d o i 1 0 . 1 3 5 0 / e n l r . 2 0 1 4 . 1 6 . 2 .

2 0 8

Changing the Face of Sustainable Development

in Developing Countries: The Role of the
International Finance Corporation
Adebola Adeyemi*

Keywords: environment, Equator Principles, International Finance Corporation,

Performance Standards, project finance, sustainable development

Abstract: Different regulatory instruments have sought to promote sustainable development,

most especially the integration of social and economic concerns in development activities.
Multilateral Development Banks (MDBs) have taken it upon themselves to promote
sustainable development practices by designing guidelines for their project financing
activities and promoting sustainable financing practice through their clients. This approach
ensures that the people affected by a project are better off as a result of its construction
and operation. This article investigates the extent to which the International Finance
Corporation (IFC) guidelines are ensuring the diffusion of sustainable development practices
in developing countries. The article discusses the updated provisions contained in the IFC’s
2012 Performance Standards in relation to the promotion of sustainable development and
considers the critique and the impact of commercial bank project financing activities and
their effect on promoting sustainable development. The article concludes that the guidelines
of the IFC provide an important framework for promoting sustainable development practices
in developing countries.

1 INTRODUCTION
Concern about the environment is not new. From the UN Global Compact to the Earth
Summit of 1992, publicity and action have been directed to combat poverty, diseases,
environmental degradation and climate change. An interesting approach to dealing
with these challenges is the concept of sustainable development. A focus on the adverse
impacts of financed projects provides an entry point for financiers to promote sustainable
financing practice through their clients. By engaging with their clients, financiers aim to
mitigate the adverse social and environmental impacts of their financing activities.

The article analyses the guidelines of the International Finance Corporation (IFC) in the
area of sustainable development and investigates the extent to which these guidelines are
ensuring the diffusion of sustainable development practices through the IFC’s engagement
with its private sector clients.1 First, the article considers the concept of sustainable devel-
opment and the reason for its adoption by Multilateral Development Banks (MDBs), in

* Adebola Adeyemi, Doctoral Researcher, School of Law, Swansea University, UK. E-mail: a.a.adeyemi.587730@
swansea.ac.uk. An earlier version of this article was presented at the Conference on Financial Globalisa-
tion and Sustainable Finance: Implications for Policy and Practice, Cape Town, South Africa, 29–31 May
2013. I would like to thank the participants at this conference for their feedback. I would also like to thank
Dr Victoria Jenkins (Swansea University) and the anonymous reviewers for their invaluable comments on
earlier drafts of the article. Any errors are mine.
1 The word ‘client’ means the recipient of finance or the party responsible for implementing and operating a
financed project.
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this case the IFC. Second, the article investigates the role of the IFC in the promotion and
diffusion of sustainable development practices. Specifically, the article considers the IFC’s
Sustainability Framework 2012 which consists of Policy and Performance Standards
on Environmental and Social Sustainability (Performance Standards) and a Policy on
Access to Information.2 The article concentrates on the Performance Standards. This is
particularly important given the changes between the 2012 and the 2006 Performance
Standards. Third, the article considers the impact of commercial bank project financing
activities and its effect in promoting sustainable development. The article concludes by
urging that the guidelines of the IFC should be used to provide an important framework
for promoting sustainable development practices in developing countries.

2 THE CONCEPT OF SUSTAINABLE DEVELOPMENT

The concept of sustainable development had begun to take shape at the Stockholm
Conference in 1972, but it was not until the Report of the World Commission on Envi-
ronment and Development 1987 (the Brundtland Commission) that the concept was
introduced into mainstream discourse. It is assumed that sustainable development will
enhance global integration of social, environmental and economic aspects thereby allevi-
ating developmental challenges facing developing countries. The Brundtland Commission
published Our Common Future in 1987.3 This laid the groundwork and provided
support for expanding the role of sustainable development while also identifying the
legal and institutional challenges requiring immediate response. On policy matters, the
commission focused on a number of issues including population, energy, food, human
settlements, environment etc., stating that these issues are connected and calling for a
holistic approach to surmount the problems.

The Brundtland Commission defined sustainable development as ‘development which

meets the needs of the present generation without compromising the ability of future gen-
erations to meet their own needs’.4 According to Our Common Future, the basic political
problem which it had to surmount was how to reconcile concern for environmental
protection with the desire for economic development by developing countries and con-
solidating economic growth in developed countries. This was quite important as many
developing countries had argued that environmental issues were a luxury for the poor at
the UN Conference on the Human Environment held in Stockholm 15 years earlier.5 The
Stockholm Declaration recognised this nexus between environmental protection and the
concerns of developing countries.6 It called for the integration of environmental concerns
in developmental decision-making and acknowledged that the pursuit of socioeconomic
development and the alleviation of poverty are the overriding priorities of developing
countries.7 The Brundtland Commission drew on this and urged for the development of
policies designed to link social and environmental aspects in economic activities.

2 IFC Sustainability Framework (2012). Available at: www1.ifc.org/wps/wcm/connect/115482804a0255db96f

bffd1a5d13d27/PS_English_2012_Full-Document.pdf?MOD=AJPERES
3 World Commission on Environment and Development, Our Common Future (Oxford University Press:
Oxford, 1987).
4 Ibid. at 8.
5 Stockholm Declaration on the Human Environment, UN Doc A/CONF.48/14, 11 I.L.M. 1461 (1972).
6 P. Birnie, A. Boyle and C. Redgwell, International Law and the Environment, 3rd edn (Oxford University
Press: Oxford, 2009) 38.
7 See Stockholm Declaration, above n. 5, Principle 13.
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The sustainability debate has progressed from Stockholm to Rio de Janeiro to Johan-
nesburg, with several reports and proposals emanating from these conferences.8 The
follow-up to the Stockholm conference held in Rio de Janeiro, was known as the ‘Earth
Summit’. This produced a number of agreements: the Rio Declaration on Environment
and Development, the Framework Convention on Climate Change, and Agenda 21.9 The
Earth Summit was successful in directing the mind of the public towards the challenging
issues on environment and development but failed in its wider objective of reaching a
global consensus on issues such as climate change and deforestation.

