters to ignore this critical provision if they wish. Second, even if an EP-bank chose to report

19“The ‘Equator Principles.’” The Equator Principles. (2006 Version)< http://www.equator-principles.com/documents/Equator_Principles.pdf>.
20
Ibid.
21
Ibid
22
Ibid

Copyright 2007. No quotation or citation without attribution.
18

the details about its transactions according to the suggestion in the footnotes, how is the reader
suppose to determine if this reporting is credible? Because the specific project is not identified, abank can exaggerate the number of transactions that went through screening to appease NGOs
that question whether that EP bank is applying the EP to its lending policies. Secondly, an EP
bank can interpret commitment of this guideline about reporting publicly at least once a year inmany ways. It may issue an annual publication that is available at the same time and location as
its annual report (10-K) filed to the SEC; or, it can choose to add one or two sentences about its
EP experience in a single press release amid the tens or hundreds of PR releases on its webpage.
There is no description requiring an EP bank to do the former. Third, and most importantly, an
EP bank can simply choose to ignore this principle outright. Again, the principles are voluntary
and adopting the EP does not require an EP bank to follow its every guideline. There is no
punishment for outright violation or ignorance in applying one or all of the principles.
VIII. Economic Costs of Adopting and Complying with the EP
This section will attempt to deal strictly with costs faced by banks in adopting andcomplying with the EP. Focusing first on adoption costs, most banks would find the costs to be
an EP member minimal if anything. As previously mentioned, a bank can voluntarily adopt the
principles simply through issuing a press release to let the public acknowledge its commitment toapplying the EP’s guidelines (whether it actually intends to apply them or not). Merely placing a
few words on its website is hardly a cost at all for most banks.
However, it’s possible that by adopting the EP, a bank is opening itself to further NGO
scrutiny or public criticism. Whereas before, a bank may have blatantly ignored theenvironmental and social consequences of a project it financed, at least it did not commit to anyCopyright 2007. No quotation or citation without attribution.
19

policy that could potentially deem the firm and its actions in this area to be in wrongdoing or
negligent violation; but in adopting the EP, the bank is publicly committing itself to a minimum
standard when it comes to project financing, so expectations from the public are higher that thebank must uphold its commitment. This idea seems to stand in contract to an earlier assumption
made by most banks (mentioned in an earlier section) about how adopting the EP reduces
reputational risk. If adopting the EP can actually increase public scrutiny over a bank’s project
finance activities (which would increase a bank’s reputational risk), then why would a bankchoose to adopt it? The answer is actually quite simple: banks with less reputational risk arethose who are not scrutinized very much, and possess less recognizable reputations or brands.
For these low reputational risk banks, adopting the EP comes without much cost at all.
For banks that possess high reputational risk, meaning they are watched more closely by NGOs
and have a more recognizable brand (i.e. Citigroup), despite having their actions scrutinized
more due to adopting the EP, they can still reduce their reputational risk if they comply with its
standards. Close scrutiny prevents these banks with high reputational risk from merely adopting
the EP and benefiting from it immediately; they must show credible signs of compliance (oraccusations of green washing become apparent). Smaller banks (or banks with less reputationalrisk) are not usually exposed to such levels of scrutiny before and after adoption of the EP.
Therefore, for a bank with high reputational risk, the cost of adopting the EP may actually be thecost of compliance (or appearance thereof). Without appearing to comply, a high reputationalrisk bank that adopts the EP would be asking for more trouble.
Turning attention now to the EP’s compliance costs, most authors have commented on
how these costs are actually quite high for ordinary banks. Amalric (2005), in examining thisissue of compliance costs, finds that rejecting projects that don’t meet the EP’s criteria to beCopyright 2007. No quotation or citation without attribution.
20

extremely costly.23 In other words, the opportunity costs are high for banks that choose to accept
only projects that meet the EP’s requirements. By committing itself to adopt and comply with
the EP, banks are betting that the cost of turning down such a project is less than the value gainedin receiving less reputational risk. If there’s a chance that banks have miscalculated this costbenefit analysis, then compliance can obviously be a cost to the firm.
Amalric (2005) also identifies due diligence, categorization of projects, monitoring
compliance, and client engagement as other costs arising from bank compliance with the EP.24
The aggregate cost of performing all these tasks should not be taken lightly. In order to show
credible commitment in complying with the EP, a bank with high reputational risk would have to“amend existing policies, and/or create new systems, tools and procedures to facilitate Equator
implementation,” according to BankTrack.25 It is simply not enough for an EP bank to merely
discuss its experience with the EP; it needs to specifically address how it is implementing the EP
into its credit review process and other environmental management processes. BankTrackidentifies four key areas it looks for in determining whether an EP bank is implementing thechanges necessary to its project finance review and monitoring processes26:
 external reporting and transparency (was the bank open and transparent in its
implementation of and compliance with the EPs, or did it fail to provide evidence andreporting to the public?) policy development: the adoption and application of the EPs (did the bank formally adopt
the EPs, and make the appropriate changes to existing policies to accommodate this newcommitment?)
 procedures and standards: changing business as usual (how do bankers have to do things
differently post-equator?) review and improvement: EP implementation challenges (what are the current challenges
23

