Can banks and other project financiers live up to their promises on climate and human rights? Are Equator Principles delivering – or at risk of losing their relevance?


Dakota Access Pipeline

The low down

The Equator Principles set a ‘soft law’ standard for international financial institutions that should guide lending decisions to support human rights and the environment. In developed and emerging markets, adherence to the principles should mean high finance respects indigenous rights and supports the fight against climate change. However, critics note the principles could not even stop a crude oil pipeline cutting across a native American reservation in the US. But the latest version of the principles, ‘EP4’, demands increased scrutiny of proposed projects. The size of project caught has halved from $100m to $50m. Legal challenges are a growing threat where false reporting on social and environmental standards has occurred.

Global standards that financial firms have shared since 2003 to avoid lending to projects considered environmentally and socially dubious are coming under increasing criticism for failing to tackle climate change and protect the rights of communities. 

The Equator Principles (EPs) have been formally adopted by 124 financial institutions, referred to as Equator Principles financial institutions (EPFIs), in 37 countries. Among them are some of the world’s largest banks, including ABN Amro, Bank of America, BNP Paribas, Citigroup, Credit Suisse, HSBC and ING. According to the Equator Principles Association (EPA), the umbrella organisation of the member EPFIs, the principles ‘cover the majority of international project finance debt within developed and emerging markets’.

It’s difficult to see how EP4 has improved the situation in any substantial way for the climate or indigenous peoples

Hannah Greep, BankTrack



Despite its laudable objective, the risk management framework has not been without controversy. The Dakota Access Pipeline (DAPL), a 1,172-mile-long underground US oil pipeline project for crude oil near the Standing Rock Sioux Reservation in the US, went ahead in 2016 despite environmental and social concerns, including those raised by the nearby native American tribes over its threat to their sacred land and water supply. Thirteen of the 17 banks that financed DAPL were signatories to the EPs; though due to public outcry some have since withdrawn from the project.

DAPL was the catalyst for the fourth edition of the principles which came into effect on 1 October 2020. But the latest revision fell far short of demands from NGOs and civil society.

‘EP4’ was formally agreed at the EPA annual general meeting in Singapore in November 2019. Campaigning organisations, including BankTrack, WECAN and Rainforest Action Network, said at the time that the new set of principles contained ‘no meaningful improvements, and completely fail to meet the challenges of protecting indigenous peoples’ rights and combating climate change’.  

Johan Frijns, director of Netherlands-based BankTrack, an international NGO focused on banks and the activities they finance, said: ‘It is outright astonishing that a process that set out to make the outdated 2013 version of the Equator Principles future-proof, taking into account the outcomes of the 2015 Paris Climate Agreement, which took two years to complete and involved nearly a hundred banks and hundreds of stakeholders, has in the end produced a document that is hardly distinguishable from the 2013 version.’   


BankTrack, a Dutch-based NGO, has spent the past 18 months monitoring the implementation of the Equator Principles (EPs) by banks and their clients at project level.


It published two reports in 2020 – Trust Us, We’re Equator Banks (parts 1 and 2) – which focused on what it considers two of the most significant commitments in the EPs: stakeholder consultation (principle 5) and project-level grievance mechanisms (principle 6). ‘Both these commitments are incredibly important to ensure that affected communities get a decisive say in how projects financed under the EPs are designed, or in certain cases whether they proceed at all,’ says Hannah Greep, Equator Principles campaign co-ordinator at BankTrack. This is based on indigenous peoples giving their ‘full, prior and informed consent’ to a project on their land.


BankTrack found that for projects in high-risk sectors such as oil, gas, hydropower and mining, ‘there were worryingly low levels of compliance with the principles,’ says Greep. She says 65% of the 37 projects analysed had either no adequate stakeholder engagement process or a project-level grievance complaints mechanism; 43% of the projects had neither.  


In part 2 BankTrack took a more detailed look at nine of the projects, speaking to local organisations and affected communities. It found that in seven projects, affected communities were not provided with the adequate assessment documentation (a basic requirement of principle 5) and in at least five cases local communities reported feeling dissatisfied with the consultation process. ‘We found in most cases, even if there was a grievance mechanism, they were hardly used because local communities either did not know about it, were too intimidated by the company to use it, or they had lost complete trust in the idea that the company would help them,’ says Greep.


The NGO has put its findings to the banks and the Equator Principles Association, calling on them to implement a ‘compliance report’ system, where banks show how each of the EPs has been met for the projects they finance, so that ‘compliance with the principles no longer needs to be taken on trust’.

Fast-forward two years and Hannah Greep, BankTrack’s EPs campaign coordinator, tells the Gazette: ‘The fourth edition of the Equator Principles was, and remains, a disappointment to BankTrack and the other organisations that worked hard to bring about the revision in the first place. The criticisms made at the time of the principles being published remain.