Although the Rio Declaration could be regarded as non-binding, it was expressed mainly
in obligatory terms with the use of the word ‘shall’ to introduce a host of its 27 provisions.
It attempts to achieve a balance between the environment and development. The anthro-
pocentric approach to environmental and development issues provides that human
beings are at the centre of concerns for sustainable development. While Principle 2 of the
Rio Declaration affirmed the sovereign rights of states to exploit resources according to
their environmental and development policies, in Principle 3, development was endorsed
as a right to which countries should aspire.10 Although there are doubts as to the legal and
economic status of a right to development, its inclusion in the Rio Declaration represents
a step forward for developing countries which have advocated that they should be free to
pursue economic growth on their own terms.

Sustainable development contains both substantive and procedural elements. The sub-
stantive elements are mainly set out in Principles 3 to 8 of the Rio Declaration. They
include the sustainable utilisation of natural resources; the right to development; the
integration of environmental protection and economic development; and the pursuit of
equity in the allocation of resources both within the present generation and between
present and future generations.11 Owing to the diverse nature of the concept of sustain-
able development, this article is restricted to an evaluation of the integration of social and
environmental considerations into economic and other development plans.

2.1 THE PRINCIPLE OF INTEGRATION

Principle 4 of the Rio Declaration is couched to ensure that development decisions are
balanced with environmental considerations. Specifically, Principle 4 provides that ‘envi-
ronmental protection shall constitute an integral part of the development process and
cannot be considered in isolation from it’.12 The importance of integration permeates
the Rio Declaration, as well as Agenda 21.13 It is, however, important to state here that
Principle 4 has had a more profound impact on developing countries – where environ-
mental considerations have historically been more prominent in development planning
– and in the practice of international development agencies.14

8 M. Grubb, M. Koch, A. Munson, F. Sullivan and K. Thompson, The Earth Summit Agreements: A Guide and
Assessment (Earthscan: London, 1993).
9 United Nations Conference on Environment and Development, UN Doc A/CONF.151/26/Rev.1 (1992) ILM
874.
10 Rio Declaration on Environment and Development, UN Doc A/CONF.151/6/Rev.1 (1992).
11 See Birnie et al. above n. 6 at 116.
12 See Rio Declaration, above n. 10.
13 See Agenda 21, above n. 9.
14 World Bank, Developing Countries: World Bank List of Economies (2007); available at: http://siteresources.
worldbank.org/DATASTATISTICS/Resources/CLASS.XLS; OECD, ‘Development Assistance Committee’s
List of Recipients of Official Development Assistance’; available at: www.oecd.org/dac/stats/daclist; United
Nations Development Programme ‘2007–2008 Human Development Index Rankings’; available at: http://
hdr.undp.org/en/statistics/
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The need to ‘integrate’ is fundamental to the concept of sustainable development and has
implications across a broad range of national and international policy requirements, as
can be seen from Agenda 21, which encourages an all-inclusive approach to considering
other factors such as economic, social, fiscal, energy, trade and development policies,
which may affect, or are capable of affecting, environmental values. The principle of
integration advances the fact that development should be undertaken in a way that takes
account of social, environmental and economic aspects.15 The integration principle has
greatly influenced the direction of the policies and standards of MDBs in advancing sus-
tainable development.

3 THE ROLE OF BANKS IN PROMOTING SUSTAINABLE

DEVELOPMENT
Debates about the ineffectiveness of traditional policy instruments as a veritable means of
ensuring sustainable development has led to an investigation of the role which financial
institutions can play in promoting sustainable development.16 One of the most useful
ways to promote sustainable development in developing countries is by attempting to
incorporate social and environmental concerns into development activities. MDBs and
private financiers are acutely aware of the negative impacts which may be occasioned as
a result of financing activities and have developed policies and guidelines to minimise the
social and environmental impacts of these activities.

Guidelines developed by MDBs are capable of constituting a standard or reference for

their private sector partners.17 MDBs are in a better position to provide guarantees,
political risk insurance and financial structuring advice (that is, securitisation, project
or corporate finance) to their clients because of their status. The IFC is mandated by
its establishment articles to provide financing directly to private sector companies or
projects in developing countries and has developed ongoing financial relationships with
the public and private sector.18 As a result, the bank enjoys a strong operational relation-
ship with commercial banks and is able to diffuse its policies and guidelines, which go on
to influence and shape corporate practices in its countries of operation.19 The IFC’s Per-
formance Standards are instructive in this regard as they seek to promote the integration
of social and environmental aspects into financing activities, particularly in developing
countries.20

15 C. Segger and A. Khalfan, Sustainable Development Law: Principles, Practices and Prospects (Oxford
University Press: Oxford, 2004) 106.
16 N. Gunningham and P. Gabrosky, Smart Regulation: Designing Environmental Policy (Clarendon Press:
Oxford, 1998).
17 P. Muchlinski, ‘Human Rights, Social Responsibility and the Regulation of International Business: The
Development of International Standards by Intergovernmental Organisations’ (2003) 3 Non State Actors
and International Law 23.
18 IFC Articles of Agreement, amended through 2012, Article 1. Available at: http://www1.ifc.org/wps/wcm/con
nect/1c95b500484cb68d9f3dbf5f4fc3f18b/IFC_Articles_of_Agreement.pdf?MOD=AJPERES.
19 C. Wright, ‘Setting Standards for Responsible Banking: Examining the Role of the International Finance
Corporation in the Emergence of the Equator Principles’, in F. Biermann, B. Siebenhüner and A. Schreyrogg,
(eds), International Organizations and Global Environmental Governance (Routledge: London, 2007) 1.
20 P. Utting, ‘Rethinking Business Regulation: From Self-Regulation to Social Control’, Technology, Business,
Society Programme Paper No. 15, United Nations Research Institute for Social Development (UNRISD,
2005).
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3.1 THE IFC AND ITS FINANCING OPERATIONS

