Financial institutes' responsibilities to climate change adaptation: the reality of the Equator Principles

Overview: context and drivers

More and more private banks are financing large development projects, often for energy and infrastructure development, that would previously have been financed by multilateral agencies like the World Bank (WB). The growing influence of the private banking sector in development creates the need to regulate the social and environmental impacts of privately-financed projects, as well as the opportunity to shape sustainable development practices through private bank financing. This includes the need to incorporate adaptation to climate change into projects. It is in the banks' own interests to control the potential costs they may incur by not taking climate change adaptation into account, including the costs of complying with environmental regulation, competition from increasingly cost-effective climate-proofed projects, harm to their reputation, and the risk of litigation.

The Equator Principles (EPs) are a set of globally-recognised, voluntary guidelines designed to assess and manage social and environmental risks in private project financing, especially in emerging markets. They were created in 2003 on the initiative of several international investment banks, by adapting the International Finance Corporation (IFC)'s socio-environmental safeguards. The EPs have become an industry standard; by 2007 they had been voluntarily adopted by 45 financial institutions worldwide. The second version of the EPs addresses climate change mitigation, but only in terms of reporting greenhouse gas reduction measures; it does not mention climate change adaptation.

The EPs categorise projects into three groups, from most to least sensitive to social and environmental vulnerabilities, based on the IFC's screening criteria. It is suggested that Environmental Impact Assessments (EIAs) are undertaken for projects in the two more sensitive categories, and that Environment Management Plans (EMP), consultations with stakeholders, and reports on implementation are completed for most of the more sensitive ones.

The study underlying this learning example focuses on the role of private banks in project finance. It asks whether it is possible and reasonable to increase the attention private banks pay to climate change adaptation by incorporating the use of climate risk assessments and strategic management plans into their procedures. The researchers conducted semi-structured interviews with 16 key actors from private investment banks, the IFC, the WB, the Inter-American Development Bank (IDB), and three NGOs in Washington DC in September 2006. The primary focus of the interviews was to uncover social networks of actors, and interviewees' perceptions of other actors, and of risk. The data were analysed using Grounded Theory and Integrated Diagramming methods.

Adaptation to climate change was broached by most interviewees in two ways: (1) 'climate-proofed' (adaptive) construction, so that an investment is sustainable regardless of future changes in climate, and (2) support for the development of adaptive capacity in communities affected by project-funded development. The former is incorporated by some but not all financial institutions when funding infrastructure projects; the latter is usually seen to fall outside the remit of financial institutions.