‘Although EP4 states that banks “support the objectives” of the Paris Climate Agreement, it does not include a single requirement that would exclude finance for fossil fuel extraction projects that directly endanger the Paris goals, meaning that equator banks can continue to finance “equator-compliant” coal power plants, oil pipelines, LNG [liquefied natural gas] terminals and oil drills in the Arctic.’  

This is the focus of a BankTrack report on the EPs and the worsening climate crisis, due out this month. Greep argues that EPs cannot be considered a ‘credible’ social and environmental risk management framework while still allowing for the continued finance of the fossil fuel industry. BankTrack believes the evidence is clear that in order to meet the goals of the Paris Climate Agreement fossil fuel expansion must end ‘immediately’.

Furthermore, ‘EP4 continues to fall short of a clear commitment to uphold indigenous peoples’ rights, including their right to free, prior and informed consent [FPIC]’, says Greep. This is because in so-called ‘designated countries’ such as the US and Canada, the new principles only require the consultation process with indigenous peoples to be ‘evaluated’ by an independent consultant. ‘There is no explicit commitment to respect FPIC in all circumstances,’ says Greep, meaning that projects deemed to be ‘equator-compliant’ can still be in violation of indigenous peoples’ rights.  

Equator banks have and continue to finance projects that ‘violate indigenous rights, exacerbate climate change and adversely impact on local communities’, according to BankTrack. These allegedly include the Coastal GasLink Pipeline in Canada, the Mozambique LNG project, and the Cirebon 2 coal power plant in Indonesia. ‘Having raised these issues with the EPA since the inception of the principles in 2003, it’s difficult to see how EP4 has improved the situation in any substantial way for the climate or indigenous peoples,’ says Greep.   

Steve Trent, CEO and founder of UK-based NGO Environmental Justice Foundation (EJF), says that although EPA ‘has paid lip service to climate and human rights, the new EP4 did not sufficiently meet any of the demands brought by the NGO coalition, which continues to advocate for meaningful protection of human rights and our environment’. In the wake of the DAPL scandal in 2017, 270 organisations, including BankTrack and EJF, as well as 130,000 individuals supported the Equator Banks, Act! petition to stop financing ‘climate disasters’ and respect indigenous peoples’  rights and territories.

Borrowers not already familiar with the UN Guiding Principles on Business and Human Rights are facing a steep learning curve

Rachel Barrett, Linklaters

According to Trent: ‘Since the publication of the EP4 in 2019 we have seen the devastating impacts of our failure to act on the “triple emergency” of climate change, biodiversity collapse and human rights, with record-breaking wildfires from the Amazon to Siberia; increasing violence against indigenous peoples’ sovereignty and territories; devastating storms, floods and droughts; and a global pandemic.’ He points out that while the latest report by the Intergovernmental Panel on Climate Change ‘warns us that our window to act now to avert climate catastrophe is rapidly shrinking’, in the five years since the Paris Agreement was signed the 60 largest banks have funded more than $3.8tn in fossil fuel projects. ‘The time to act is now, but the Equator Principles as they stand fail to meet the challenge,’ he says.

Lenders’ lawyers

So what do solicitors acting for lenders and borrowers think of the updated version? For Melbourne-based White & Case partner Tim Power, EP4 introduced significant changes. ‘Most importantly it expanded the range of financial products subject to the Equator Principles and reinforced [their] human rights and climate change dimensions, in the latter case by addressing physical and transition risks in alignment with the Task Force on Climate-Related Financial Disclosures [TFCD] recommendations,’ he says.  

Stuart Neely, counsel in Norton Rose Fulbright’s London office, says that ‘whereas EP3 envisaged a requirement on the sponsor to conduct human rights due diligence “in limited high risk circumstances”, principle 2 of EP4 requires that potential human rights impacts be assessed for every project, with such assessment conducted by reference to the UN Guiding Principles on Business and Human Rights’.

Philadelphia-based Jillian Kirn, a shareholder in Greenberg Traurig’s ESG practice, says that more transactions and projects are covered under EP4 than previous iterations, including certain loans to local, regional or national governments. For instance, project-related refinancing and acquisition financing is now ‘in scope’; and the new framework applies to project-related corporate loans over $50m rather than the previous $100m threshold, Kirn notes. ‘Additionally, EP4 is the first time the EPs have included a statement recognising a broader responsibility for managing adverse environmental and social risks and impacts, even for financial products that fall outside the EPs’ current scope.’   

For Munib Hussain, special counsel at Milbank in London, ‘in comparison to EP3, EP4 has broadened the Equator Principles’ reach significantly’.

This is especially so when considering its application to ‘designated countries’ (34 in total) which include Australia, Canada, the US, UK, as well as several European nations. These are ‘deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment’. To qualify, EPA requires a country to be both a member of the OECD and appear on the World Bank High Income Country list.

