Published: June 21, 2018
Equator Principles

In November 2017, some of the world’s largest banks came together and agreed to undertake a targeted review of the Equator Principles (EPs). The EPs are an environmental and social risk management framework used by 93 financial institutions in 37 countries. The review was announced in response to Indigenous Peoples, NGOs, investors, and others calling for more responsible lending practices from the financial sector. The review, which began in January 2018 and will culminate in August 2019, presents an important opportunity for Indigenous Peoples to influence the environmental and social standards used by 93 banks worldwide, and interface directly with financers of extractive industries and other corporate activities on their land. This article gives background information on the Equator Principles and how Indigenous Peoples can participate in the review process.

What are the Equator Principles?

The EPs are an environmental and social risk management framework used by 93 financial institutions in 37 countries. Equator Principles Financial Institutions (EPFIs) must ensure that projects adhere to the environmental and social standards outlined in the EPs as part of their due diligence on potential loans. Projects that fail to comply with these standards are not eligible to receive financing from EPFIs. Governance and management of the EPs is coordinated through an international secretariat known as the Equator Principles Association (EPA).

In their current form, the EPs contain the following language on Indigenous Peoples: “Projects affecting Indigenous Peoples will need to comply with the rights and protections for Indigenous Peoples contained in relevant national law, including those laws implementing host country obligations under international law. Consistent with the special circumstances described in IFC Performance Standard 7, projects with adverse impacts on indigenous people will require their Free, Prior and Informed Consent (FPIC).”

Several structural aspects of the EPs hinder their intended function of mitigating harm to communities. No other event did more to shed light on this than the Dakota Access Pipeline (DAPL). DAPL was financed by a consortium of seventeen banks, thirteen of which are EPFIs. These banks financed a project that was staunchly opposed by Native American tribes, despite their commitments under the EPs. The result was scores of protests targeting banks, a divestment campaign that triggered account closures worth an estimated $4.5 billion, and irreparable damage to brand and good will. In the aftermath of harsh criticism received by EPFIs tied to DAPL, banks reached the consensus that changes were in order and announced plans to review the EPs.

What issues will be addressed as part of the review?

Issues that have been flagged by Indigenous Peoples, NGOs, investors, and/or EPFIs themselves as needing to be addressed as part of the review include the following:

(1) Scope

In their current form, the EPs are applied to four types of financial products: project finance advisory services, project finance, project-related corporate loans, and bridge loans. Other types of financial products—such as general corporate loans and asset management activities—are not covered by the EPs. This creates a loophole through which EPFIs are able to (indirectly) finance activities that do not align with the environmental and social standards.

For this reason, many stakeholders are calling for the scope of the EPs to be expanded to include all banking transactions with actual or potential impacts to Indigenous Peoples.

(2) Designated Countries versus Non-Designated Countries

The EPs are not applied uniformly in all countries. The EPA makes a distinction between Designated Countries (mostly in Europe and North America) and Non-Designated Countries (everywhere else). When financing projects in Designated Countries, EPFIs are permitted to replace the environmental and social standards outlined in the EPs with those that comply with national laws. This is due to the assumption that Designated Countries’ national laws mirror—at a minimum—the environmental and social standards outlined in the EPs. This may be true in some cases, but not when it comes to Indigenous rights. Australia, Canada, New Zealand, and the United States (all Designated Countries) have national laws requiring consultation with Indigenous Peoples, but not FPIC as required in the EPs.

This is how so many EPFIs became entangled with DAPL—when the United States government approved the project, it was assumed to be in compliance with the EPs. Many stakeholders are calling for the elimination of the distinction between Designated Countries and Non-Designated Countries, and for the EPs to be applied uniformly in all countries. The EPA has formed a Designated Countries Working Group to examine the issue.

(3) Definition of FPIC

In their current form, the EPs qualify the FPIC requirement with the following subtext: “There is no universally accepted definition of FPIC. Based on good faith negotiation between the client and affected Indigenous communities, FPIC builds on and expands the process of Informed Consultation and Participation, ensures the meaningful participation of Indigenous Peoples in decision-making, and focuses on achieving agreement. FPIC does not require unanimity, does not confer veto rights to individuals or sub-groups, and does not require the client to agree to aspects not under their control.”

Framing FPIC as a process of informed consultation and participation, as opposed to an exercise of Indigenous governance, could be interpreted to mean that projects may still proceed even if consent is not achieved. It is true that FPIC is complex and does not afford any Indigenous individual the ability to unilaterally veto any project. However, FPIC also enables Indigenous Peoples to collectively give or withhold consent in accordance with their legal or traditional means of making decisions—a critical point that is currently missing from the EPs’ interpretation.

(4) Accountability and Implementation

Each individual EPFI has considerable autonomy when it comes to implementing the EPs. The result is widespread variance in how effectively they do so and how transparently they report on their practices. If an EPFI is alleged to have breached the environmental and social standards, there are no mechanisms for recourse for negatively-affected parties or EPFIs themselves. So far, 10 EPFIs have stated that a grievance mechanism would be helpful in cases such as DAPL, when banks found themselves unexpectedly tied to a controversial project with little avenues for ending or altering their involvement due to the legally binding terms and conditions of the loan. In May 2017, ten EPFIs (most of which financed DAPL) issued a statement calling for “amendments to the EPs framework to facilitate the resolution of issues resulting from a potential breach of the applicable environmental and social standards that may lead to a significant damage to the environment and/or communities.” The prospect of a grievance mechanism is supported by many civil society stakeholders. That said, it is likely that many EPFIs remain opposed to a grievance mechanism, and considerable engagement from civil society will be required to support the stances of the more forward thinking EPFIs.

How can Indigenous Peoples participate in the review process?

A description and timeline of the review process can be found on the EPA’s website. Currently we are in Phase 2, during which the EPA is conducting initial stakeholder consultations while having internal discussions on key topics and thematic areas. In September 2019, the EPA will release a draft of the revised EPs and conduct additional stakeholder consultations on the content of the draft. The finalization and launch of the revised EPs is slated for August 2019.

Given the circumstances that led to the review, the EPA has highlighted Indigenous rights as an important area of focus. It is critical that Indigenous Peoples substantively participate in discussions on how banks should align their lending practices with international standards for Indigenous rights. As part of its stakeholder consultations, we recommend the EPA conduct deliberate targeted outreach to Indigenous governments, activist organizations, and business groups, as well as international Indigenous bodies such as the UN Permanent Forum on Indigenous Issues. At the same time, Indigenous Peoples must be proactive about securing themselves a seat at the table and making their voices heard.

The First Peoples Investment Engagement Program (FPIEP) is compiling indigenous input and views on the EPs, and collaborating with NGOs and investors to amplify indigenous perspectives in the review process. Contact fpiep@colorado.edu for more information.