November 21, 2019

Commercial banks ignore the climate crisis as Equator Principles revision fails to limit finance for fossil fuels

Tokyo, Japan – On November 18 the updated version of the Equator Principles (EP4) – the financial industry benchmark for determining, assessing and managing environmental and social risk in Project Financing – was adopted by the Equator Principles Association representing 101 signatory banks at its Annual Meeting in Singapore. Notable signatories and known major fossil fuel financiers include Japan’s biggest banks Mitsubishi UFJ, Mizuho and SMBC, and major global players Barclays, Citigroup, HSBC, JPMorgan Chase and Standard Chartered.

Despite a two year consultation process and clear demands from over 300 civil society groups for banks signed up to the Equator Principles to no longer allow the financing of new coal power plants and other new fossil fuel infrastructure in order to keep global temperature rise below 1.5 degrees Celsius, the new EP4 fails to take the climate crisis seriously, and merely notes in the preamble that when financing Projects:

We support the objectives of the 2015 Paris Agreement and recognise that EPFIs [Equator Principles Financial Institutions] have a role to play in improving the availability of climate-related information, such as the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) when assessing the potential transition and physical risks of Projects financed under the Equator Principles”(p3, emphasis added).

There is no requirement for alignment with Paris Agreement objectives when financing projects – rather there is a new provision as part of Principle 2 – Social and Environmental Assessment, that clients are “expected to include assessments of potential adverse Human Rights* impacts and climate change risks”(p9) in the Assessment Documentation. This Assessment Documentation “should propose measures to minimise, mitigate, and where residual impacts remain, to compensate/offset/remedy for risks and impacts to Workers, Affected Communities, and the environment”(p8-9). 

The key word missing here is “avoid” – when new fossil fuel development projects are assessed as causing unacceptable climate risks to present and future generations, these projects should be avoided in the first place, as outlined by the recent IPCC 1.5ºC report.   

The inclusion of a specific Climate Change Risk Assessment in EP4 is a step forward, with project risk assessments expected to include both climate-related physical and transition risks in line with the TCFD recommendations, in addition to an evaluation of lower greenhouse gas intensive alternatives. However, “consideration of the project’s compatibility with the host country’s national climate commitments”, and publication of such alternatives analyses, let alone opting for the less greenhouse gas intensive option, is left to the discretion of the EPFI, and there is no clarity on what measures should be taken if projects do not align with emissions reductions goals. 

By stopping short of concrete exclusions for carbon-intensive fossil fuel development projects in line with the best-available science, the EP4 framework will likely allow more business-as-usual, with a veneer of climate risk assessment that does not require compliance or transparent reporting. 

Given the weak provisions on climate, signatory banks cannot claim that they are appropriately managing environmental and social risks related to their financing decisions via implementation of this framework. This applies particularly to Japanese and US banks, which are implicated in blocking more progressive revisions of EP4 according to insiders. 

With the Equator Principles Association now refusing to make a serious climate commitment, it is up to individual banks to prove their commitment to aligning their business with the Paris Agreement, by ruling out new finance for coal and other fossil fuel development, and commit to portfolio phaseout plans that align with achieving the 1.5ºC temperature goal. 

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Note to Editors:

*On Human Rights, there is an explicit reference for clients to refer to the United Nations Guiding Principles on Business and Human Rights (UNGP) when assessing the human rights impacts of projects, however it is not included as an applicable standard to which assessed projects must comply. 

More stringent language on Indigenous Rights is reflected in Principle 5: Stakeholder Engagement, where the EPFI must demonstrate for all projects affecting Indigenous Peoples, that informed consultation and participation processes have been conducted, as per IFC performance standard 7 which specifies the rights of Indigenous Peoples to Free, Prior and Informed Consent (FPIC).