The IFC is one of five institutions making up the World Bank Group and operates as its
private sector lending arm.21 It has extensive experience in project finance, including the
application of sustainability standards.22 In 1956, separate Articles of Agreement were
drafted for the IFC, with a mandate to promote private sector development by financing
the establishment or expansion of productive private enterprises which would contribute
to development.23 Its financing activities in developing countries consist of long-term
project loans, equity stakes in financial institutions and other private companies, partial
credit guarantees to help clients access additional long-term capital, and technical
assistance in the form of staff training, capacity building and corporate restructuring.24

Among MDBs, the IFC has, over the years, become the largest source of loan and equity
financing to the private sector in developing countries. It has invested over $96 billion
since 1956.25 This means the institution can exert some influence over the behaviour of its
clients. The IFC identifies, evaluates, negotiates and closes financially viable investment
projects akin to commercial banks. Its organisational and business structure is similar to
that of commercial banks and, to this end, its investment decisions are based primarily on
financial viability. Indeed, the ability of a project to deliver economic returns is considered
a prerequisite for the IFC to provide financial or technical support.26

Although the IFC remains devoted to its original purpose of mobilising financial resources
in support of financially viable private sector projects in developing countries, the insti-
tution increasingly seeks to mitigate the adverse effects of its financing activities.27 This
means that in deciding to finance a project, the IFC considers profitability and possible
adverse impacts of the project using its Performance Standards which address issues such
as social and environmental impact assessment, natural resource conservation, involun-
tary resettlement, indigenous peoples, labour and so on.28 Moreover, with the growth of
private financing, the IFC is able to influence its private sector partners by performing an
underwriting role.

3.2 INTERNAL AND EXTERNAL PRESSURES FOR CHANGE

Since the 1990s, international financial institutions have tried to incorporate sustainable
development practices into their financing criteria.29 The IFC was established in 1956, but
it was not until 1990 that it first acknowledged the environmental impacts of its activi-
ties.30 The IFC first made clear its plans for committing to sustainability in its ‘Strategic

21 The others are the International Bank for Reconstruction and Development (IBRD), the International
Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the Interna-
tional Centre for Settlement of Investment Disputes (ICSID).
22 B. Richardson, ‘Financing Sustainability: The New Transnational Governance of Socially Responsi-
ble Investment’ (2007) 17 Yearbook of International Environmental Law 73, 89.
23 See IFC, Articles of Agreement, above n. 18.
24 IFC, Annual Report (IFC: Washington DC, 2005).
25 IFC, Global Mining (IFC World Bank Group, 2012) 3.
26 A. Jaabre, ‘Update on IFC Financing’, in S. Lazarus, (ed.), IFC and its Role in Globalization – Highlights from
IFC’s Participants Meeting (IFC: Washington DC, 2002) 37–42.
27 See Wright, above n. 19 at 10.
28 See IFC, above n. 2.
29 A. Kiss and D. Shelton, International Environmental Law, 3rd edn (Transnational Publishers: New York,
2004) 153.
30 E. Morgera, Corporate Accountability in International Environmental Law, (Oxford University Press: Oxford,
2009) 147.
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Directions’ paper approved by the Board in May 2001. This noted a move towards a triple
bottom line approach, measuring people, planet and profits.31

As sustainable development started to take hold only after the establishment of most
MDBs, the institutions have had to develop their policies in line with the spirit of sus-
tainable development to minimise the adverse effects of their financing activities.32 Oren
Perez notes that it was the external pressures for reform (in the form of environmental
campaigns in the 1980s) which changed the orientation of the World Bank Group towards
sustainable development.33

The IFC’s journey towards increased accountability began as a result of its involvement
in the Chilean hydropower project in 1995. The institution was criticised by NGOs for
failing to employ the World Bank’s environmental and social policies when assessing the
hydropower project.34 In response to this criticism, the IFC formally adopted most of the
World Bank’s Environmental and Social Safeguard Policies (ESSAP) in 1998.35 The main
element of the ESSAP was the Operational Policy on Environmental Assessment (OP 4.01),
which listed environmental screening, public consultation, information disclosure and
implementation requirements, and identified the World Bank’s Pollution Prevention and
Abatement Handbook (PPAH) and Occupational Health and Safety Guidelines (OHSG) as
benchmarks for private sector projects.36

Although the adoption of the World Bank ESSAP was a step in the right direction, the
policies were not effectively streamlined into the IFC’s core business – financing the private
sector.37 In 2006, the IFC designed and adopted its own Sustainability Framework which
includes a Policy and Performance Standards on Social and Environmental Sustaina-
bility (Performance Standards). This contains the organisation’s commitment to social
and environmental sustainability and a policy on Access to Information.38 The Perfor-
mance Standards demonstrate the IFC’s commitment to sustainability by advising clients
on ways to deal with adverse social and environmental aspects arising from financed
projects.39

However, the 2006 Sustainability Framework has been replaced by the 2012 Sustainabil-
ity Framework, which also includes the Performance Standards and a Policy on Access to

