Introduction
Responsible financing plays a vital role in the financial services industry. Key components of responsible or sustainable financing include integrating environmental, social, and governance (ESG) factors into the financing decision-making process (Gelder & Kouwenhoven, 2013). The concept of sustainability within financial services emphasizes various dimensions. Globally, financial institutions are increasingly considering environmental and social factors when making financial decisions (Weber & Acheta, 2014). The motivation behind incorporating these factors is to ensure that financing policies are responsible. Gelder and Kouwenhoven (2013) suggest that "responsible financing policies should include clearly defined, verifiable criteria that financial institutions can use to assess proposed investments" (p.19).
One of the prominent responsible financing policies is the Equator Principles (EPs), which serve as benchmarks in the financial industry for assessing and managing environmental and social risks in project financing (Richardson, 2008). These principles are grounded in the International Finance Corporation (IFC) performance standards, advocating for the inclusion of environmental and social sustainability in project financing (Dupuy & Vinuales, 2013). The EPs are primarily adopted by private financial institutions engaged in project finance, known as Equator Principles Financial Institutions (EPFIs) (Weber & Acheta, 2014). However, the adoption of these principles by financial institutions is voluntary. Institutions that adopt the EPs demonstrate their commitment to adhering to social and environmental guidelines when making project financing decisions. Moreover, individuals or groups affected by projects financed through EPFIs have the right to raise grievances through the appropriate project-level grievance mechanisms. Issues that can be raised include information disclosure, consultation, and community engagement (Weber & Acheta, 2014). Thus, the EPs play a crucial role in promoting accountability among EPFIs.
This paper critically examines accountability, a key commitment of the EPs, among financial institutions to men and women as citizens in project financing. The analysis focuses on the social, environmental, and governance dimensions of accountability and evaluates the effectiveness of EPFIs in ensuring their operations are responsible and do not harm men and women as community members. The paper also explores the nature and focus of accountability, evaluating ex-post/ex-ante and vertical and horizontal dimensions.
Analysis
Social and Environmental Accountability to Citizens in Financing Projects
The rise of environmental and social standards in project finance has become a significant focus for major international financial institutions when making financing decisions (Putten, 2008). A key area of focus for these institutions is funding large infrastructure projects, which often target companies or borrowers planning to undertake such developments (Marco, 2011). These infrastructure projects are generally intended to improve societal welfare. However, there are instances where such projects have had negative impacts on communities.
To mitigate these negative effects, international financial institutions (IFIs) have developed various environmental and social standards. One factor contributing to increased negative effects is the failure of project owners to comply with set standards, often driven by a desire to maximize profits. Marco (2011) notes that "non-compliance results in serious social and environmental impacts that leave project-affected communities devastated and often without a legal remedy" (para. 2). Consequently, project owners may neglect their contractual obligations, leaving affected communities without access to remedies, which can negatively impact overall societal welfare.
In recognition of the need to protect communities from the negative effects of infrastructure projects, some countries, such as the United States, have incorporated the third-party-beneficiary theory into their contract law. This theory asserts that non-signatories to a project have the right to seek legal remedies, such as enforcing compliance with environmental and social issues, to safeguard community welfare (Marco, 2011). The importance of incorporating social and environmental dimensions as core aspects of accountability stems from the potential impact of these projects on the project owners' ability to repay loans (Weber & Acheta, 2014). Brennan and Mullerat (2011) argue that "at minimum, environmental problems can affect a borrower's ability to repay its loans as scheduled" (p.155). Such occurrences could lead to an increase in non-performing loans for financial institutions. Additionally, failing to conduct environmental and social assessments before funding projects can harm the reputation of financial institutions. Brennan and Mullerat (2011) suggest that financial institutions are increasingly concerned with the reputational risks associated with funding projects that result in negative environmental outcomes. Similarly, Bebbington, Unerman, and O'Dwyer (2014) emphasize that "banks are concerned not only for their public reputation among shareholders and customers but also for their reputation within the banking community."
Building Accountability Among Project Financiers and Borrowers
Projects involve multiple stakeholders, including financiers and borrowers (Biermann, Siebenhuner, & Schreyogg, 2009). Marco (2011) stresses that projects funded by EPFIs must be implemented in an environmentally and socially responsible manner. Therefore, financial institutions must ensure that their financing activities do not negatively impact local communities (Marco, 2011).
