The UNEP Finance Initiative is a partnership between a broad range of financial institutions and the UN Environmental Programme. The partnership has been going for more than 12 years and is signed up to by over 200 financial institutions, including insurance companies, fund managers, commercial and retail banks.
The Equator Principles are a set of environmental and social performance standards for project financing developed by a range of major commercial banks with the assistance of the International Finance Corporation. The EPs require participants to demonstrate compliance with IFC’s environmental and social policies in project finance lending for investments in excess of 650m. This extends to ensuring that project contractors abide by these guidelines. To date 28 major financial institutions have committed themselves to its principles.
Is one more demanding than the other?
The first point to note is that the two should be complementary. Many of the “Equator banks”, as they are known, are also members of UNEP FI. UNEP FI has a broader base, having to be relevant to the full range of financial institutions rather than specifically commercial lenders. The EPs focus on both social and environmental matters while the UNEP FI was originally conceived of to address environmental issues alone, although it is increasingly broadening its focus. Nonetheless, the fact that the EPs focus on ensuring contractor compliance with the principles does make them particularly challenging, albeit that they are tailored to one type of financial institution.
Are these initiatives as significant as they sound?
The financial services sector and capital markets are undoubtedly at the forefront of globalisation and as such have much to contribute to sustainable development. UNEP FI is now looking at a range of issues, from ways in which its members can provide needed financing in conflict and post-conflict situations, to ways of countering climate change. Meanwhile, the Equator banks account for over 80% of all large capital project funding worldwide. However, some of the highest profile capital projects in recent years – the Three Gorges, Narmada River and Ilisu dams – have all gone ahead despite the withdrawal of World Bank funding and of many leading multinational companies and financial institutions. So, significant, yes. The solution, on their own, no.
What are the principal obstacles to success?
There are two principal obstacles: The first is the nature of investment markets. This means that however well intentioned the leadership of a financial institution, analysts, fund managers and executives are still encouraged to look at issues in the context of short term liabilities. Second, the complexity of trying to incorporate sustainability considerations into everyday business operations is problematic. Even environmental consultancies and NGOs struggle to manage their environmental impacts effectively. It will take some time for non-experts to be able to manage them.
How do you think each will develop?
The nature of the sustainability agenda means that UNEP FI has broadened its original remit. Some members have developed social performance indicators and UNEP FI is hoping to merge these with its environmental performance indicators to create “sustainability performance indicators”. When finalised and communicated it is anticipated that members will be able to use these indicators for the Global Reporting Initiative’s sector specific supplement on finance. Elsewhere, the EPs are currently going through a process of stakeholder engagement that will give them yet more credibility. The challenge will be to advance the extent to which these initiatives support one another and inform investment decisions. There is a long way to go, but the work in progress is encouraging.
Do these initiatives indicate that SRI has become mainstreamed?
What were once considerations for niche players alone have become issues that a broader set of firms are taking on board. But many financial institutions do not participate in the initiatives. The commitments of the leaders are noteworthy and exciting, but there is clearly a long way to go before sustainability issues are truly incorporated into the diverse range of activities conducted by financial sector.
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