31 IFC/Compliance Ombudsman Advisor, A Review of IFC’s Safeguard Policies. Core Business: Achieving
Consistent and Excellent Environmental and Social Outcomes (IFC: New York, 2013) 13.
32 A. Suerda, ‘The Law Applicable to the Activities of International Development Banks’ (2004) 308 Recueil des
Cours 1, 123–127.
33 O. Perez, The New Universe of Green Finance: From Self Regulation to Multi Polar Governance, Working
Paper No. 07-3 (Bar-Ilan University, Faculty of Law, 2007); D. Nielsen and M. Tierney, ‘Delegation to Inter-
national Organisations: Agency Theory and World Bank Environmental Reform’ (2003) 57 International
Organisations 241.
34 S. Park, ‘Becoming Green: The World Bank Group, Norm Diffusion and Transnational Environmental
Advocacy Networks’, in D. Stone and C. Wright (eds), The World Bank and Governance: A Decade of Reform
and Reaction, CSGR Series in Globalisation and Regionalisation, (Routledge: London, 2006).
35 J. Hair, B. Dysart, L. Danielson and A. Rubaleava, Pangue Hydroelectric Project (Chile): An Independent Review
of the International Finance Corporation’s Compliance with Applicable World Bank Group Environment and
Social Requirements (IFC Internal Document, World Bank: Santiago, 1997); IFC, The Environmental and
Social Challenges of Private Sector Projects (IFC: Washington DC, 2002).
36 See Wright, above n. 19 at 6.
37 IFC/CAO, ‘A Review of IFCs Safeguard Policies’ (2003). Available at: www.cao-ombudsman.org/howwework/
advisor/documents/ReviewofIFCSPsfinalreportenglish04-03-03.pdf, 7.
38 IFC Sustainability Framework (2006). Available at: www1.ifc.org/wps/wcm/connect/Topics_Ext_Content/
IFC_External_Corporate_Site/IFC+Sustainability/Sustainability+Framework/Sustainability+Framew
ork+-+2006/.
39 See Park, above n. 34; IFC, above n. 37.
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Information.40 The 2012 Performance Standards contain eight principles which provide
guidance to clients on the management of social and environmental risks and impacts
to enhance development opportunities. With the Performance Standards providing for
management of environmental and social risk,41 pollution prevention,42 community health
and safety43 etc, they seamlessly align with existing international standards designed to
promote sustainable development.

3.3 IFC PERFORMANCE STANDARDS 2012

This section highlights the effect of the changes between the 2006 Performance Standards
and the 2012 Performance Standards. For individuals or communities adversely affected
by a project, the Performance Standards are the benchmark for holding the IFC and
its clients accountable. The IFC utilises the Performance Standards as a framework
for increasing the overall sustainability of its clients’ activities and enhancing develop-
ment outcomes in areas of operation. The IFC updated its Performance Standards on
1 January 2012. These replace the 2006 Performance Standards, so all projects imple-
mented after that date must comply with the 2012 Standards. IFC clients and project
borrowing from institutions whose guidelines are comparable with the Performance
Standards are affected by this update. Specifically, the Equator Principles (EPs), which
are based on the framework of the Performance Standards, are affected by this change.
This section considers Performance Standards 1, 2, 3 and 7 as these provisions contain
the most important changes.

3.3.1 Performance Standard 1: Assessment and management of environmental and social risks
and impacts
The Performance Standards provide guidance to clients on identifying risks and impacts
and advice on how to avoid, mitigate and manage these risks and impacts.44 The IFC
describes social and environmental risk as the probability of the occurrence of certain
hazards and the severity of impacts resulting from the occurrence. Environmental and
social impacts are changes to the physical, natural or cultural environment and the
impact on surrounding communities and workers resulting from the business activity
to be supported.45 Performance Standard 1 identifies the management of environmental
and social risk as an important factor in ensuring good financial, social and environmen-
tal outcomes.46

The 2006 Performance Standards expect the private sector to implement Environmen-
tal Management Systems (EMS) to manage environmental risks and impact from the
early stages of the project. The 2012 Performance Standards call for the implementation
of an effective Environmental Social and Management System (ESMS) and a redirec-
tion from minimal community engagement to community consultation. The ESMS is a
process involving interaction between the client, its workers, local communities and other
stakeholders. In managing risk, an effective ESMS involves a methodological approach
taking into account the nature, scope and possible negative impacts of a project. The
ESMS contains the following seven elements: policy; identification of risks and impact;
management programmes; organisational capacity and competence; emergency prepar-

40 See IFC, above n. 2.

41 Ibid. at Performance Standard 1.
42 Ibid. at Performance Standard 3.
43 Ibid. at Performance Standard 4.
44 Ibid. at 14.
45 Ibid. at n. 3.
46 Ibid. at 16.
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edness and response; stakeholder engagement; and monitoring and review.47 This aspect
applies to all the provisions of the Performance Standards and is similar to other interna-
tional frameworks on environmental and social management (for example, the ISO 9001
and the 14001 initiative).

