Original Post by Emily Lomauro:
The Equator Principles (EPs) is a framework used by the Equator Principles Financial Institutions (EPFIs) to ensure projects that are financed by these institutions work to mitigate impacts on the environment, climate, and communities (Equator Principles Association 2013, 2). The EPs apply to all industry sectors, across the globe. Covered financial products include project finance advising, project financing, project-related corporate loans, and bridge loans (Equator Principles Association 2013, 3). Use of the EP framework is voluntary for financial institutions (Equator Principles Association 2013, 11) and therefore I think it is a tool used to “green wash” the image of financiers.
Citigroup, an EPFI since 2004, funded 13 projects in 2018 covered under the EP framework. Their total investment in these projects was not listed, although these projects are presumably part of Citigroup’s goal to invest $100 billion from 2014-2023 (Citigroup 2018, 53). Citigroup has their own Environmental and Social Risk Management (ESRM) policy in which they assess project impacts on climate, air and water quality, biodiversity, communities, and other environmental and social issues (Citigroup 2018, 59). Citi’s ESRM policy utilizes a similar ranking system for projects (A, B, and C) and has guided them to deny funding for projects that do not adequately mitigate environmental and social risks. It appears it is though this ESRM framework that Citigroup comes to identify sustainable investment opportunities rather than the EP framework.
The EPs focuses on how to perform, from project review to monitoring and reporting, a thorough assessment on project risks/impacts/mitigation measures. There is little mention in this framework about shareholder wealth but I think it is safe to assume that the EPFIs who decide which projects to invest in will do so with shareholder wealth in mind. In the end, their job is to increase shareholder wealth and by investing in sustainable projects they can improve their reputations and potentially turn that into more clients.
I think if all financial institutions applied the EP framework to their funding decisions, it could lead to more sustainable projects. However, I also believe that so long as there is a demand for financing without sustainability strings attached, there will be financers ready to help.
Citigroup. 2018. “2018 Global Citizenship Report” Citigroup. https://www.citigroup.com/citi/about/citizenship/download/2018/Global-Citizenship-Report-2018.pdf?ieNocache=93
Equator Principles Association. 2013. The Equator Principles June 2013. The Equator Principles Association. http://equator-principles.com/wp-content/uploads/2017/03/equator_principlesLinks to an external site. _III.pdf
My Comment:
Excellent post! It provides a model of a bank implementing a self-motivated Environmental and Social Risk Management (ESRM) policy. As I looked into the social/ethical banking definition in last week’s discussion, I realized there are ways non-social/ethical banks can still abide by sustainability laws and also not necessarily be implementing the equator principles. In the case a bank holds the environment as one of its key values both in image and practice, it is revealed in its ESRM policy. Environmental economists need to focus on identifying corporations who are sustainably leading the way with a thorough ESRM policy and create models based upon them for other companies in the same industry. For example, the report includes information about how to enhance relationships with stakeholders on pages 19 and 20. Crucially, the models need to show how going green is both a catalyst for the international economy and results in substantial equity within the firm.
For example, in Citigroup’s ESRM policyLinks to an external site., it mentions the company calculated its 2018 financing activities contributed approximately $8.2 billion to U.S. GDP. The report could be enhanced by depicting how the company arrived at the $8.2 billion total to help other companies be able to replicate it. That being said, how else can Citigroup edit the report to be more so a guide to sustainable business for other banks instead of a display of achievements?
I am particularly interested in the ranking system used to deny funding for projects that do not adequately mitigate environmental and social risks. I wonder how the grade (A, B, and C) factors into the overall decision to fund. The majority of its funded projects are from the letter B category defined as “likely to have potential limited adverse coal or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures” (Citigroup 2018). However, the report also showed Citigroup had zero project advisories in category C defined as minimal or no impact. Still, the bank’s data from 2014-2018 on page 55 revealed positive environmental and social impact displayed in the past tense with quantifiable evidence.
I am also recently fascinated by how Citigroup is clearly valuing human rights initiatives. The section on pages 9-10 specifically notes Citigroup uses the influential corporate voice to support immigrants around the world in the workforce, highlight the importance of pay equity, gender equity, support small businesses, root for U.S veterans, and declare a commitment to racial as well as ethnic inclusion. I also appreciate how scenario analysis is implemented on page 11 to show the results of 2 degree Celsius or lower conditions possible in the future. Not only does the report emphasize Citigroup can prepare for potential risks revealed by the scenario analysis, it also notes there are opportunities to leverage during the transition global climate change is inevitably going to bring.
Additional reporting is published in another Citigroup report titled Finance for a Climate-Resilient FutureLinks to an external site..
https://www.citigroup.com/citi/about/citizenship/download/2018/Global-Citizenship-Report-2018.pdf?ieNocache=93
https://www.citigroup.com/citi/sustainability/data/finance-for-a-climate-resilient-future.pdf
Comment by Emily Lomauro:
I did see in the Citigroup report (2018, 60) that they declined to fund an oil and gas project that were using “industry-leading biodiversity management approaches” but determined “the project would [not] be able to obtain the free, prior and informed consent of the affected Indigenous Peoples” (Citigroup 2018, 60). They also declined 3 financing requests for new coal-powered projects. But that is 4 projects of thousands they approve every year. It would be interesting to see the emissions prevented vs emissions enabled breakdown for all of their project rejections/approvals.