Amalric, Frank. “The Equator Principles: A Step Towards Sustainability?” Working Paper No. 01/05, Center for
Corporate Responsibility and Sustainability at the University of Zurich, January 2005.
24
Ibid.
25
BankTrack (2005). “Unproven Principles. The Equator Principles at Year Two. An Anniversary Assessment.”
26
Ibid.

Copyright 2007. No quotation or citation without attribution.
21of EP implementation and what goals have been set to improve implementation andcompliance)
 impacts: a [sic] different with the EPs? (what has been the impact of the EPs?)
For most people, simply finding out whether a bank hired new people, trained its existing
people, and amended its credit policies would be an easy way to determine if it making an honest,
credible attempt at complying with the EP. Therefore, the costs of compliance can be said to be
fairly high – a high reputational risk bank must spend a significant amount of money toadequately display credible commitment to implementing the EP.
IX. Motivation for Adoption
This paper’s section covering reputational risk and costs of adoption and compliancealready seems to imply that some banks will adopt the EP because they can free-ride on thebenefits of being an EP member without actually contributing to the costs necessary for actual
compliance. Again, we can assume that these banks possess low reputational risk because civilsociety groups like BankTrack actually check for signs of credible compliance; so any heat abank may be experiencing before adopting the EP will not go away if it chooses merely to
become an EP member without showing signs of compliance. Additionally, banks with highreputational risk will not only adopt the EP, but choose to comply with its guidelines if thebenefits in lowering its reputational risk is greater than the costs it must bear in complying (orappearing to comply) with the principles.
Academic scholars studying this area have also introduced plausible explanations on abank’s motivation for EP adoption. Amalric (2005), for instance, offers three hypotheses on why
the EP was created, its objective, and the “economic rationale” for why banks participate. His
contribution to the literature here is invaluable, as he uncovers more costs (not presented in theCopyright 2007. No quotation or citation without attribution.
22

previous section) and convincingly argues that the EP serves to do the following27:• “level the playing field in the industry among players facing different reputationalrisks,”• “screen[s] projects for social and environmental risks,” and• “counter[s] critics of large development projects.”
With regard to the first hypothesis, Amalric reasons that because larger banks are more
susceptible to reputational risk, they must therefore adopt higher corporate standards,
disadvantaging them with respect to cost. Thus, these larger banks who are more exposed to
reputational risk will adopt the EP in order to “restore a level playing field by imposing an
industry standard on all actors.” Furthermore, since large project finance transactions operate
mainly on syndications with lead arrangers, and because the larger EP banks with highreputational risk comprise a sizable portion of the project finance market, a bank who is not amember of the EP and takes the role of a lead arranger will have a hard time forming a syndicatethat isn’t composed of at least one EP member. What this suggests is that free-riding possibilities
are extremely limited if the non-EP bank desires to assume the role of an arranger; needing otherbanks to form a syndicate (one of which will likely be an EP bank that is limited in the type of
projects it can accept), the non-EP bank will have to sacrifice any potential of being an arranger.
Greenfield’s (2004) analysis succinctly encapsulates these ideas, as he states that thecollaboration between EP-banks “reduce[s] the ability for corporate clients to shop around for abank that has lower environmental and social standards.”28
As for the logic behind his second hypothesis, Amalric suggests that because multilateral

27

Almaric (2005).
Greenfield, Zev. “The Equator Principles: A New Industry Framework for Environmental and Social Standards in
Global Project Finance Lending.” Corporate Social Responsibility (CSR) and Sustainability Paper Awards,
Columbia Business School (2004).
28

Copyright 2007. No quotation or citation without attribution.
23

development banks (MDBs) were withdrawing from their traditional role as a monitor for
projects, banks must now screen the projects themselves – which can be costly. The significanceof screening a project stems from the potential environmental and social risks that each project
can carry: if a project is not carefully screened, certain risks become reality, decreasing theprobability that banks will recoup their investment or financing costs. Therefore, with MDBs
“retreating” from their role, banks look to shift more of the screening costs onto their projectsponsors, which the EP essentially does. Amalric argues that this setup works because individual
sponsors (borrowers) face a collective action problem29, and so are forced to accept these costs.
They may attempt to find other banks but it is unlikely that they can; if non-EP banks areprevented from assuming a lead arranger role (described previously), then a project big enoughto require syndication will ensure participation of an EP bank (who will need to comply with theEP’s requirements). Also, these sponsors have an incentive to accept lending from EP banks
because it “signal[s] the quality of their projects and thus reduce[s] the price of credit.”
Amalric’s last hypothesis, which is in line with the section on reputational risk andparallels the academic literature describing the rationale behind voluntary environmental
programs by large firms, suggests that because of a growing concern over sustainable
development from NGOs and other stakeholders, banks find it necessary to adopt the EP. The
adoption of the EP allows banks “an entry into the debates” and “a way to resist the upgrading ofstandards in a way that would run against the banks’ interest.” Of course, implicit in thisargument is idea that as stakeholders continue to examine the role banks play in sustainable
development the following events occur to the detriment of lenders: the World Bank Group29

