A/HRC/4/99
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26.
Project finance is a particular method of funding in which the lender looks primarily to
the revenues generated by a single project, both as a source of repayment and as security for the
exposure. Project finance has been the focus of much discussion about human rights issues in
the financial sector because of its allegedly high correlation with human rights abuses, despite
the fact that it represents only a small percentage of total global lending and an even smaller
percentage of the activities of the sector as a whole.
27.
In June 2003, the Equator Principles (the Principles) were adopted by financial
institutions as a banking industry framework for addressing environmental and social risks in
project financing. Signatory institutions agree to incorporate social and environmental concerns
into their internal credit risk procedures and to require borrowers to observe standards as a
condition for lending. The Principles have now been adopted by over 40 institutions
representing more than 80 per cent of global private project finance capacity. Following the
adoption of a new version of the IFC Safeguard Policies on which the Principles are based, a
revised set of Principles were released in July 2006.
Panellist presentations
28.
Motoko Aizawa (Head, Policy and Standards Unit, Environmental and Social
Development Department, International Finance Corporation) outlined how the International
Finance Corporation (IFC) supports human rights through project finance. The IFC commits to
addressing human rights in its sustainability policy framework and has an exclusion list that
screens out investments in sectors such as arms and tobacco. The IFC Performance Standards
identify areas of risk in environmental and social development, with specific requirements on
avoiding, mitigating, minimizing or compensating for adverse impacts in areas such as labour,
use of security forces, indigenous peoples and cultural property. Ms. Aizawa explained that the
Performance Standards do not make borrowers directly responsible for international human
rights standards, in part because these refer to State obligations. Ms. Aizawa shared an example
of how the IFC would investigate labour issues: the project team uses country and sector screens
to flag potential risks; questions are posed to the client using a sector-specific questionnaire,
beginning a process of engagement that may include a site visit/labour audit, and will eventually
lead to a corrective action plan that is included in the loan agreement and monitored, in some
cases with third party verification. Ms. Aizawa said that in project finance the most critical issue
is the willingness of lenders to engage with clients, ask questions, demand that problems be
corrected, and offer support to the borrower to improve the situation.
29.
Robert Tacon (head of risk reporting, Group Risk Management and Reporting, Standard
Chartered Bank) explained that financial institutions which adopt the Equator Principles are
expected to embed these principles into their organizations through policies and procedures. The
Equator Principles is not an organization itself; there is no collective monitoring of FIs who have
adopted the Principles by a central management body. He noted that while in most cases project
finance accounts for a very small percentage of the asset base of an FI which has signed up to the
Principles, such projects can account for a disproportionate level of human rights concerns.
Mr. Tacon said that while FIs which have signed up to the Principles account for a significant
proportion of the financing of major projects, local and regional banks are increasingly entering
the market. FIs do not have expertise in environmental and social issues and therefore have to
rely on external advice, which is often contradictory. For example, at what point should an FI be
comfortable that the human rights issues in a project have been adequately addressed: when,
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