The Equator Principles: The Private Financial Sector's Attempt at Environmental Responsibility

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ABSTRACT

The Equator Principles are a set of voluntary environmental guidelines created to manage environmental degradation that results from large-scale developmental projects in the Third World. On June 4, 2003, ten private financial institutions adopted these guidelines, and by the end of 2006 this number had grown to forty. Moreover, in June 2006 the Principles were revised, raising the level of scrutiny for companies that adhere to these guidelines.

At first blush, the adoption of the Equator Principles by private financial institutions appears to be a substantial step toward implementing environmental standards in developing countries that lack adequate regulations. However, three years after their inception, debate as to whether the Principles are actually spurring environmental change remains. This Note analyzes whether the Equator Principles are having a positive impact and achieving their stated goals related to the local environment in developing countries. This Note concludes that, despite a great deal of uncertainty regarding their real impact, the Equator Principles clearly have improved the situation by placing the private sector in a proactive environmental role and strengthening the public's ability to hold the financial sector accountable for its actions.

TABLE OF CONTENTS

   I. INTRODUCTION
  II. THE EQUATOR PRINCIPLES
 III. SETTING THE STAGE FOR PRIVATE ACTION
      A. Introduction
      B. Potential Causes
  IV. CRITICISMS OF THE EQUATOR PRINCIPLES
   V. INCENTIVES FOR ADHERING TO THE EQUATOR
      PRINCIPLES
  VI. SAKHALIN II: A TEST CASE
 VII. THE FUTURE OF THE EQUATOR PRINCIPLES
      A. Liability
      B. The Equator Principles II.
         i. Methodology Behind the Changes
         ii. Changes to the Equator Principles
      C. The Impact of the Equator Principles
VIII. CONCLUSION

I. INTRODUCTION

Hydroelectric dams, power plants, and other large-scale developmental projects can substantially improve local economies; however, these projects frequently come at a great cost to the environment. (1) In most cases, governments of the developing world (2) have failed to establish environmental regulations to prevent the degradation of the local environment from these large-scale projects. (3) This lack of governmental regulation has allowed private institutions to set their own bar for the environmental standards in the developing world. Initially, project standards set by these private institutions were minimal and resulted in large environmental degradation. (4) However, as private funding for these projects increased, public criticism intensified, and private financial institutions were targeted for their role in contributing to the environmental degradation. (5)

As a result of the increased public backlash, ten private financial institutions adopted a set of environmental guidelines known as the Equator Principles on June 4, 2003. (6) These private institutions, known collectively as the Equator Principles Financial Institutions (EPFIs), created the Equator Principles to "manag[e] social and environmental issues related to the financing of projects." (7) By their third anniversary, the Equator Principles had been adopted by forty financial institutions including banks, export credit agencies, and development finance institutions. (8) These financial institutions control approximately 80% of all project lending world-wide. (9) Although the ability of the EPFIs to enforce these Principles is limited to the contractual relationship of a specific project, their influence over the industry grows as more banks adopt the Equator Principles. (10) In turn, this creates the possibility for the Principles to become the international standard for all large-scale developmental projects. (11)

It is tempting to think of the Equator Principles as a substantial step toward enhancing environmental regulations in countries without adequate standards. …