The 2012 Performance Standards provide wider and increased stakeholder engagement
with those who are either affected or who may have an interest in the project. It calls for
community consultation and engagement with all relevant stakeholders during the design,
implementation, operating and closing phase of the project. Specifically, Performance
Standard 1 provides that the client should take account of the needs of other stakeholders
not directly affected by the project but who may have an interest in it. Groups not directly
affected but with interests in a project include national and local governments, NGOs,
and other neighbouring projects.48 The guidance notes describe stakeholders in a very
wide sense. They include: people or groups directly or indirectly affected by a project;
persons or groups with an interest in the project; and persons or groups with the potential
to influence project outcomes.49

3.3.2 Performance Standard 2: Labour and working conditions

IFC clients face an increased responsibility to identify and rectify risks of project partici-
pants using child labour in the project’s primary supply chain. Clients are also expected to
monitor the general health of their workers and pay particular attention to the health of
women and workers under the age of 18. Clients are expected to investigate their primary
suppliers and seek to remedy, or stop doing business with, suppliers whose operation
degrades critical habitats and ecosystems. Primary suppliers are those who provide goods
or materials essential for the core business processes of the project.50

3.3.3 Performance Standard 3: Pollution and the environment

In relation to pollution prevention, demanding requirements are contained in the 2012
Performance Standards as a result of the increasing danger posed by climate change. The
2012 Performance Standards are couched in such a way that the commercial feasibility
of a project is to be less of a consideration than the prevention of negative impacts of a
project. Further, it requires the use of less hazardous substitutes where environmentally
hazardous materials are used. The 2012 Performance Standards provide that where waste
cannot be recycled, it ought to be disposed of in an environmentally responsible manner.

Performance Standard 3 requires that clients quantify direct emissions from facilities
within the project site and indirect emissions associated with the production of energy
consumed by the project. This is to be done in accordance with national and interna-
tionally recognised methodologies provided by the Intergovernmental Panel on Climate
Change or host countries.51 This annual quantification exercise is required for emissions
above 25,000 tonnes of CO2. This is 100,000 tonnes under the previous Performance
Standards, making climate change mitigation a direct challenge for clients.52

47 IFC, Assessment and Management of Environmental and Social Risks and Impacts, Guidance Note 1 (IFC/
World Bank Group: Washington DC, 2012) 3.
48 IFC, above n. 2 at 16.
49 See IFC, above n. 47 at 41.
50 IFC, above n. 2 at 24.
51 Ibid. at 30.
52 See IFC, above n. 38 at paras 10–11.
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3.3.4 Performance Standard 7: Indigenous peoples

The IFC recognises that indigenous peoples are amongst the most vulnerable segments of
the population. They usually feel the effects of development activities far more than other
groups as they are especially limited in their capacity to defend their economic, social and
legal rights.53 The 2012 Performance Standards require the design and implementation of
a Livelihood Restoration Plan for communities affected by involuntary resettlement. This
should be implemented in a transparent and consistent manner. Also, it requires the Free
Prior Informed Consent (FPIC) of the affected indigenous people to the project design,
implementation and effects. The Performance Standards do not contain a definition for
FPIC, but provide that the client should engage with indigenous groups in good faith.
The client is also expected to hire competent professionals to determine the impact on
indigenous people.

The 2012 Performance Standards go further than those of 2006 by providing for gender
inclusion. Performance Standard 7 provides that the assessment of land and the use of
natural resources should take into account gender differences, making provision for
the role of women.54 IFC clients are expected to assess the extent to which resettlement
may be likely to impact on women’s economic and social development. Clients are also
expected to ensure that development projects do not negatively impact on the property
rights, working conditions and economic development of women.55

4. PROMOTING SUSTAINABLE DEVELOPMENT THROUGH

PROJECT FINANCE: THE ROLE OF COMMERCIAL BANKS
4.1 PROJECT FINANCE
Project finance can take a number of forms depending on the legal and financing
structure adopted by project participants. Project finance is generally described as a
lending method for the development or exploitation of a right or an asset whereby the
lender relies primarily on the revenues generated from such development or exploitation
as the source of repayment for both the original loan, as well as the security for the initial
capital exposure.56 This project is usually run by a Special Purpose Entity (SPE) (that is,
a project company established by the borrowing company, usually a Multinational Cor-
poration (MNC)).57 Under this type of arrangement, the SPE is not permitted to perform
any function other than developing, owning and operating the installation.

The consequence of this type of financing is that repayment of the project finance loan
depends primarily on the SPE’s cash flow and on the collateral value of its assets and not
the assets of the investing MNC that established the SPE. Owing to the limited recourse
nature of the project finance loan, banks have a stake in the SPE’s financial performance.58
This stake provides financial and reputational incentive to the bank to ensure that social
and environmental risk of the proposed project is considered and lessened where appro-
priate. As project financing is often used outside the world’s developed economies and

53 IFC, above n. 2 at 47; Performance Standard 7, para. 1.

54 Ibid. at 49; Ibid. at para. 14.
55 Ibid. at 49; Performance Standard 7.
56 See G. Vinter, Project Finance: A Legal Guide, 2nd edn (Sweet and Maxwell: London, 1998) xxxi.
57 See Basel Committee on Banking Supervision, International Convergence of Capital Measurement and
Capital Standards (Basel II), November 2005. Available at: www.bis.org/publ/bcbs118.pdf.
58 See Vinter, above n. 56 at 111.
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legal systems, it is not uncommon for the project documentation to form the principal
legal framework for the transaction.59

4.2 PROJECT FINANCE AND THE RISE OF COMMERCIAL BANKS

Commercial banks are important players in arranging project finance deals and are an
invaluable source of funds. The banks provide the requisite funds singularly, jointly with
other commercial banks or in conjunction with the IFC. Private sector involvement in
project finance in developing countries increased rapidly in the early 1990s as a result of
the widespread privatisation of traditional public sector industries, the harmonisation of
tax regimes and lower restrictions on foreign capital.60 From 1990 to 1997, the volume of
private financing deals in developing countries increased dramatically from less than $5
billion to over $50 billion.61 This increase was driven by commercial banks from countries
such as Japan, the USA, France, Germany, the Netherlands and the UK, and accounted for
roughly three-quarters of all commercial infrastructure finance in developing countries.62
For instance, in its Citizenship Report, Barclays listed active projects and the jurisdic-
tion where these projects are located. The bank was involved in 21, 2, 2, and 0 project
financing transactions in Africa, the Middle East, the United States and Europe respec-
tively.63 This underlines the growth of private financing and the critical role played by
commercial banks in mobilising finance to execute projects in high-risk regions individu-
ally or by way of loan syndications.64 Within the same period there was a significant fall
in financing from official sources (for example, the World Bank and the IFC).65

Despite the fall in development bank financing, MDB participation in a development

project is important as it is better placed to mitigate political risk.66 MDB interaction
with governments and institutions in developing countries places it in a better position
to provide political risk guarantees compared with commercial banks. For instance, a
development bank is able to use the leverage stemming from its special status and from
its repeated interactions with the government to negotiate favourable policies.

