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28th January 2006 Major banks contravening their social policies

Article - Major banks contravening their social policies
Environmental organisations have warned that major banks may be contravening their environmental and social policies by helping to finance controversial projects indirectly.

A growing number of financial institutions have developed guidelines that prevent them providing loans to projects that cause environmental damage or have a harmful impact on local people.

However, campaigners are now arguing that banks should extend those standards to all their business activities, including the underwriting of bond issues for clients with poor policies on the environment and human rights.

Recently, they sounded the alarm over a US$1 billion bond sold to international investors by the state-owned Export-Import Bank of China (China Exim), the world's third-largest export credit agency.

Like most bond issues, it was co-ordinated and underwritten by several global banks, including Merrill Lynch, HSBC, Citigroup, BNP Paribas and Goldman Sachs.

Many major banks have already agreed a set of ethical principles in their own lending - but so far they have not applied them to bond underwriting.

In a report, the International Rivers Network (IRN) and Friends of the Earth highlighted China Exim's role in funding "socially and environmentally destructive projects in countries with bad human rights records", including Sudan and Burma.

They argued that, by arranging the bond issue, banks would "help finance projects which they could not finance directly under their own environmental policies".

For example, China Exim is one of the funders of the US$1.8 billion Merowe/Hamadab Dam now under construction in northern Sudan.

During a visit to the country earlier this year, IRN ascertained that an environmental assessment prepared by project engineering firm Lahmeyer International had not been approved by the Sudanese government as required by law, nor made public.

According to IRN, it failed to address some potential negative environmental impacts of the dam, such as sedimentation of its reservoir.

In addition, there is concern that the 50,000 indigenous people who are being displaced by the dam are not receiving adequate compensation. IRN estimates that this project violates World Bank policies on environmental assessment, natural habitats and involuntary resettlement on some 60 counts.

These policies in fact form the basis for the Equator Principles, a voluntary initiative for financial institutions that lays out environmental and social guidelines for project financing.

Since its launch in 2003, 32 international banks have signed up to these principles, but so far they only apply to direct project lending.

Citigroup, HSBC and ABN Amro, which has also published guidelines for sectors including oil and defence, all say their policies have caused them to turn down unsuitable projects and even client relationships.

They identify the next challenge as moving from mitigating negative project impacts to contributing to sustainable development.

"Now we look not only at environmental and social risks, but also at sustainability and other ethical issues that affect our core business. We aim to be more pro-active and solutions-oriented," said André Abadie, head of the sustainable business advisory team at ABN Amro.

Yet unless the Equator member banks address the thorny issue of indirect financing, raising the environmental and social standards of infrastructure projects across the board - particularly in developing countries - may prove elusive.

Rachel Kyte, director of the Environment and Social Development Department at the World Bank's International Finance Corporation, identifies this as a key issue: "The challenge going forward is whether the banks want to apply the Equator Principles to other business instruments, including bond issuance and capital market activities in general."

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