Finance Industry Must Catch Up on Transparency

Country: International
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It's no secret that building something like a dam, a mine, or an oil refinery requires a lot of money from investors. And putting up the money for projects like these assumes considerable risk. The dam could displace residents. The mine could pollute surrounding communities. The oil refinery could explode. In any of these projects, misappropriated revenues or unmet community obligations could lead to significant unrest. The blame for these types of incidents can spread to the companies that built the dam, the country where it's located and even the financial institutions that funded its construction.

Many entities in that last group—the financial institutions—support the Equator Principles (EP). The EP is a risk framework used by financial institutions for identifying, assessing and managing environmental and social risks behind big projects. (“Big" is defined as total project capital costs exceeding $10 million). There are over 70 member financial institutions from more than 30 countries in EP; these companies are known as Equator Principles Financial Institutions (EPFIs).

The EP association, the body that manages EP and its member banks, is currently revising the principles. Last week, RWI submitted comments on the draft revision.

First, we found the EP is lagging behind international best practice when it comes to revenue and contract transparency standards in the oil, gas and mining sectors. The U.S. has passed, and the EU is in the process of passing, laws requiring certain oil, gas and mining companies to disclose the payments they make to governments around the world, country-by-country and on a project-level basis. The Extractive Industries Transparency Initiative (EITI) is an international standard under which more than 1,000 oil, gas and mining companies publish what they pay to governments and 36 governments publish what they receive from companies. And the IFC Sustainability Framework now includes revenue disclosure and contract transparency requirements for IFC-financed extractive projects.

At the very least, the new EP should mandate that all EPFI's require their clients disclose their payments to the host government (such as royalties, taxes, and profit sharing) and make public their contracts with the host government. By doing so, the EP would keep pace with international best practice in revenue and contract transparency, and would provide EPFIs with an important additional risk assessment tool.

Secondly, RWI suggests the EP not allow (as is the case in the present draft)_borrowers to veto lender compliance with the EP’s project-specific data reporting requirements. EP's own website states:

Equator Principles Financial Institutions (EPFIs) commit to not providing loans to projects where the borrower will not or is unable to comply with their respective social and environmental policies and procedures.

EP has never allowed for a borrower’s veto of EP requirements; why should it begin now?

In the case of the EPFIs, money equals leverage, and that power can go a long way towards improving the lives of citizens in natural resource-rich countries. The EP Association plans to vote to adopt the new EPs in January 2013. We'll be watching as the draft is finalized; we hope that the EP Association can make great strides by incorporating revenue and contract transparency, which will help ensure that the EPs keep pace with international best practice.

Suzanne Ito blogs for RWI.

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