The collective action problem comes from Olson’s work (1965), which Amalric cites in his paper: Olson, Mancur(1965). “The Logic of Collective Action: Public Goods and the Theory of Groups.” Cambridge, MA.: Harvard
University Press.

Copyright 2007. No quotation or citation without attribution.
24(WBG)—under heavy pressure from an array of stakeholders—declines involvement in large
development projects; developing countries, cognizant of the growing concern oversustainability and of the decreasing role of the WBG, have less of an appetite for development
projects with drastic environmental and social ramifications; and the probability of more activist
campaigns against the banks increases. Concluding his paper, Amalric allows the reader todecide which hypothesis is more convincing, although he notes that none are mutually exclusive
and a combination of all three hypotheses could be in play.
While it seems that this section has covered most of the possible motivations for adoption,
Wright and Rwabizambug (2006), in focusing generally on the motivation behind adopting a
voluntary codes (i.e. not just the EP), find reasons that may pertain to this discussion. Theysuggest that “corporate codes of conduct can help differentiate an individual firm’s reputationfrom the malpractices of competing firms or clients, and boost its credibility relative to critics.”30
This idea relates a little bit to this paper’s ideas on reputational risk, but differs slightly insuggesting that this strategy is motivated by the desire for differentiation (or green
marketing). In regard to whether banks are motivated to adopt the EP for this reason, it isentirely possible, but its influence in ultimately deciding whether a bank will adopt the EP at thisor not should be minimal. Because the number of firms who have adopted the EP now cover
over 80% of the project finance market, the benefit of differentiation is not applicable anymore.
It’s possible that a bank like Citigroup, one of ten banks that first adopted the EP, was thinking inthese terms. But in analyzing their history with RAN (described earlier) and what led to theiradoption of the EP, a much stronger case can be made about Citigroup’s desire to reduce its
reputational risk.
30

Rwabizambuga and Wright (2006).

Copyright 2007. No quotation or citation without attribution.
25

Another motivation Wright and Rwabizambug cite is that adoption of a voluntary code“can provide a mechanism for firms to manage the social and ecological footprints of theiractivities, and enable them to identify cost-efficiency measures related to energy and waste
management, the integration of new technologies, process intensification, and businessexpansion into green “niche markets.” This reason here does not really apply to our case for
obvious reasons – lenders are strictly focused on the financial sector and most of their products
are intangible services where energy and waste management are not as relevant as they are forfirms that manufacture physical products. However, interpreted as a risk management strategy,
this motivation would apply for the reasons Amalric cites in his second hypothesis.
Both authors also suggest that adopting a voluntary code is “motivated by the anticipationthat irresponsible practices in a given industry may attract the attention of domestic regulators orcivil society groups.” This idea has already been fully explored in this paper, except the notionthat banks (collectively) may believe that they can halt or delay government regulation by
adopting a voluntary code. In terms of how plausible this is in motivating banks to adopt the EP,
right now it does not seem very plausible at all. Banks in this sector have not had noticeable
hardship conducting their project financing activities. Instead, a better argument can be madethat banks have had their way with governments, illustrated by the number of projects indifferent parts of the world, and the size of many of these projects (such the BTC pipeline, to be
discussed in a later section).
Lastly, for some banks with low reputational risk, Wright and Rwabizambuga (2006)
show that there may be no real motivation behind adoption of the EP. Performing a statisticalregression using a variable they call “Voice and Accountability,” a measure of the political, civil,
and human rights in a country, and “Government Effectiveness,” the “bureaucratic competenceCopyright 2007. No quotation or citation without attribution.
26

and quality of public service delivery, ” they show that EP-banks are “typically based incountries characterized by high levels of political, civil, and human rights” (plotted regression
below).31 They conclude their paper by asserting that “weak regulatory pressure, and moresignificantly, reduced civil society scrutiny, removes a major impetus for adopting a code of
conduct such as the Equator Principles.” In other words, banks with little reputational risk do nothave as much motivation for adopting the EP than their peers do. Reconciling this finding withan earlier observation made in the section on reputational risk, we can posit that banks whochoose to adopt but not comply with the EP must possess some minimum degree of reputationalrisk that can be lowered through EP adoption. Perhaps then, those banks with little reputationalrisk who choose not to adopt – despite the opportunity to free-ride – are indifferent to the EP
because the difference between the benefits and costs of adoption are so slim.