Hussain explains that, under EP4, projects in the US and other ‘designated countries’ no longer enjoy the assumption that these countries’ laws satisfy four core Equator Principles (2, 4, 5, and 6).

‘Accordingly, and in connection with EP4’s additional requirements, a project located in the US may now also be required to provide the financiers with an environmental and social impact assessment, have developed an environmental and social management system, undergo effective stakeholder engagement processes with affected communities, workers and other relevant stakeholders, and have undertaken a climate change risk assessment,’ he says.   

Rhys Davies, a partner and head of international sustainability and ESG at DLA Piper in Australia, says: ‘A subtle but important change in relation to impacts on indigenous peoples is that designated countries are no longer exempt from the requirement for evaluation against IFC [International Finance Corporation] Performance Standard 7, which incorporates the critical concept of [FPIC] that has been at the heart of recent controversies in Australia and the US, among others.’

Impact on projects

Despite criticism that the latest revision has not gone far enough, there has been a noticeable impact on projects. ‘One effect of the revision has been the need to build in additional time for evaluating EPs for projects in designated countries,’ says Kirn. ‘Under EP4, all projects are reviewed for compliance with the EPs and projects located in designated countries are separately evaluated for specific project-related risk to determine if [IFC] performance standards should be applied. In the US, that can mean adding a buffer to the timeline for another stage of diligence: local, state, tribal, federal, and EP4.’

EP4 does not apply retroactively to existing or operating projects, unless they are being expanded or upgraded, notes Hussain. But he says that clients sponsoring projects in developing countries have had to reassess the environmental due diligence already undertaken before launching the financing process. ‘This has meant additional more stringent assessments, particularly related to human rights and the climate, which now needs to include physical risks, alternative technologies, transition risks, and quantification of emissions,’ he says. ‘Additional time is being spent on stakeholder engagement, in particular with affected indigenous communities. This has meant a delay of a few months on some projects in order for those additional assessments to be completed.’


For instance, Hussain has worked with clients including export credit agencies (ECAs) and development financial institutions (DFIs) ‘to ensure that the relevant environmental and social representations, covenants and events of default in new financings reflected the changes to the EPs’, he says. ‘Some… clients, in particular certain ECAs, have withdrawn from financing processes where they were unable to derive the necessary comfort around the environmental and social impact and compliance of a project with applicable environmental and social standards, including EP4.’

One example is UK Export Finance, the UK’s ECA, which in December announced that it would no longer support fossil fuel projects abroad.

Borrowers for projects expected to emit more than 100,000 tons of CO2 equivalent must now also provide an assessment on physical and transition risk. London-based Linklaters environment and climate change partner Rachel Barrett says this is ‘a major change from EP3’, adding: ‘For many borrowers this is unfamiliar territory that they are having to navigate in an area still fairly nascent. This should get easier as best practice evolves but this will take time.’

She notes that as EP4 requires a more in-depth analysis of human rights risks and impacts across a wider range of projects, ‘borrowers who are not already familiar with the UN Guiding Principles on Business and Human Rights are facing a steep learning curve. Their advisers and financier groups have an important role to play in building capacity, setting clear expectations and supporting borrowing entities as they rise to this challenge’.

Barrett points out that clients are having to implement EP4 during the pandemic, which ‘creates its own set of hurdles in relation to conducting due diligence, stakeholder engagement and arranging site visits’.

‘We’re less than 12 months into EP4, which is not a lot of time in the project financing world,’ says DLA Piper’s Davies. ‘Borrowers are still coming to grips with the substance of the changes in EP4, and not all have adequately taken them into account up front, which has resulted in costly delays.’

Further, Davies says the significance of the changes relating to impact on indigenous peoples, particularly for projects in previously exempt OECD countries, ‘is still not as well understood as it should be – with lenders and borrowers alike sometimes confusing domestic regulatory compliance with satisfaction of the expectations of IFC Performance Standard 7. We expect to see this issue continue to gain prominence’.

BankTrack and WECAN recently organised a series of workshops for Equator banks on the right to FPIC and how to properly conduct this process on the ground. ‘We still see that there is a lack of guidance coming from the EPs on how this should be done, meaning that civil society has to try and fill that gap, and it’s only for the banks that are willing to listen,’ says Greep.

Neely points to principle 6 of EP4 which extends the requirement to provide grievance mechanisms to workers on site (including contractors and sub-contractors). This, he argues, ‘reflects the importance of labour welfare as a key ESG topic’.   

Highlighting the implications of these changes, White & Case’s Power says: ‘We do a lot of work in the renewable energy industry, so concerns about worker conditions and forced labour in the supply chain for solar panels in Xinjiang has become particularly topical for banks and financial institutions this year.’

