The International Finance Corporation (IFC) has led a group of 10 banks in announcing the adoption of a voluntary set of environmental and social guidelines that will be applied to project financing in all industry sectors globally, including water and transport infrastructure.

The guidelines are known as the “Equator Principles” (EP) and are based on IFC and World Bank policies and guidelines. The IFC is the World Bank’s private sector development arm and its mission is to promote sustainable private sector investment in developing countries.

The banks are ABN Amro Bank, NV, Barclays PLC, Citigroup, Inc, Credit Lyonnais, Credit Suisse Group, HVB Group, Rabobank, Royal Bank of Scotland, WestLB AG, and Westpac Banking Corporation.

“The adoption of the EP confirms that the role of global financial institutions is changing dramatically. More than ever people at the local level know that the environmental and social aspects of an investment can have profound consequences on their lives and on their communities, particularly in the emerging markets where regulatory regimes are often very weak,” says Peter Woicke, IFC executive vice-president and the World Bank Group’s managing director.

“The amount of investment this will affect is massive. Even if you use an extremely conservative estimate, this will change the rules of the game for about US$100bn in global investment in the next 10 years,” according to Woicke, while Charles Prince, chairman and CEO of Citigroup’s Global Corporate and Investment bank, says “Today the EP become the actual standard for our industry.”

In regard to whether EP will affect pending transactions, ABN Amro project finance head Richard Burrett says: “Clearly the banks adopting EP will start the process of implementing the principles into their decision-making from now on. That may take or may occur at different rates within the institutions, therefore it conceivably will affect the negotiations of clients and transactions that have not yet been formally agreed upon.”

Regarding how much private sector consultation has taken place, Burrett adds that the banks have spoken to numerous stakeholders, including NGOs, in the EP’s formulation and there has been an active dialogue process.

In adopting the EP, a bank will provide loans only to those projects whose sponsors can demonstrate to the bank’s satisfaction their ability and willingness to comply with comprehensive processes aimed at ensuring that projects are developed in a socially responsible manner and according to sound environmental management practices.

The banks will apply the EP to all loans for projects with a capital cost of US$50mn or more. The EP will use a screening process for projects based on IFC’s environmental and social screening process. Projects will be categorised as A, B or C (high, medium or low environmental or social risk) by the banks. For A and B projects, the borrower will complete an environmental assessment addressing the environmental and social issues identified in the categorisation process. After appropriate consultation with affected local stakeholders, category A projects, and category B projects where appropriate, will prepare environmental management plans to address mitigation and monitoring of environmental and social risks.

Environmental issues include pollution prevention and waste minimisation, pollution controls (liquid effluents and air emissions) and solid and chemical waste management.

The borrower will be required to demonstrate to the bank that the project complies with host country laws and the World Bank and IFC Pollution Prevention and Abatement Guidelines for the relevant industry sector. For projects in emerging economies, the borrower would also have to demonstrate that the environmental assessment has taken into account the IFC Safeguard Polices, which provide guidance on issues such as natural habitats, indigenous populations, involuntary resettlement, safety of dams, forestry and cultural property.