Breath of Clarity

Royal Bank of Canada Funding the Dakota Access Pipeline

Original Post by Danette Bordenkircher:

The Equator Principles is a risk management framework that is used to determine, assess, and manage environmental and social risks in projects. It has been adopted by financial institutions and is intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision making. The Equator Principles are currently being used in 38 countries and have increased the attention on social and community standards and responsibility. This includes robust standards for indigenous peoples, labor standards, and consultation with locally affected communities within the Project Finance market. However, according to the report from Royal Bank of Canada, it appears that the Equator Principles may be used as a form of greenwashing instead of funding truly sustainable projects. (The Equator Principles 2020)

Royal Bank of Canada(RBC) adopted the Equator Principles in 2003 with their most recent report being from 2017-2018. RBC states that in order for a proposed project to be financed, the client must comply with Equator Principles and show that environmental or social issues associated with the project are minimized, mitigated, or offset. Yet, on their most recent report, one of the funded projects was the Dakota Access Pipeline which they loaned $275 million to. (Raferty 2018) The pipeline was recently ordered to shut down until a full environmental impact statement was concluded and during its construction, there were major protests due to its impact on indigenous people. ( Harvard Law School 2020) Since the Equator Principles are supposed to have robust standards for indigenous peoples, it’s difficult to see how this project would have ever met the standards to be funded. On their report, 4 out of the 5 projects listed were in the oil and gas sector and 1 was in power. Their report or website did not show any information on how these specific projects planned to minimize or offset environmental risks but just gave information on how the Equator Principles work. (The Equator Principles 2020)

Since the Equator Principles are voluntary, they do not hold financial institutions accountable. In addition, the reporting should be more transparent and clearly show how projects that are being funded are offsetting any environmental or social risks. The Equator Principles listed should lead to more sustainable projects worldwide, however, it appears that they are not currently working that way if they are still funding destructive oil and gas projects. RBC has some work to do if they want shareholder wealth to be environmentally and socially balanced. It is possible that with stricter mandated reporting and participation in the principles, the Equator Principles could lead to sustainable, balanced financial institutions. (The Equator Principles 2020)


“Dakota Access Pipeline – Environmental & Energy Law Program.” Harvard Law School, July 23, 2020. to an external site..

Raftery, Isolde. “What Other Banks Are Loaning Money to the Dakota Access Pipeline?” KUOW, October 25, 2018. to an external site..

“Reporting – Royal Bank of Canada (2017-2018).” The Equator Principles. Accessed August 11, 2020.

Comment by Emily Lomauro:

Danette, I was intrigued by your example from the Royal Bank of Canada’s (RBC) funding of the Dakota Access Pipeline so I looked into them a little further. First, it does seem counter-productive for RBC to use the EPs in order to fund oil and gas projects. But looking further into their financial ties to the oil and gas industry, it seems pretty obvious that they would be on board. From 2015-2017, RBC provided $26.485 billion in financing to fossil fuel industries. This was second to only the China Construction Bank (Rainforest Action Network 2018, 6). And in the below chart, you can see the 2017 fossil fuel financing, with RBC leading the world in funding.

RBC is able to finance these ventures because of a major shortcoming of the EPs, which is “they [the EPs] apply only to forms of finance that are directly related to a specific project (project finance or corporate loans where proceeds are known), leaving the possibility for banks to finance projects without applying the Equator Principles, by using other types of finance” (Rainforest Action Network 2018, 70). If they are funding projects not covered under the EPs, they are not required to provide transparent reporting on said projects. Also, projects that occur in “designated countries” do not need to undergo closer inspections because the environmental and social laws in these countries are said to meet the EP standards. Only projects in “non-designated” countries need to undergo further review (Equator Principles Association 2013, 6). So by those standards, funding for the DAP never had to undergo strict evaluation.

Rainforest Action Network. 2018. “Banking on Climate Change” Rainforest Action Network. March 28, 2018. to an external site.

Equator Principles Association. 2013. The Equator Principles June 2013. The Equator Principles Association. (Links to an external site.) _III.pdf

Comment by Danette Bordenkircher:

Thanks for the response and the additional information. I’m surprised that environmental laws in the United States meet EP standards so that the US is considered a “designated countryLinks to an external site.”. According to dataLinks to an external site. from 2019, the US was one of the top producers and consumers of oil in the world, making it one of the top contributors to climate change. If the EPs were truly focused on lowering the environmental and social impact of financial institutions, mitigating climate change should be one of the highest priorities. Funding oil and gas projects, like the DAPL, is far from sustainable and shows that the EPs can be used as a form of “greenwashing”. (Harvard 2020) While some financial institutions may use them as intended, it’s clear that there are a lot of loopholes that allow unsustainable projects to be financed.

“Dakota Access Pipeline – Environmental & Energy Law Program.” Harvard Law School, July 23, 2020. to an external site.. to an external site.

I just came across this articleLinks to an external site. from 2017 and thought it tied in with our discussion. After several banks supported DAPL, ten Equator Principles banks proposed that projects in high-income countries should receive more evaluation and that they should not rely on the assumption that environmental and human rights are adequately protected. The ten banks were also concerned that supporting projects such as DAPL, “where consultation with an Indigenous community did not involve their free, prior and informed consent” would damage the EP’s reputation. (Frijns 2017) As of May of this year, the United States is still listed as a designated country “deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment”. Regardless, I thought it was interesting, that some of the EP banks were requesting stricter project evaluations.

“Designated Countries.” The Equator Principles. Accessed August 14, 2020. to an external site..

Frijns, Johan. “Ten Equator Banks Demand Decisive Action on Indigenous Peoples Following DAPL Debacle.” 2017.

My Comment:

Hi Emily,

Thanks for the post! I find it interesting the location of projects impacts the degree to which inspection is strict. Further, I am astounded the weakness in reporting requirement design enabled the DAP to be funded. I found a reportLinks to an external site. where the authors noted even banks following the EPs “often do not report information necessary to evaluate environmentally induced financial risks” (ElAlfy and Weber 2019, 13). The report also outlined three main sustainability reporting challenges in the banking industry.

Firstly, the authors describe corporations have a limited understanding of their scope of responsibility. Specifically, banks develop reports from an “outside-in” approach, which prioritizes agendas based on ranking schemes of sustainability institutions, instead of incorporating a strategic “inside-out” process driven by intrinsic motivation to improve the future of ecosystems. The authors suggested companies implement the “inside-out” approach by defining their sustainability weaknesses and developing tactics to reduce their operational externalities. In the case the Royal Bank of Canada (RBC) adopted the switch from “outside-in” to the outlined version of “inside-out,” the corporation would have recognized its deep ties to the oil and gas industry and particularly focused on not funding other projects in the fossil fuel industry.

Secondly, the authors identified lack of standardization in reporting frameworks as a key problem. I see the point relevant in explaining why the Dakota Access Pipeline (DAP) was supported by RBC. The varied protocol across locations resulted in a lack of quality reporting. Having various expectations of what the company should report leads to inconsistent actions. The authors noted, further, disclosure is just the first step as the banking industry needs a standardized way to manage the risks. In general, the banking industry lacks a consistent strategy to address climate-related financial risks.

Thirdly, the reality of multiple groups facilitating sustainability reports leads to confusion in terms of reporting cycles. Consequentially, the quality of the reporting is diminished. Due to time and data limitations, banks may elect a reactive approach instead of deploying strategies that could otherwise enhance corporate responsibility. The authors mention achieving reliable strategic reporting frameworks requires continuous collaboration among states and private sectors.