Beyond the Mine Mouth: The Equator Principles and IFC Performance Standards

On April 30, 2006, a new generation of social and environmental standards came into effect.  These standards were developed by the International Finance Corporation (IFC) – the private-sector lending arm of the World Bank Group. The IFC's mission is to promote sustainable private sector investment in developing and transitioning countries, help reduce poverty and improve people's lives. The standards constitute an updating and revision of previous 'Safeguard Policies' and provide guidance on the roles and responsibilities of the private sector. As a result, these standards constitute a significant change to the practices of the extractive industries in OECD (Organization for Economic Cooperation and Development) countries.

The significance of the IFC Performance Standards, however, goes beyond social and environmental protection.  Whilst the IFC is an important global financier in its own right, its Performance Standards also apply to project lending by all Equator Principle Financial Institutions (EPFI). The Equator Principles were created in 2003 and updated in 2006 to reflect the Performance Standard changes.  They provide a benchmark for the finance industry to manage social and environmental issues and risks, and as of December 2007 applied to 56 lending institutions, or approximately 90% of global project finance.

What these changes in global financing reflect is a response by the finance sector to growing social and environmental risks and threats to the financial viability of projects. Whilst some commentators, such as BankTrak, feel that the standards have not gone far enough, overall these changes are considered to reflect an increasing commitment to conduct business in a socially and environmentally responsible manner.

Industry Standards or an Industry of Standards?

The recent drive towards greater social and environmental responsibility and the poor record of the mining sector in particular, has created a growth industry in standards, principles, initiatives and guidelines.

As a result, mining proponents can find themselves navigating through a complex landscape of voluntary initiatives and systems. Examples include UN Global Compact, UN Principles of Responsible Investment, OECD Guidelines for Multinational Enterprises, Voluntary Principles on Security and Human Rights, ICMM Principles for Sustainable Development Performance and the Global Reporting Initiative. While each of these represents advancement towards greater social and environmental protection, it is not feasible for many projects (if any) to comply with them all. Projects must therefore first seek to ascertain what is most relevant to their project and what they are willing to commit to.

So far, the strongest message from extractive industries has been in support of the IFC Performance Standards (alongside the UN Voluntary Principles on Security and Human Rights) as a benchmark, especially given their direct link to project financing.

Equator Principles and IFC Performance Standards

The Equator Principles are a set of ten voluntary social and environmental principles which must be met to satisfy the conditions of lending. In essence, they are a process or checklist. The Equator Principles refer directly to the IFC Performance Standards and borrowers from an EPFI must demonstrate compliance.  There are eight IFC Performance Standards (Table 1) which aim to strengthen social and environmental policy and practice and to guide project proponents and financiers.

The revised and expanded standards are highly relevant to mining projects.  They employ a new outcomes-based approach with clear requirements for client performance and project outcomes. The standards include established issues such as biodiversity conservation and involuntary resettlement, while covering new areas such as employee working conditions, community security and health, alongside greater consultation, transparency and accountability. Key requirements and differences are summarized in Table 2.

table-one

What Does it all Mean?

The bottom line of these changes is that failure to comply or demonstrate compliance with social and environmental standards may impede or hinder access to capital and potentially threaten the financial viability of a project. Responsibility for compliance is firmly placed with the proponent. As a result, proponents may find themselves increasing their focus on efforts including: social and community issues; integrated management and action planning; disclosure, transparency and accountability; and the need to secure social and environmental licenses to operate.

table-twoFortunately, the growth industry in standards has in turn fuelled the development of associated guidelines, tools, capacity building and new types of expertise in the mining sector. Increasingly, you can now find an array of social scientists and community development experts sitting alongside geologists and mining engineers.  One of the best sources for the mining sector is the International Council on Mining and Metals (ICMM) which has rembarked on a series of initiatives to help guide the sector towards greater social and environmental responsibility.  Best practice and guidelines have been produced on biodiversity, emergency preparedness and response, indigenous peoples, community development and reporting, among others.

locale-guide

Whilst it is difficult to map the changes made by banks and lending institutions, and criticism from the NGO sector the ability of the standards to address issues, evidence suggests that changes within the financial sector should not be underestimated or the new standards dismissed.

Michael Warner (2006) of the Overseas Development Institute sums up the importance of the standards: "The principal change in the new IFC Performance Standards is not that the 'bar' might or might not be lower in places than it was. It is that the standards represent a wholly new mechanism for deciding, investment-by-investment, where the 'bar' on environmental and social performance should lie in the first place".

Social and environmental responsibility is a complex landscape which presents both challenges and opportunities for the mining sector. What industry representatives and the finance sector have made clear, however, is that the status quo is not sustainable. While no set of principles or standards can guarantee results on the ground, the Equator Principles and IFC Performance Standards are widely regarded as a positive step beyond the mine mouth.

Gillian Davidson is the manager of Social and Economic Sciences at Rescan

Links and References:

· Bank Trak

· Equator Principles

· Global Reporting Initiative

· ICMM Principles for Sustainable Development Performance

· IFC Performance Standards

· IFC Safeguard Policies

· International Council on Mining and Metals

· International Finance Corporation

· National Roundtables on CSR and the Canadian Extractive Industry in Developing Countries

· OECD

· OECD Guidelines for Multinational Enterprises

· Overseas Development Institute

· UN Global Compact

· UN Principles of Responsible Investment

· Voluntary Principles on Security and Human Rights

· World Bank Group

· http://go.mining.com/apr08-a1