4.3 ADOPTING THE EQUATOR PRINCIPLES TO PROMOTE SUSTAINABILITY IN

PROJECT FINANCE
It is important to highlight the factors that led financiers to integrate sustainability aspects
in their financing decisions. For instance, ABN AMRO was targeted by the Dutch Chapter
of Friends of the Earth for financing the large-scale conversion of Indonesian forests into
oil palm plantations without carrying out substantive social and environmental impact
assessments67 while Barclays was criticised for its involvement in the large-scale forestry

59 Ibid. at 21.
60 See Wright, above n. 19 at 5.
61 B. Esty, ‘Why Study Large Projects? An Introduction to Research on Project Finance’ (2004) 10 European
Financial Management 213–224.
62 Wright, above n. 19 at 5.
63 Barclays Citizenship Report (2011) Available at: http://reports.barclays.com/cr11/servicepages/downloads/
files/risk_in_lending_barclays_cr2011.pdf.
64 World Bank, Global Development Finance (Washington DC: The World Bank, 2004).
65 From 1991 to 1997 long-term financing from official sources fell to nearly 40 per cent. Above n. 35.
66 IFC, Financial Institutions: Lessons of Experience (IFC/World Bank Group: Washington DC, 1998) 62;
E. Kaynak and J. Baker, International Business Expansion into Less Developed Countries (Routledge: New
York, 2012) Ch 3.
67 Friends of the Earth, Greasy Palms: The Social and Ecological Impacts of Large-Scale Oil Palm Plantation
Development in Southeast Asia (2005). Available at: www.foe.co.uk/resource/reports/greasy_palms_impacts.
pdf.
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projects of Asia Pulp and Paper.68 In these and numerous other cases, public campaigners
alleged that financiers bore some responsibility for the adverse impact of their financing
activities and demanded that financiers directly confront irresponsible or negligent
borrowers to ensure that funds are not used to execute projects with adverse social and
environmental impacts.69

In October 2002, a meeting of project finance banks was arranged by ABN AMRO and the
IFC to discuss the negative impacts of social and environmental aspects in project finance.
Commercial banks, including Citigroup, ABN AMRO, Barclays Bank, WestLB, together
with the IFC, presented case studies on past projects which had attracted controversy
because of negative social and environmental impacts. These four banks assumed the
burden of drafting what were to become the Equator Principles (EPs), with the IFC acting
as technical adviser.70 The commercial banks then went ahead to employ the normative
framework of the IFC’s Performance Standards as the basis for the EPs.71

The EPs are a benchmark for assessing and managing social and environmental risks
in projects.72 The depth of financier commitment to the EPs is evidenced by their will-
ingness to lose potential profits by withdrawing from projects that fail to meet the
requirements established by the EPs. The preamble to the EPs provides that signatories
will neither advise on nor finance projects unless they reflect sound social and environ-
mental practices.73

Although the EPs are drafted mainly in procedural form, they contain many substantive
requirements through the incorporation, by reference, of the Performance Standards.74
It is important to state here that the primary reason for basing the EPs on the IFC’s Per-
formance Standards is the fact that the EPs would immediately gain recognition and
legitimacy from private financing institutions.75 This was as a result of the IFCs relation-
ship with commercial banks and its unparalleled expertise in project-financing activities.
This prior familiarity provided a strong rationale for basing the EPs on the Performance
Standards. Although the IFC has less financial clout compared with large commercial
banks, it occupies a privileged position as an MDB providing political risk guarantees
and underwriting services to private sector providers of finance, enabling it to signifi-
cantly influence the management of social and environmental issues in project financing
in developing countries.76

Assessing the EPs from an institutional standpoint, the study conducted by the inter-
national law firm, Freshfields Bruckhaus Deringer, noted that the EPs have positively
influenced financial markets generally and redefined project lending in particular.77
Further, around 71 per cent of total project finance debts in emerging market economies
were subjected to the EPs ($52.9 billion out of a total of $74.6 billion) with the EPs further

68 Friends of the Earth, Briefing Note: Barclays Finance of Rainforest Destruction (2002). Available at: www.foe.
co.uk/resource/briefings/barclays_finance_destruct.pdf.
69 See Wright, above n. 19 at 7.
70 IFC, Environmental and Social Leadership through the Equator Principles. Available at: www.ifc.org/ifcext/
environment/epbroc1.pdf.
71 WRight, above n. 19 at 12.
72 Equator Principles III (2013). Available at: www.equator-principles.com/resources/equator_principles_III.
pdf, 2.
73 Ibid.
74 IFC, above n. 2.
75 Wright, above n. 19 at 12.
76 See IFC, above n. 66.
77 Freshfields Bruckhaus Deringer, Banking on Responsibility: Part 1 of Equator Principles Survey 2005: The
Banks (FBD: London, 2005).
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promoting good environmental practices in the other areas of the financial sector.78
Despite their voluntary nature, a large majority of signatory banks are now able to show a
significant level of adoption of the EPs within their lending criteria and practice.79 On their
part, Conley and Williams found that participation in the EPs affects firm culture within
the signatory bank and potentially promotes awareness and better practices both within
the signatory bank and beyond the bank’s project finance portfolio.80 They maintain that
signatories have the capacity to diffuse standards of responsibility both within the project
finance industry and elsewhere in the financiers’ business.81