Fig. 3: Governance Levels in Home Countries of Equator Banks [from Wright and Rwabizambuga (2006)]32

31
32

Ibid
Ibid.

Copyright 2007. No quotation or citation without attribution.
27

X. Incentives/Disincentives for ComplianceThis paper accepts the idea that incentives/disincentives are strongly influenced by the
expected costs of compliance. While the preceding sections have already advanced (explicitly or
through implication) the incentives/disincentives to EP compliance, this section will review andunderscore the ones most compelling in influencing a firm’s decision to comply.
Concerning incentives to comply, this paper has already noted that large banks (in termsof the size of its project financing activities and visibility of its brand) cannot simply adopt the
EP. Reputational risk can only be diminished for these banks through a perceived credible
commitment to complying with the EP. Mere adoption of the EP (without any credible signs ofcompliance) simply opens the bank up to more scrutiny (increasing its reputational risk). In
addition, most of these larger banks should have the capacity or resources to comply with theEP’s provisions. . Another incentive for compliance, as pointed about Amalric, is the ability toshift screening costs onto the borrower. For a number of large banks who desire to reduce theirreputational risk through compliance with the EP, this is an added benefit that can be realized bycomplying with the EP to formalize this mechanism. Sponsors have little recourse to thispredicament due to collective action problems. In sum, the benefits of complying for somebanks will outweigh its costs
As for the disincentives to comply, for banks that face little reputational risk, the costs ofcomplying will be greater than the possible aggregate benefits gained through compliance with
the EP. Essentially, banks that possess minimal reputational risk find no need to show a credible
commitment to applying the principles. Besides this disincentive, a lack of transparency,
implementation, and enforcement requirements allow some banks to simply free-ride; that is,they can enjoy the benefits of being an EP member without paying their fair share of theCopyright 2007. No quotation or citation without attribution.
28

compliance costs. For convenience and clarity, the incentives/disincentives just mentioned areoutlined below:
Incentive to Comply
1) Large banks can’t simply adopt; reputational risk is diminished only through a perceived
credible commitment (and adoption opens bank to more scrutiny)a) Larger banks have capacity/resources to comply (institute new environmental
monitoring/screening reviews; train and hire new staff)
2) Banks want to shift screening costs onto sponsor (borrower); complying with EPformalizes this mechanism (sponsors have little recourse due to collective action
problem)Disincentive to Comply
1) Costs exceed benefits (banks with low reputational risk)a) If reputational risk is low, there’s little need to show credible commitment
2) Lack of transparency, implementation, and enforcement requirements allows free riding
for many players
XI. Credible Signs of ComplianceThis paper has already established that complying with the EP requires lenders to changeor adopt new credit policies and project review processes. The addition of new staff, and thetraining of existing ones should accompany EP adoption. Examining EP banks for credible signsof compliance, what do we find?
Both BankTrack and the Ethical Investment Research Services (EIRIS) find mixedCopyright 2007. No quotation or citation without attribution.
29

results when it comes to showing credible signs of EP compliance. In analyzing nine banks thatthey classify as having medium or high exposure risk (what this paper terms as reputational risk),
EIRIS finds that only 5 were “committed to drawing up an environmental management plan or to
conduct an environmental impact assessment” despite the importance of these activities inscreening for the environmental and social risk found in a project.33 Banktrack, in looking at the
number of EP banks that created new EP policies, tools, and procedures internally, found only 10
of 26 (about 38% of EP banks in its survey) accomplishing this.
In other areas like external disclosure, banks have normally argued that they are in a bindas to the project financing details that many NGO groups demand and their own obligation toguard the privacy of their client. Although the sponsor behind projects that were rejected,
categorized, and put through the whole EP review process is still hidden, BankTrack cited
Citigroup, HSBC, HVB, ING, and Westpac among the nine banks that actually addressed theneed for ‘better external disclosure.’ To BankTrack, “publicly discussing challenges and goals”
are important because it “allows stakeholders to identify where common problems may beoccurring.
Overall, this mixed result in showing credible signs of compliance lends further support
to this paper’s notion that because banks face different reputational risks, some have the
incentive to comply while others decide to free-ride. In fact, many of BankTrack’s findings fromits analysis of the each individual EP bank in its survey substantiate our theoretical model. For
example, it should come as no surprise that Citigroup, as the world’s largest commercial bank,
was lauded by BankTrack for being “one of the leadership banks that have committed to go
beyond the EPs by essentially applying them to corporate credits,” and having “taken significant
33

EIRIS (2006).

