Equator Principles: The Voluntary Approach to Environmentally Sustainable Finance, The
![handle is hein.kluwer/eelr0014 and id is 280 raw text is: 280 European Environmental Law Review November 2005
Environmentally Sustainable Finance
The Equator Principles: The
Voluntary Approach to
Environmentally Sustainable
Finance
Benjamin J. Richardson
Professor Osgoode Hall Law School
Toronto
Summary: This article considers the Equator
Principles, a voluntary code br environmentally
responsible project financing by commercial and
investment banks. The value of voluntary environmental
approaches is increasingly recognised in the European
Union, and in its Sixth Environment Action
Programme, the European Commission advocated a
voluntary initiative with the financial sector to promote
harmonised standards for green lending and investing.
The article begins by explaining the broader relevance
offinancial institutions to sustainable de velopment. The
nature and effectiveness of voluntary environmental
measures to engage the private sector is canvassed
before looking at the Equator Principles in detail. The
article explains what the Principles demand of lenders,
assesses their implementation, and makes some
observations on their adequacy for the promotion of
environmentally sustainable finance.
I. A New Frontier for Environmental
Law
The financial services sector is increasingly recognised
by scholars and policy-makers as an economic sector
that has a significant bearing on sustainable develop-
ment. Comprising primarily lenders, investors and
insurers, the financial sector is environmentally
significant not so much because of its own, direct
ecological footprint, but rather due to its indirect
environmental effects through its loans to and invest-
ments in other businesses. Quite simply, many
companies ranging from mining firms, industrial
manufacturers to small retail businesses depend upon
the financial services sector for funds to start or
expand their operations.' Since the 1970s, companies
in OECD countries have had to rely increasingly on
external financing, rather than internal funds gener-
ated from their operations, to stay in business.2 The
growing dependence on the financial sector arises also
from the support it provides businesses through
insurance and financial advisory services. Thus, the
pollution and other environmental harms of those
businesses are in a sense also partly the responsibility
of their financiers.
While environmental activists and policy-makers
have long recognised the nexus between financial
markets and sustainability. until recently they were
preoccupied with public development finance. In
particular, multilateral development bank (MDB)
lending from the World Bank and its sister organisa-
tions.3 In addition to the conditions they attach to
project-based development loans, the MDBs have
attracted attention for their influence on the general
economic policy of borrower countries through con-
ditional structural adjustment and sector policy loans.4
Since the 1980s, international economic institutions
have experienced increasing public pressures to mod-
ernise their financial policies to address ecological and
social risks. Some reforms have since been made to
their operations, such as mandatory environmental
assessment of some project financing proposals.5
While the environmental reform of intergovern-
mental development finance is obviously important,
alone it is not enough. The private capital markets
must also be reformed. Private financiers hold greater
capital resources and influence over capital allocation
than governments,6 and their hold over capital funds is
increasing in the context of the globalisation of
financial markets.7
The relationship between financial markets and
sustainable development is problematic. There is
evidence that financial markets do not allocate capital
efficiently, and that unsustainable, speculative bubbles
suck in financial resources while inefficient under-
investment arises at other times or in other sectors.8
1See generally F.S. Mishkin, Financial Markets and
Institutions (2002); D.S. Kidwell, Financial Institutions,
Markets, and Money (2002).
2 R.L. Deaton, The Political Economy of Pensions (1989) pp.
210-14.
3 See further Z. Plater, Multilateral Development Banks,
Environmental Diseconomies, and International Reform
Pressures: The Example of Third World Dam-Building
Projects [1989] 9(2) Boston College Third World Law
Journal 169; S. Hansen, Macroeconomic Policies and
Sustainable Development in the Third World [1990] (4)
Journal of International Development 533.
4 See J. Warford and Z. Partow, Evolution of the World
Bank's Environmental Policy [1989] 26(Dec) Finance and
Development 5.
5 B.M. Rich, The 'Greening' of the Development Banks:
Rhetoric and Reality [1989] 19(2) Ecologist 44.
6 Organisation for Economic Cooperation and Develop-
ment (OECD), Institutional Investors in the New Financial
Landscape (1998).
7 A. Harmes, Unseen Power: How Mutual Funds Threaten
the Political and Economic Wealth of Nations (2001) chapter
6.
8 Ibid. passim.
Copyright 2007 by Kluwer Law International. All rights reserved
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