UK: Equator Principles

Last Updated: 17 December 2012
Article by Malcolm Dowden

Large scale infrastructure projects in the UK and around the world are under increasingly close scrutiny from campaigning NGOs and ethical investment indices concerned with their environmental and human rights impacts. Those increased levels of scrutiny and activism are finding legal expression, including court proceedings just launched by Friends of the Earth in the Netherlands in respect of Shell's activities in Nigeria, and the 2006 International Court of Justice ruling in respect of the Fray Bentos pulp mill in Uruguay.

NGOs are also pressing for more rigorous and meaningful enforcement of the environmental and human rights elements of the 'Equator Principles' (EPs), which are currently being updated and extended. In particular, NGOs are seeking to highlight the limited effectiveness and inadequate implementation of grievance mechanisms – intended to hear, address and resolve community complaints without requiring expensive recourse to formal judicial proceedings.

A lender's commitment to the EPs is public. Campaigners and NGOs need only look to the EP Association's website to confirm that a lender has adopted the EPs. From there it is a short step to identifying infrastructure projects likely to be governed by them and to questioning whether the project's promoters are complying with the covenants set out in the EPs documentation. For lenders, failure to enforce those covenants carries reputational risk. Campaigning NGOs cannot directly enforce obligations found in a contract between lender and borrower. They can, however, exert public pressure and promote shareholder activism where enforcement is lacking.

What are the Equator Principles?

In our previous article (Infrastructure Journal, 19 September 2012) we explained that the EPs are a voluntary code for commercial lenders providing funds for major development projects. They provide a framework allowing lenders to identify and manage (or require the borrower to manage) a project's environmental and social impacts. Although the EPs have been in operation since 2003, and have been adopted by 77 major lending institutions, they have been widely regarded as 'soft law' with little risk of enforcement. That perception may have to change as their reach extends and borrowers' obligations increase with the adoption of a revised version, EP III.

Although typically associated with petrochemicals, power, water and sewage, extractive industry and transport the EPs apply to all sectors and all jurisdictions, including real estate, transport, water, sewage and communications development. The voluntary element is only on the lender's side. Once a lender signs up to the EPs its borrowers are required to enter into a set of covenants that impose legally binding obligations to meet environmental and human rights standards.

Key issue: the grievance mechanism

To comply with those covenants borrowers must establish and implement a grievance mechanism, 'designed to receive and facilitate resolution of concerns and grievances about the Project's environmental and social performance'.

The grievance mechanism provisions are principally concerned with the impact on communities directly affected by a project. International examples include the enforced displacement of indigenous populations to make way for development projects. However, the requirement applies in all jurisdictions and in any sector involving project finance or advice falling within the EPs.

The EPs refer to affected communities as the 'primary user' of the grievance mechanism. That implies that the mechanism must also be open to secondary and other users. That provides campaigning NGOs with the ability to intervene and to voice concerns about environmental or social impacts. As with the main lending covenants, the ability to intervene allows NGOs to exert significant reputational pressure on lenders, and to demand that grievance mechanisms are genuine, robust and effective.

This is an area of particular difficulty for borrowers and of potential concern for lenders. A grievance mechanism must seek to resolve concerns promptly, using an understandable and transparent consultative process that is:

  • culturally appropriate
  • readily accessible
  • at no cost, and
  • without retribution to the party that originated the issue or concern

There is little practical guidance on the design and implementation of grievance mechanisms. They are not a judicial procedure, and must not impede access to judicial or administrative remedies. However, they must be more than merely a token. They must seek to resolve concerns, not just to hear them. Of all the issues likely to attract adverse attention to EP projects, this is arguably the point of greatest vulnerability. It is not a core activity for either lender or borrower, but provides campaigning NGOs with ample opportunity to scrutinise the level of constructive engagement with affected communities. If there are flaws in the project plan, or impacts that have been inadequately addressed, this is the stage at which they would be most likely to become visible, and where reputational risks are most acute.

In its 2008 report on grievance mechanisms the CAO drew on a wide range of case studies to support its argument that grievance mechanisms must be designed and implemented as a core element of a project's management and accountability structure, and should be in place throughout the project lifecycle. It requires:

  • a transparent grievance receipt and registration system: to provide ways for community members to register complaints and confirm they have been received
  • grievance eligibility assessment: to determine whether the issues raised fall within the mandate of the grievance mechanism and that the complainants are eligible to use it
  • grievance evaluation: to clarify the concerns raised in the complaint and to establish whether and how they might be resolved
  • resolution procedures: whether internal decision-making processes of the company, joint decision-making with community representatives or third party determination or mediation.
  • grievance tracking, monitoring and reporting to the community: to demonstrate that the process is meaningful and that it meets the requirements of the EPs, the UN's Ruggie principles and other international benchmarks and standards.
  • organisational learning and identification of systemic problems that require change to minimise the risk of recurring or future disputes.

Many of those elements have been successfully implemented in the Community or Collaborative Planning approach pioneered by architect John Thompson for projects ranging from the refurbishment and regeneration of 1960s tower blocks to major international projects such as eco-city and urban expansion in China and Russia. Those projects seek, from the earliest planning stages, to identify local concerns and to engage communities as stakeholders in the project. In that process listening is as important as informing, and specific follow-up far more important than merely registering complaints.

The wide range of issues identified through Community Planning is similar to the potential conflict points in any infrastructure project. They do not relate solely to the 'headline' impact of the project (eg pollution or damage to habitats, disturbance or displacement of local residents). Case studies set out in the CAO analysis include problems stemming from the conduct of construction workers failing to pay for goods and services or disrupting local economic life by inconsiderate parking or excessive noise, to the longer term failure of a project to confer any appreciable economic benefit on its host community. The message is that apparently minor and localised problems can have a disproportionate effect if challenged as a failure to apply the EPs.

While this may be regarded as falling outside 'mainstream' law, the elements of an effective grievance mechanism closely reflect the principles of good legal dispute resolution. As NGO scrutiny and willingness to challenge continues to increase, legal experience is an extremely useful resource when designing, implementing and embedding a mechanism capable of withstanding challenge.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Malcolm Dowden
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