Accountability is a critical component of project financing, requiring institutions to monitor and evaluate how they fulfill their responsibilities (Schedler, 1999a). The World Bank (2004) defines accountability as "holding individuals and organizations responsible for performance measured as objectively as possible" (p.7).
One of the key elements of the Equator Principles is communication, highlighted under the principle of stakeholder engagement. Gelder and Kouwenhoven (2013) argue that financial institutions must establish clear communication channels with the individuals or communities affected by their financing activities. Similarly, Morca (2011) notes that "a project expected to have significant negative impacts must demonstrate to the satisfaction of the EPFI that it has sufficiently considered the concerns of the community" (p.465). One way financial institutions can be accountable to the community, as outlined in Principle 5, is by conducting free, prior, and informed consultations (Michalowski, 2014). Accountability also requires financiers to ensure that project owners or borrowers disclose the project's strategic environmental assessment and publicly outline the action plan for implementation. This information should be published promptly, for a reasonable duration, and in a language that is easily understandable (Michalowski, 2014). Sauvant (2012) adds that "local communities must be informed at all stages of the investment process, starting before negotiations commence and continuing until the end of the investment" (p. 596).
Despite the voluntary nature of implementing the Equator Principles, monitoring compliance with social and environmental aspects remains a significant challenge. Gelder and Kouwenhoven (2013) highlight that the extent to which financiers oversee, police, and enforce these aspects depends on the resources and staff of the EPFIs, leading to inconsistencies in monitoring compliance. Additionally, borrowers may fail to fulfill their promises to ensure that projects do not negatively impact the environment and society. Professor David B. Hunter points out that "because well-recognized internal incentives tend to favor lending, [financial institution] project staff frequently view environmental and social concerns as impediments to their development role" (Morca, 2011).
Case Studies
The Standard Chartered Bank, for example, has integrated responsible project financing to promote economic growth. One such project funded by the bank was the construction of the Barakah nuclear power plant in the United Arab Emirates (Reuters, 2013). Despite not being directly involved in project implementation, Standard Chartered had an obligation to conduct extensive environmental and social assessments to identify potential risks. The bank acknowledges the "nuclear energy industry's potential safety, environmental, and social challenges, some of which may include long-lasting adverse consequences of nuclear accidents on the environment, communities, and economies" (Standard Chartered, 2016, p.2). This demonstrates the bank's commitment to safeguarding societal welfare in financing large infrastructure projects.
A notable case of insufficient accountability involves the Theun-Hinboun Expansion Project in Laos, which involved constructing a dam and water diversion. The project, funded by three EPFIs, began in 2008 (Boer et al., 2015). Due to inadequate environmental and social assessments, the project caused significant harm, including the destruction of local fisheries, riverbank erosion, and the displacement of over 4,186 indigenous people. Additionally, the livelihoods of over 51,441 people living downstream were negatively affected (Marco, 2011). A survey revealed extensive violations of the Equator Principles, such as the failure to establish a monitoring mechanism and the lack of resettlement alternatives for displaced persons.
Another example is the construction of a hydroelectric dam on the Madeira River, a major Amazon tributary in Brazil. Funded by Spain's Banco Santander, an EPFI, the project failed to provide or obtain free, prior, and informed consent from local communities (Marco, 2011). Scherer and Palazzo (2008) emphasize that transparency is a key element of accountability, requiring organizations to be clear in their roles and responsibilities. The project led to significant environmental damage, including deforestation and the killing of over 11 tons of fish. Socially, the project caused an increase in violence in the area, driven by the influx of money and immigration due to employment opportunities (Marco, 2011).
These cases underscore the importance of accountability between financiers and borrowers during project conception and implementation to minimize negative social and environmental impacts. However, due to the voluntary nature of the Equator Principles, non-compliance among borrowers and financiers is relatively common, as evidenced by these case studies.
Despite this gap, affected communities have the opportunity to seek remedies under the third-party-beneficiary theory, which allows non-signatories to a project to raise concerns through established grievance mechanisms. Leader and Ong (2011) assert that project financiers and borrowers must establish grievance mechanisms accessible to all individuals and communities affected by the project. For instance, in the case of the Theun-Hinboun Expansion Project, affected parties could seek redress under Laotian law, which mandates compensation
