The Impact of the Equator Principles on Lender Liability: Risks of Responsible Lending

Abstract

With great power comes great responsibility. Although the world's leading financial institutions are unlikely to be mistaken for superheroes, they would do well to remember that maxim as they rush to cast themselves as champions of sustainable development. Leading lenders have been quick to adopt the Equator Principles, a voluntary set of environmental and social guidelines applicable to their project finance activities. By adopting more responsible lending practices, however, lenders increase their control over project activities, potentially exposing themselves to greater liability risks.

Part I of the paper sets forth the content of the Equator Principles and their impact on the operations of lenders that adopt them - called Equator Principles Financial Institutions ("EPFIs"). Part II outlines the current scope of lender liability for environmental damage and describes how the steps EPFIs take to protect their project investments generate liability risks. Part III surveys existing methods for holding lenders accountable for their projects' social and economic harms and explains why EPFIs are prime targets for such liability. The paper concludes with reflections on the Principles endeavor and the evolving liability risks that accompany sustainable financing.

Keywords: lender liability, Equator Principles, project finance, international finance, sustainable development, banking, bank liability, World Bank, IFC