The EPs have become widely accepted and applied in project finance globally.82 According
to Watchman et al., voluntary initiatives, such as the EPs, have caused a fundamental
shift of business and financial values towards greater importance being attached to social
and environmental issues by financial institutions.83 Similarly, the writers found that a
number of borrowers have approached signatories to the EPs because of their robust
approach to sustainability issues.84 Writing on the impacts of the EPs on the financial
sector and the environment, Thomas states that they reflect a growing awareness of the
relationship between financial services, investment and sustainable development and
could lead to projects that are beneficial not only to the financial sector but also for the
environment.85

Evidence of instances where signatories to the EPs are rejecting high-risk project finance
deals is gradually increasing. For instance, Barclays rejected two of the six high-risk
project finance deals considered in 2005 and, overall, chose not to participate in 25
out of a total of 68 project finance transactions.86 In its ‘Environmental Sustainability
Policy’ document, Barclays pointed out that it is the responsibility of the bank to manage
indirect impacts of its lending activities through its policies, guidelines and commitment
to the EPs.87 This action by Barclays prevents the most obvious environmentally and
socially unacceptable projects from receiving approval and also raises project developer
awareness of crucial social and environmental issues. It is important to note that the bank
does not simply turn down potentially harmful projects, but seeks to bring the project in
line with social and environmental best practice. Being a signatory to the EPs, Barclays
believes it can exert more influence by seeking to bring projects in line with them.88

78 R. Macve and X. Chen, ‘The Equator Principles: A Success for Voluntary Codes’ (2010) 23 Accounting,
Auditing and Accountability Journal 898.
79 D. Ong, ‘From International to Transnational Environmental Law? A Legal Assessment of the Contribution
of the Equator Principles to International Environmental Law’ (2010) 79 Nordic Journal of International
Law 47.
80 J. M. Conley and C. A. Williams, ‘Global Banks as Global Sustainability Regulators? The Equator Principles’
(2011) 33 Law & Policy 542.
81 Ibid.
82 As at 10 March 2014, there are currently 79 signatories to the EPs. See www.equator-principles.com/index.
php/members-reporting.
83 This is evidenced by the adoption by over 3,000 companies of the UN Global Compact; the adoption
of the Principles of Responsible Investment by signatories representing over $5 billion in assets under
management, and the fact that over 160 financial institutions have joined the UNEP Finance Initiative.
See P.Q. Watchman, A. Delfino and J. Addison of the law firm LeBoeuf, Lamb, Greene & MacRae, ‘EP 2:
The Revised Equator Principles: Why Hard-Nosed Bankers are Embracing Soft Law Principles’ (2007).
Available at: www.equator-principles.com/resources/ClientBriefingforEquatorPrinciples_2007-02-07.pdf, 4.
84 Ibid. at 81.
85 W. Thomas, ‘Equator: Risk and Sustainability’ (2004) Project Finance International Yearbook 16.
86 Barclays Environmental and Social Risk Assessment in Lending (2007). Available at: www.personal.
barclays.co.uk/PFS/A/Content/Files/intranet_extra_material_march_2007.pdf.
87 Barclays Environmental Sustainability Policy (2012). Available at: http://group.barclays.com/Satellite?blob
col=urldata&blobheader=application%2Fpdf.
88 See Macve and Chen, above n. 78 at 898.
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4.4 CRITICISM OF THE EPs

Although some of the studies measuring the impact of EPs points to positive results, there
are studies which critique the EPs as a vague attempt at furthering sustainability. This
was evident in the interview conducted by Conley and Williams, which casts doubt on the
compliance pull of the EPs, with some participants justifying their participation as a way
of deflecting NGO and stakeholder criticism.89 Richardson states that the overall evidence
of the success of the EPs is patchy and points to the need for more comprehensive inter-
vention to promote socially and environmentally responsible financing.90

Another critique relates to the discretionary nature of the EPs; signatories thus have wide
discretion with numerous avenues to shirk from responsibility. The key requirement
is that the environmental assessment (EA) process addresses to the satisfaction of the
signatory the project’s overall compliance with the EPs.91 This represents the essential
commitment of the signatories. However, this commitment is entirely dependent upon
the subjective assessment of the signatory. This implies that a signatory may go ahead
and fund a project if it is satisfied that the project complies with the EPs. Flexibility gives
lenders considerable discretion in the way the EPs are applied to their financing activi-
ties.92 The discretionary nature of the EPs and the lack of clarity of its provisions could
mean that, for any individual project, opponents can credibly claim that the financier has
violated the EPs, while the lender can also claim that it has applied them to its satisfac-
tion.93

Specifically, the last paragraph of the EPs provides that it is ‘a framework for developing
individual, internal practices and policies. As with all internal policies, these Principles do
not create any rights in, or liability to, any person, public or private’.94 It is safe to infer
from this quote that the EPs do not contain any specific criteria which can be employed
to measure or judge a financier’s decision to provide funding for a project. Richardson
provides examples of unsustainable projects which have been funded by signatories to
the EPs, referring specifically to the Baku-Tbilisi-Ceyhan (BTC) pipeline running through
Azerbaijan, Georgia and Turkey. It was the involvement of the IFC in the BTC project
that led to the disclosure of agreements between the host governments and project
sponsors. This enabled NGO groups to highlight areas that conflicted with sustainable
development and human rights goals.95 However, Richardson points out that participat-
ing private financiers claimed in many respects that the EPs were applied. The BTC case
shows that a signatory may conform to decision-making procedures contained in the
EPs yet, ultimately, still fund a development that many may see as being unsustainable.96
It is important to state here that without careful design and implementation, voluntary
measures such as the EPs may fail to achieve their goal of promoting sustainability and
instead become a reprehensible means to perpetuate business as usual.97

