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Steven Heim of Boston Common Asset Management explains why he is leading a coalition of investors calling for the responsible investment principles signed in 2003 to be strengthened
Responsible investing is growing at a meteoric pace, with the market surpassing $30 trillion in assets under management at the start of last year, marking a 34% rise from 2016. But it’s crucial that the ESG mechanisms and frameworks put in place by the financial community keep pace. Events over the past three years at the Dakota access pipeline in the western US highlight potential shortcomings, especially when it comes to an integrated approach to assessing and mitigating the environmental and social risks posed by energy projects, including protecting the rights of indigenous people.
Two decades ago, commercial banks largely turned a blind eye to environmental and social risks associated with lending, prioritising purely financial returns and credit risks. That’s why the launch of the Equator Principles in 2003 was widely seen as a watershed moment. It was intended to provide a minimum standard for due diligence to support responsible social and environmental risk decision-making. But 16 years later, despite adoption now by 98 financial institutions across 37 countries, and having already been through three iterations, a number of gaps still exist in the framework’s policies.
The mass protests that captured global attention over the Dakota access pipeline are one of the most glaring instances of the framework’s shortcomings. The Standing Rock Sioux tribe vehemently opposed the routing of the 1,172-mile long underground oil pipeline, which passed within half a mile of their reservation.
Alarmingly, 13 of the 17 banks that financed the Dakota access pipeline project were signatories to the Equator Principles
However, despite concerns raised that the pipeline could threaten the tribe’s water supply from Lake Oahe and the Missouri river if a leak occurred, project financing was still given the go-ahead. Alarmingly, 13 of the 17 banks that financed the Dakota access pipeline project were signatories to the Equator Principles.
That’s why since 2017, Boston Common Asset Management has coordinated an investor input to the banks financing the Dakota access pipeline, and later to the Equator Principles Association. More widely in the last two months we have led a coalition of 50 investors and organisations, including those representing indigenous investors such as the Oneida Trust Enrollment Committee, in issuing an investor statement calling for the Equator Principles to be strengthened.
There’s still a long way to go, but for indigenous investors like the Oneida Trust Enrollment Committee these recent actions have provided optimism that change is on the horizon. “We are happy to see the Equator Principles Association recognising the need to review the Equator Principles. We hope the final draft of the EP4 [version four of the Equator Principles due out later this year] is broadened to apply worldwide so all signatories obtain free, prior and informed consent [FPC] before financing a project that may impact indigenous peoples,” said Keith Doxtator, director of the Oneida Trust Enrollment Committee.
While the Dakota Access Pipeline has been the most high-profile case, it is far from being an isolated event. Indigenous peoples in North America have also flagged concerns about the protection of their rights in relation to other proposed projects financed by EP’s signatory banks, such as the Keystone XL Pipeline and the Trans Mountain Pipeline. The problem is even more severe in emerging markets, where environmental and social regulation and enforcement is more limited. Major mining and oil pipeline projects in developing nations have frequently suffered from disruptions and protests, with calls ensuing for boycotts of the financing banks.
The main call to action to the Equator Principles Association and those banks that have endorsed the principles, is that the revised guidance must be “strengthened to recognise the right of indigenous peoples to FPIC regardless of jurisdiction and to fully align with the UNGPs (UN Guiding Principles on Business and Human Rights).” The current iteration of the Equator Principles falls short of protecting these rights post Dakota access pipeline.
Trailing in social risk management framework, our investor report also found that the banking community is lagging in climate management. With just a skin-deep commitment to green finance, banks’ climate shortcomings are threatening to undermine efforts in the transition to a low-carbon economy. The recent investor statement to the Equator Principles Association also welcomed the introduction of a climate change risk assessment to address physical and transition risks in EP4.
As responsible investing has helped the transition to a low carbon economy gain steam, the banking sector has largely been dragging its heels
As investors take actions seeking to bolster the Equator Principles, other key measures are being taken. Recommendations by the European Commission’s High-Level Expert Group aims to help “hardwire’’ the consideration of long-term material risks into the policies of all EU capital market players including banks, with specific ideas to incentivise green financing and lending recommended.
But as responsible investing has helped the transition to a low carbon economy gain steam, the banking sector has largely been dragging its heels, failing to put the proper social and environmental risk management framework in place. Opportunities are abundant for banks to play a leading role in catalysing sustainable finance’s growth. Now it’s up to banks to absorb the stakeholder feedback and strengthen frameworks such as the Equator Principles. Fully aligning with the UN Declaration on the Rights of Indigenous Peoples, the UN Guiding Principles on Business and Human Rights, and the Taskforce on Climate-related Financial Disclosures (TCFD) will go a long way to protecting indigenous rights, the environment and corporate projects from experiencing costly delays and disruptions. That would be a win for everyone.
Steven Heim is managing director of Boston Common Asset Management
Responsible banking Dakota Access Pipeline Standing Rock Keystone XL Trans Mountain Pipeline EP4 responsible investing