Impacted industries have become increasingly concerned about the potential for legal challenges to arise from shortfalls between a project’s commitments under the EPs or other similar ESG protocols, and the project’s actual implementation

Jillian Kirn, Greenberg Traurig

Legal challenge

Borrowers and lenders are also at increased risk of legal challenge. This is because over the past two years, there has been ‘a marked proliferation’ of ESG-related frameworks and ‘a significant focus’ by shareholders, regulatory bodies, and the public on ESG-related disclosures, according to Kirn. ‘Impacted industries have become increasingly concerned about the potential for legal challenges to arise from shortfalls between a project’s commitments under the EPs or other similar ESG protocols, and the project’s actual implementation. As regulations and mandates take shape, those ESG commitments are more likely to be legally binding,’ she warns.

For Greep, the calamitous events of the past 18 months have exposed the framework’s ‘narrow concept of risk management’ which focuses on managing risks to a project posed by external circumstances, such as climate change or pandemics. She contends that the concept should be extended to include the risks that the project itself will have for ‘communities, nature, climate and future pandemics, both locally and globally’.

There are three other main areas in need of improvement. First, accountability. BankTrack has called on EPA to introduce an EP-level accountability mechanism to allow affected communities a forum to seek remedy and redress for social and environmental violations by EP banks. Second, implementation. Each and every relevant principle must be adhered to correctly. Third, transparency. ‘Project name reporting was brought in with EP3, which was a huge step forward, but more needs to be done to ensure that all project names are being reported and that this data is accessible,’ Greep says. BankTrack has created its own project database and reporting table tool, but Greep says this should be done centrally by EPA.

Trent says there must be ‘an end to the unjust distinction’ between designated and non-designated countries, as well as a series of commitments. These should include ‘a consistent and rigorous level of scrutiny for all projects, under all circumstances’ and ‘the urgent phase out of all types of fossil fuel financing and the exclusion of projects which threaten national and global emissions reductions targets, including accounting for indirect project emissions’. Furthermore, he urges an ‘explicit’ commitment to FPIC of indigenous and local communities ‘in all projects, across all circumstances’.   

Addressing some of these concerns, Power says: ‘A glass half full to some is half empty to others. I have worked on deals where fantastic conservation and local community outcomes have been achieved from initiatives that have been prompted by EP requirements, but that is not universally so.

‘Much commentary on EP4 emphasised the requirements to assess physical and transitional climate change risks in accordance with TFCD recommendations, and to support the objectives of the Paris Climate Agreement. This is fine, but the focus is more on assessing risks than expressly discouraging financing of fossil fuel projects, for example, which is what I suspect some NGOs would like to see.’

As banks face increasing pressures from politicians and civil society over lending practices, are the EPs at risk of losing relevance?   

Davies says: ‘It’s important to be clear about what the EPs are, and what they are not. The EPs are a tool for debt capital market participants to satisfy themselves that the projects they are lending into meet baseline environmental and social standards. However, they are not necessarily a complete answer to all material ESG issues that may arise in the context of a project. Project sponsors, the borrowers, increasingly apply a range of frameworks to manage their ESG performance, of which the EPs are only one.

‘The EPs continue to enjoy widespread adoption by project finance participants and are capable of application in other contexts. They provide a robust baseline for environmental and social risk management. The continued growth of green and sustainability-linked debt, along with the proliferation of other ESG performance frameworks – whether voluntary or mandatory – should be expected to build on the baseline established by the EPs.

‘We don’t see the EPs at ongoing risk of irrelevance, but we do think – because of these other market phenomena – that their role is changing to being only one of a set of ESG tools.’

Although the EPs are not legally binding, they are ‘highly influential and popular among commercial lenders,’ says Barrett, adding that they are often applied in conjunction with other ‘soft law’ standards such as the IFC Performance Standards and World Bank Group Guidelines. ‘These all form part of an authoritative soft law framework with clear benefits for financial institutions and borrowers alike,’ she says.

For Barrett, ‘the relevance of the EPs is likely to continue to increase in line with growing public focus on ESG issues, in particular climate change and human rights. For those financiers who wish to engage more with environmental and social issues, even outside the project finance market, the EPs provide a useful reference point’.  

Kirn considers the EPs ‘an authoritative environmental and social risk framework for the financial services industry’ but notes that there are projects where, for instance, some of the financing institutions adhere to the UN Principles for Responsible Investment, others apply the UN Principles for Responsible Banking, and some are EPFIs.

‘As ESG becomes a more and more crowded industry, there will be many other organisations vying to take the title of “the authoritative ESG management framework for the financial services industry”,’ she concludes. ‘The EP4 revision was important to keep the EPs at the fore but future revisions that keep pace with US, EU, and UK developments will likely be necessary in order to retain brand relevance.’

Marialuisa Taddia is a freelance journalist