The sustainability and societal impact of the financial sector have been discussed intensively since the global financial crisis of 2007-2008. Although voluntary codes of conduct — such as the Equator Principles (EPs) for project finance, the UN Principles for Responsible Investment that focus on the sustainability of institutional investments and the UN Environment Programme (UNEP) Financial Initiative (UNEP FI), a general guideline for managing sustainability in the financial sector — have been in place for at least a decade, they were unable to point the financial sector in a sustainable direction in order to prevent the financial crisis. It is also argued that these voluntary codes were unable to adjust to the unfolding crisis. Even after massive national and international interventions and billions of dollars of support for the financial sector, it seems that the financial industry continues with a “business as usual” attitude, the only difference being that financial institutions are now obliged by the Bank for International Settlements to keep a higher amount of core capital compared to their risks.

Using the EPs as an example of voluntary codes of conduct for sustainable project finance, we discuss the effect of these “soft” regulations on the sustainability risk assessment of project finance in the financial industry.

Our research suggests that project financiers that adopt the EPs do so because of the need to maintain or increase their reputation and to use the EPs as guidelines for risk management. It seems that the EPs have not materially changed the way Equator Principles Financial Institutions (EPFIs) assess environmental and social issues in project finance. Consequently, the impact of the EPs on the strategic direction of EPFIs is arguable.

The third version of the EPs (EP 3) addresses climate change. EP 3 requires that EPFI project clients report on projects emitting more than 100,000 tonnes of CO2. However, there is no threshold for financing projects with high CO2 emissions. Although EPs demand analyses of alternative approaches emitting less greenhouse gas (GHG) from EPFI clients, financiers are still allowed to finance projects with higher GHG emissions. The EPs’ annex even allows project financiers to withhold the analysis and the GHG emissions “in some circumstances” (The Equator Principles 2013, 24), making the effectiveness of the guideline questionable. Moreover, even though the EPs now emphasize consideration of aspects of human rights in EP transactions, they do not indicate how to operationalize “specific human rights due diligence reporting” and mention of human rights is seemingly absent or pointed out only obliquely in sustainability reports (ibid.).

Although the EPs provide clear guidelines on how and what should be reported, a significant number of the reports do not provide transparent information about social and environmental risks. Our research suggests that in some cases, EPFIs do not even comply with their own voluntary guidelines (Weber 2014a, 18). Furthermore, because projects are usually not disclosed in the EP reports, stakeholders are unable to verify the risk categories of a particular project or its compliance with the EPs.

What could be changed to make the EPs a mechanism that shifts the financial sector in a more sustainable direction? EPFIs have adopted the EPs based on a business case approach rather than on a sustainability case approach (Weber 2014b). It is mostly argued that the EPs are beneficial for the financiers and the benefits are increased reputation or more structured risk management processes. EPFIs do not centre on the improvement of project sustainability, although positive impacts on project sustainability, such as lower GHG emissions or stronger stakeholder involvement, are the main motive of NGOs to support the EPs (O’Sullivan and O’Dwyer 2009). Similar approaches, such as the Global Reporting Initiative or the Carbon Disclosure Project, went a similar route. They started to push businesses in a more sustainable direction by increasing transparency and offering guidelines to enable businesses to become more sustainable, but ultimately failed to create substantial changes with respect to the sustainability impacts of businesses (Dingwerth and Eichinger 2010; PWC and Carbon Disclosure Project 2013, 60). 

Consequently, the question is whether private codes of conduct, such as the EPs, will be able to drive the financial sector to play a more active role in sustainable development, such as financing a green economy. A shift toward genuine sustainability — away from purely business benefits and toward sustainable development — may increase the effect of voluntary guidelines for social and environmental risk assessment.

In addition, such guidelines should be more outcome- than process-oriented. While the EPs address the main sustainability issues — the environment, impacts on society and communities, guaranteed stakeholder inclusion processes and climate change — they only offer guidance for assessment processes instead of guidelines for evaluating the results of the assessment processes and for decision making. Although the EPs claim to guarantee the assessment of environmental and societal standards, in particular in countries with weak regulations, they are not a substitute for missing or weak environmental and social standards. There is no reason for projects to comply with voluntary standards if they do not even follow host-country regulation. 

Enforcement mechanisms may be another way to improve the effectiveness of voluntary sustainability codes of conduct. For example, as demonstrated above, a significant number of EPFIs do not comply with the reporting guidelines; however, there are no consequences for the EPFIs in these cases. Enforcement mechanisms could include monetary fines or exclusion from the EPs. To guarantee non-biased enforcement, the EPs and other similar codes of conduct could establish a multi-stakeholder body that audits and assures the EPFIs’ performances and reports on both compliance and non-compliance.

Currently, the EPs only address products, services and processes connected with project finance. Principally, an EPFI can follow the guidelines and be sustainable in terms of project finance, but show a contrary behaviour with respect to other products and services. This is also a problem for other voluntary guidelines in the financial sector, such as the Principles for Responsible Investing or early versions of UNEP FI that only focused on lending. Arguably, a minimum description of a model sustainable project and a general definition of sustainable banking and finance independent from particular products and services are missing from these guidelines. 

Such an approach could also prevent cases where banks are ranked as leading sustainability performers but are also involved in controversies and banking scandals. Well-known cases include Citigroup, JPMorgan Chase & Co., Bank of America, Morgan Stanley and Credit Suisse. These are often labelled as sustainability leaders in their industry, but they were deeply involved in controversial business during the financial crisis. It seems that voluntary guidelines, such as the EPs, would rather focus on areas that are material for the financial industry or those areas that provide business opportunities. They do not provide any guidance on how to change the overarching business strategy to become more sustainable and create benefits for society and sustainable development. Internal solutions from EPFIs, NGOs, and input from state regulations and policies could include aspects as to how EPFIs should operationalize pro-green economy incentives, innovations and regulations (UNEP 2014). Continued research is needed to understand how EPs will evolve into an effective tool for a sustainable financial sector.

Works Cited

Dingwerth, K. and M. Eichinger. 2010. "Tamed Transparency: How Information Disclosure under the Global Reporting Initiative Fails to Empower." Global Environmental Politics 10 (3): 74–96.

O'Sullivan, N. and B. O'Dwyer. 2009. “Stakeholder Perspectives on a Financial Sector Legitimation Process.” Accounting, Auditing & Accountability Journal 22 (4): 553–87.

PWC and Carbon Disclosure Project. 2013. Global 500 Climate Change Report 2013. London: Carbon Disclosure Project.

The Equator Principles. 2013. The Equator Principles. Geneva: The Equator Principles.

UNEP. 2014. Inquiry into the Design of a Sustainable for Financial System: Policy Innovations for a Green Economy. United Nations Environment Programme.

Weber, O. 2014a. Equator Principles Reporting: Do Financial Institutions meet their Goals? CIGI Papers No. 38. Waterloo, ON: CIGI.

———. 2014b. “The Financial Sector's Impact on Sustainable Development.” Journal of Sustainable Finance & Investment 4 (1): 1–8. Doi: 10.1080/20430795.2014.887345.

The question is whether private codes of conduct, such as the EPs, will be able to drive the financial sector to play a more active role in sustainable development, such as financing a green economy.
  • Olaf Weber is a CIGI senior fellow and an expert on sustainability and the banking sector. He is currently a professor in the School of Environment, Enterprise and Development at the University of Waterloo and a University of Waterloo Research Chair in Sustainable Finance.

  • Emmanuel Acheta was a research financial analyst at the University of Waterloo before becoming a doctoral student at the University of Waterloo’s School of Environment, Resources and Sustainability in the sustainability policy and governance program.