Copyright 2007. No quotation or citation without attribution.
30

steps to embed the EPs into core business practices.” In contrast, Bank of America, whose
reputation/brand is on-par with Citigroup but has little project financing activities (lowering its
reputational risk), was chided for “not [providing] any updates as to its implementation of orcompliance with the EPs.34
XII. Case Study: The Baku-Tbilisi-Ceyhan Oil Pipeline
While theoretical models have helped to clarify the incentives for a bank in choosing
whether to comply with the EP, real case studies would be more illustrative in demonstrating
actual compliance. However, due to the EP’s lax requirements on transparency and disclosure,and how wording in the EP can lead to subjective assessments on compliance, finding a propercase study can be tricky. Nonetheless, the Baku-Tbilisi-Ceyhan (BTC) pipeline project serves as
an excellent example because of its sheer size, which garnered the project much media attention.
Moreover, members of the press covering this project have brought up issues that are clearly
antithetical in nature to the spirit of the EP (ensuring that environmental or social concerns
related to the project are addressed). Also, because there are public financial institutions
involved in the project, such as the IFC, public documents about the project are also available.
Concerning the BTC project, the total project cost is said to be at $3.6 billion USD.35
Nine EP banks were identified as providing financing to the project. Despite their participation,
a number of big issues, such as the pipeline running through wetlands with endangered animals,
displacement of individuals as a result of the pipeline’s construction, and potential leakage thatwould cause havoc on the environment, were apparently not resolved. In covering the pipeline’s
34

BankTrack, 2005.
“IFC Board Approves Investments in Caspian Oil and Pipeline Projects Expected high development impact withenvironmental, social, and transparency safeguards.” IFC News, Press Release. 4 Nov. 2003.
<http://ifc.org/ifcext/media.nsf/content/SelectedPressRelease?OpenDocument&UNID=87B904CEA7A55BF585256
DD4004FFBA3>
35

Copyright 2007. No quotation or citation without attribution.
31

construction, PBS (the Public Broadcasting Service) took issue with how close the pipeline
would run to national wildlife:“Yet another problem spot in the construction of the BTC pipeline in Georgia canbe found where the pipeline skirts the edge of Borjomi-Kharagauli National Park.
The Borjomi region is famous for its pristine wilderness, and its spas have drawn
visitors since they were first developed under the patronage of 19th-century
Russian czars. Borjomi is also the source of renowned mineral water. Borjomi
water is a major source of revenue both locally and within the greater Georgian
economy, where it makes up as much as ten percent of Georgia's total export
trade. The BTC pipeline will run as close as 16 kilometers from the Borjomi
springs.”36

Obviously, the pipeline’s dangerous proximity to the Borjomi-Kharagauli National Parksuggests that environmental concerns were subverted in the project financing process. It would
be hard for most experts to argue that an oil pipeline poses no threat to a natural spring if thatpipeline were as close as 16 kilometers away!
Adding to the environmental threat posed by the pipeline, recently leaked documents(February 2007) from the U.S. Overseas Private Investment Corporation’s (OPIC)
Accountability Office reveal that the coating used in building the pipeline could lead to leakage.
News agencies with access to the document report that cracks were found in the pipeline in
November of 2003 but were not disclosed of immediately, and consultants to the lenders had
36“Extreme Oil, The Journey.” PBS (Online). Accessed 3/2/07.
<http://www.pbs.org/wnet/extremeoil/journey/georgia.html>.

Copyright 2007. No quotation or citation without attribution.
32

concerns about the coating and its effect on the durability of the pipeline.37 Here, another big
environmental issue emerges that challenges the credibility of EP banks involved in this project.
If cracks were occurring and faulty coating was known to be used in the process, shouldn’t EPbanks have been responsible for actively getting the pipeline recoated correctly, or walking awayfrom financing the project completely?
On the issue of displacement by individuals who were affected by the project, theObserver (UK) published a piece from an activist working for the Kurdish Human Rights Project
who argued that many Kurds (affected by the project) were not even notified about theconstruction of the pipeline:“A Fact Finding Mission to the pipeline areas conducted by the Campaign inAugust this year found massive discrepancies between BP's claims about theconsultation and compensation plans it must by law compile, and reality. Fewerthan one quarter of our sample of concerned parties had been officially informed
about BTC; one village, HaËibayram, listed by BP as consulted by telephone, wasan abandoned wreck of shattered walls. Many of those who had received
information remained confused and unsure of their rights.”38
While BP’s alleged failure in notifying Kurds of the project is significant, for the
purposes of this paper, the more noteworthy aspect is how those 9 EP banks could either allow

37“BP’s BTC pipeline needs extra monitoring-US agency.” MarketWatch. 12 Feb. 2007.
<http://www.marketwatch.com/news/story/bps-btc-pipeline-needs-extra/story.aspx?guid=%7B14D0E706-AA204FBC-864C-74ABD51AF5E5%7D>
38“Why campaigners oppose the pipeline.” Observer.co.uk. 1 Dec. 2002.
http://observer.guardian.co.uk/business/ethics/story/0,12651,851000,00.html

Copyright 2007. No quotation or citation without attribution.
33

such negligence too occur or decide to finance the project if the event happened before they wereinvolved.
Due to all these apparent failures by the 9 EP banks to address the environmental andsocial concerns present in construction of the BTC pipeline, the case study adequately
demonstrates that not all banks are complying with the EP’s guidelines. This is unsurprising,
given what the preceding theoretical models have shown: banks with low reputational risk haveless incentive to comply given the high costs of compliance and opportunities to free-ride. In
grading how the principles fared in this project then, BankTrack is not far off the mark:“The Equator Principles can be used in three ways – to exclude financing of
projects which fail to meet certain minimum standards, to set markers for
improving projects’ design and performance, and to hold clients accountable formeeting environmental and social performance standards. In the BTC case, which
the Equator banks themselves touted as a key test of the Principles, the banks
failed all three parts of the test.”39
XIII. Establishing the Counterfactual and Investigating Alternatives
Recognizing the EP’s weakness in forcing all lenders to comply with its guidelines, andhow some EP banks will not address the environmental and social impact of a project as a resultof this weakness, it’s interesting to note what other alternatives to the EP are out there, and how
the project finance field would function without the EP. Thus far, the only real alternative to theEP that has emerged has been the Collevecchio Declaration.
The problem with the Collevecchio Declaration (CD) is that its guidelines are so

39

BankTrack (2004).

Copyright 2007. No quotation or citation without attribution.
34

ambitious (compared to the EP) that lenders will not even really consider it, making it less of real
alternative to the EP. While Richardson (2005) notes that the CD “presents itself as a moreobjectively and independently determined voluntary code,” it is also “too radical and threatening
to the status quo” in the eyes of financial institutions.40 A look at the full text of the CD’s
provisions (provided in the appendix of this report) show although the text has many “should”
statements (similar to the EP), its overall message is much stronger in conveying a clear sense ofwhat is required of lenders, especially in areas such as disclosure and implementation. But
despite the 101 organizational backers, if financial institutions view the CD’s guidelines as being
based on “naïve or inaccurate understanding of the workings of financial institutions” (asRichardson implies they might), then any real improvements the CD has over the EP ismeaningless because there’s no chance that it will be adopted by any banks. Accordingly, we
can assume that while certain banks desire to reduce their reputational risk as much as possible,
they prefer the EP over the CD because in the tradeoff between control over their financing
activities and the benefits to gain from reducing reputational risk, control is more important.
Besides, if the status quo, as Richardson points out, is currently meeting their interests, thanswitching over to a more extreme voluntary code is simply too risky, and could invite evenharsher scrutiny if full compliance cannot be met.
The counterfactual to the EP, or what the conditions would be like without the EP, isdebatable. Some may argue that the existence of an EP provides a false sense of security – agreater share of the public believes that banks are actually paying attention to environmental andsocial concerns when they are not. But looking at what some banks have accomplished with theEP, a more acceptable conclusion is that while the EP has its obvious flaws, it has helped bridge
40

Richardson (2005).

Copyright 2007. No quotation or citation without attribution.
35

the divide between NGOs and financial institutions. Another positive that has been described isthe number of large banks that have been encouraged to go beyond the EP’s requirements,
incorporating environmental and social concerns into other areas of its credit policies.
According to the law firm of Freshfields Bruckhaus Deringer (2005), whether this would have
happened without the EP is unlikely:“Although the Equator Principles may be voluntary, their genesis is not due tovoluntarism. There were undoubtedly a number of important drivers, such as thecommitment of many Equator Bank chairmen and chief executives to sustainable
development and responsible banking.”41

The law firm goes on to imply that the EP inspired a number of positive developments,
many of which would not have resulted inevitably. While its difficult to assess what would haveor wouldn’t have occurred without the EP, this paper takes the position that the EP provided a
way for some banks and NGOs to engage with one another. Banks wanted to address many NGO
concerns to reduce reputational risk, and NGOs had to present something feasible that banks
could follow. Without the EP, it’s unlikely that something like the CD would have brought suchstakeholders together.
XIV. BankTrack
Before concluding this paper, a section on BankTrack is presented here since theorganization has proven to be at the forefront in monitoring bank compliance with the EP. But it

41

Freshfields Bruckhaus Deringer (2005).

Copyright 2007. No quotation or citation without attribution.
36

should be understood that BankTrack does not certify compliance, nor is it formally connected to
the EP (meaning that it has not been designated as an official EP monitor or watchdog). Moreaccurately, BankTrack is a consortium of NGOs. The consortium is broken down into 17
members and 6 partners (whom BankTrack says it “share[s] resources and information [with]”
comprise this organization.42 BankTrack claims that it unites organizations with a “proven trackrecord in monitoring and campaigning on the private financial sector.” Examining a sample of
BankTrack’s members (visiting their website, reading their mission statement, and skimming
through their annual report) confirms that members are related to the project finance field insome way. For example, International Rivers Network is focused on protecting rivers around theworld, which it does by campaigning against dam projects that it finds destructive. Pacific
Environment, another BankTrack member, takes an even broader approach, working to protect
all facets of the environment by attempting to stop, delay, or amend an environmentally
destructive project.
For NGOs, the BankTrack network provides them a wider channel to receive information
and research about a specific project; it also gives each member more voice or power in engaging
with a lender. Whereas an EP bank may have shrugged off a single NGO that had problems with
its lending policies, now it must contend with the possibility that there is strong coalition behindthat NGO, and not engaging with them can lead to a major campaign against the lender’s projectand operations.
Since it’s imperative that individuals question claims made by any organization, thissection now attempts to answer why BankTrack’s publications or claims against an EP bank or
project can be trusted to be reliable. Without fully understanding the process through which
42

According to BankTrack’s website, this information is accurate as of 2007.
<http://www.banktrack.org/?show=18&visitor=1>

Copyright 2007. No quotation or citation without attribution.
37

BankTrack receives its information, it’s easy to say that because the organization lacks theorganizational capacity to research a project and its impact on the environment adequately, itspublications and claims are unlikely to be very accurate. Its 2005 annual report describes ameasly 3 full-time workers it plans to have the following year!43 But this really shouldn’t matter.
The three full-time individuals it employs primarily serve a secretariat role, such as maintaining
the website and email lists, arranging meetings with members, managing online publication of
documents written by members, and marketing the organization to the public. The writing in the
publications and the claims made on behalf of BankTrack come from its members, which also
have small staff (anywhere from possibly 6 to 12 people). But while BankTrack members may
do research, on-site investigation, and hard environmental impact analysis, but most of what they
rely upon in determining a project’s environmental impact or an EP bank’s compliance is locatedin the public domain. Again, EP banks have the privilege of not having to disclose informationon their project or how they implement the EP. Accordingly, most (if not all) of a BankTrackmember’s source of information comes from government reports, press clippings, people
affected on the ground, public financial records, and other information sources that cannot be
closed off from the public. Therefore, many of its claims can easily be verified through online
fact-checking. Because of this scenario and the large number of stakeholders with knowledge
and involvement in a project, it’s unlikely that claims would be intentionally misrepresented.
Because it’s so easy to determine the whether a claim made against a lender or project is accurate
and complete, a BankTrack member has no incentive to risk its reputation based on a fabrication.

43“Right on Track.” BankTrack. Annual Report 2005.
<http://www.banktrack.org/doc/File/internal%20documents/presentation%20material/060401%20Annual%20report%202005.pdf>

Copyright 2007. No quotation or citation without attribution.
38

Since large financial institutions overwhelm a typical BankTrack NGO in financial resources thatcan be used to effect public opinion (TV commercials, online ads, etc.), it is better for the
BankTrack member to rely on the truth to deliver its message instead waging a war of words thatwould favor the financial institution.
XV. Conclusion
In attempting to assess compliance with the EP, this paper has relied on theoreticalmodels that explain how reputational risk and costs provide incentives/disincentives forindividual firms to adopt and/or comply with the EP. Examining these models and studying the
BTC pipeline project, we see mixed results from EP banks in complying with the EP’s guidelines.
This does not come as a surprise given that banks differ in the level of reputational risks they
face, which affect their cost of adopting and/or complying with the EP.

Copyright 2007. No quotation or citation without attribution.
39

XVI. Discussion Questions
1. Consider the origins of the Equator Principles. Why were they formed?
2. Discuss the motivations for adoption. Do you agree with the argument that this private
regulatory scheme is an attempt to prevent and/ or shape future governmental regulation? Or is
the scheme an attempt to hedge reputational risks? Does the adoption of the principles helpbanks “boost their credibility relative to their critics”?
3. Discuss the incentives and disincentives for compliance. Who does the Equator Principles
benefit? How does that influence compliance?
4. Do the Equator Principles give you confidence that those who adopt them are funding global
sustainable development projects? How should the guidelines be strengthened? Should theguidelines be institutionalized into a formal organization? Is it possible to do so?
5. Discuss the three ways BankTrack says the Equator Principles can be used and how they
actually used, with respect to the Baku-Tbilisi-Ceyhan Oil Pipline. Who should be held
accountable for the ecological destruction and human displacement caused by the project?
6. Who are the main stakeholders in the project finance? Which actors have the most power?
Who has the least? Where do the pressures for change stem from?
7. Discuss the credibility of BankTrack. Do you agree with the author that this consortium ofNGOs can be trusted? Do you think a formal watchdog organization can help pressure banks toadopt and comply with the Equator Principles? Why or why not?

Copyright 2007. No quotation or citation without attribution.
40

XVII. Bibliography
Amalric, Frank. “The Equator Principles: A Step Towards Sustainability?” Working Paper No.
01/05, Center for Corporate Responsibility and Sustainability at the University of Zurich,January 2005.
BankTrack (2004). “Principles, Profits or just PR? Triple P investments under the Equator
Principles. An Anniversary Assessment.” Amsterdam: BankTrack.
BankTrack (2005). “Unproven Principles. The Equator Principles at Year Two. An Anniversary
Assessment.” Amsterdam: Banktrack.
BankTrack. “Right on Track.” Annual Report 2005.
BankTrack. “Equator Principles II, NGO comments on the proposed revision of the Equator
Principles.” April 26, 2006.
“BP’s BTC pipeline needs extra monitoring-US agency.” MarketWatch. 12 Feb. 2007.
Ethical Investment Research Services (EIRIS). “Project finance: a sustainable future?” SEE Risk
briefing: July 2006.
The Equator Principles. “The ‘Equator Principles.’” (2006 Version)“Extreme Oil, The Journey.” PBS (Online). Accessed 3/2/07.
<http://www.pbs.org/wnet/extremeoil/journey/georgia.html>.
Freshfields Bruckhaus Deringer. “Banking on responsibility, Part 1 of Freshfields Bruckhaus
Deringer Equator Principles Survey 2005: The Banks.” July 2005
“IFC Board Approves Investments in Caspian Oil and Pipeline Projects Expected highdevelopment impact with environmental, social, and transparency safeguards.” IFC News, Press
Release. 4 Nov. 2003.
Greenfield, Zev. “The Equator Principles: A New Industry Framework for Environmental andSocial Standards in Global Project Finance Lending.” Corporate Social Responsibility (CSR) andSustainability Paper Awards, Columbia Business School (2004).
Lawrence, Robert F. and Thomas, William L. “The Equator Principles and Project Finance:
Sustainability in Practice?” Natural Resources and Environment (American Bar Association),
Fall 2004.
Mizuho Financial Group, Inc. “Mizuho Corporate Bank’s Adoption of Equator Principles.” Siteaccessed 3/1/07.
Olson, Mancur (1965). “The Logic of Collective Action: Public Goods and the Theory ofCopyright 2007. No quotation or citation without attribution.
41

Groups.” Cambridge, MA.: Harvard University Press.
“Project Finance.” Investopedia. Site accessed 3/1/07.
<http://www.investopedia.com/terms/p/projectfinance.asp>.
”Project Finance.” Wikipedia. Site accessed 3/1/07.
<http://en.wikipedia.org/wiki/Project_finance>.
Richardson, Benjamin J. “The Equator Principles: The Voluntary Approach to Environmentally
Sustainable Finance”, European Environmental Law Review (2005): 280-290.
Rwabizambuga, Alexis and Wright, Christopher. "Institutional Pressures, Corporate Reputation,
and Voluntary Codes of Conduct: An Examination of the Equator Principles". Business andSociety Review, Vol. 111, pp. 89-117, March 2006.
Swiss Reinsurance Company (Zurich). Nov. 1999, 3000 en.
<http://www.swissre.com/INTERNET/pwswpspr.nsf/alldocbyidkeylu/MBAR4UZHCB?OpenDocument>.
“Why campaigners oppose the pipeline.” Observer.co.uk. 1 Dec. 2002.
<http://observer.guardian.co.uk/business/ethics/story/0,12651,851000,00.html>

Copyright 2007. No quotation or citation without attribution.
42

XVIII. Appendix
Appendix ACopyright 2007. No quotation or citation without attribution.
43

Copyright 2007. No quotation or citation without attribution.
44

Copyright 2007. No quotation or citation without attribution.
45

Copyright 2007. No quotation or citation without attribution.
46

Copyright 2007. No quotation or citation without attribution.
47

Copyright 2007. No quotation or citation without attribution.
48

Copyright 2007. No quotation or citation without attribution.
49

Copyright 2007. No quotation or citation without attribution.
50

Copyright 2007. No quotation or citation without attribution.
51

Copyright 2007. No quotation or citation without attribution.
52

Copyright 2007. No quotation or citation without attribution.
53

Copyright 2007. No quotation or citation without attribution.
54

Appendix BCopyright 2007. No quotation or citation without attribution.
55

Thadsfj