89 See Conley and Williams, above n. 80 at 542.

90 See Richardson, above, n. 22 at 94.
91 See EPs III, above n. 72 at 5.
92 R. Lawrence and W. Thomas, ‘The Equator Principles and Project Finance: Sustainability in Practice?’
(2004) 19 Natural Resources and Environment 20, 24.
93 Ibid. at 26.
94 EPs III, above n. 72 at 13.
95 A. Dufy and M. Grieg-Gran, ‘The Linkages between Project Finance and Sustainable Development’ in
S. Leader and D. Ong (eds), Global Project Finance, Human Rights and Sustainable Development (Cambridge
University Press: Cambridge, 2011) 34.
96 Richardson, above n. 22 at 93.
97 Ibid. at 80.
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Having considered the criticism, it is easy to be sceptical about the impact of the EPs.
However, we must bear in mind the fact that employing hard law to further sustain-
ability in project financing is problematic. Voluntary initiatives have arisen to fill the
regulatory vacuum with financiers relying on the EPs.98 Having an alternative to local
regulation is important, as individuals and groups can voice their demand for responsible
behaviour based on these policies and guidelines. NGOs and stakeholders can also draw
the attention of signatories to the EPs, pressing that they honour their commitments.

Despite the challenges, the adoption of EPs by financiers is growing and is widely applied
in developing countries where environmental regulation may be weak and difficult to
enforce.99 For example, Nigeria has laws on environmental protection and an Environ-
mental Impact Assessment Act, but the environmental enforcement rate is still quite
low.100 Therefore, the importance and influence of the policies and guidelines of financiers
emerges in this context, where the existence of an effective legal framework to regulate
the environmental and social impact arising from financing activities is almost absent.

5 THE IFC’s CONTRIBUTION TO SUSTAINABLE

DEVELOPMENT
Through its participation in financing arrangements with the private sector, the IFC
has developed invaluable operational relationships with private financial institutions in
developing countries. Its financing schemes continue to benefit private institutions and the
locality where projects are sited. For instance, the IFC arranges debt or equity financing to
a private institution or investment fund operating in a developing country, which in turn
provides financing to multiple private companies. These financing schemes may include
staff training and corporate restructuring programmes aimed at improving corporate
governance and commercialising risk-management practices in private financial institu-
tions.101 The IFC also organises participants meetings for private financial institutions,
investment funds and development agencies to showcase its loan syndication programme
providing the opportunity to discuss opportunities and share experiences about investing
in developing countries.102

The IFC also has other stringent methods of securing client compliance. It is capable of
attaching conditions or incorporating legal obligations into loan documentation. The use
of loan covenants to support compliance with environmental and social requirements is a
standing practice regularly employed by the institution.103 For instance, it could link dis-
bursement of funds to the attainment of certain milestones or specific acts of the clients.
Also, the IFC could include a policy-put in the loan documentation enabling it to sell its
shares for non-compliance with policy provisions. These activities allow the IFC to con-
solidate its hold on private institutions, enabling greater penetration of its policies and
guidelines.

98 Ibid. at 89.
99 See www.equator-principles.com/index.php/members-reporting; Richardson, above n. 22 at 89.
100 Y. Omorogbe, ‘The Legal Framework for Public Participation in Decision Making on Mining and Energy
Development in Nigeria: Giving Voices to the Voiceless in Human Rights’, in D. Zillman, A. Lucas and
G. Pring (eds), Natural Resource Development: Public Participation in the Sustainable Development of Mining
and Energy Resources (Oxford University Press: Oxford, 2002) 580.
101 Wright, above n. 19 at 11.
102 Ibid. at 11.
103 World Bank Group, Safeguards and Sustainability Policies in a Changing World: An Independent Evaluation
of World Bank Group Experience (The World Bank Independent Evaluation Group Study Series: Washington
DC, 2010).
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The IFC has been able to seamlessly integrate the use of its loan documentation and
the provisions of the Performance Standards to ensure client compliance with its sus-
tainability objectives. The IFC has achieved this because of its operational mandate, its
financial muscle and the expertise of its staff who have been involved in major financing
projects.104 Owing to the pervasive influence of the IFC on private sector financing in
developing countries, the institution is able to influence standard setting largely by the
use of its Performance Standards, thereby promoting the penetration of sustainable
development practices in developing countries. Over time, the underlining sustainabil-
ity objective of the IFC has shifted from a ‘do-no harm’105 approach towards a policy of
‘doing good’, evidencing an improved concern on sustainability and the management of
associated risks.106 The approach has now shifted to increased engagement with clients
with the institution playing a more supervisory role to achieve its overall development
objectives.107

With the nature of project finance and the problematic aspects of employing hard law in
developing countries, soft instruments (for example, the Performance Standards and the
EPs) have arisen to guide financiers in their financing activities even when such provisions
are absent in the host jurisdiction.

6 CONCLUSION
This article has evaluated the concept of sustainable development and has urged that
the Performance Standards of the IFC promote the diffusion of sustainable develop-
ment practices in developing countries. The Performance Standards of the IFC play a
key role in directing the minds of clients to their social and environmental responsi-
bilities. The IFC employs a mix of approaches in ensuring client compliance with its
policies and guidelines. Provisions can be inserted in loan documentation, while other
policies contained in the Performance Standards guide clients concerning their financing
activities. The Performance Standards provide an overarching framework which aim to
limit the negative impacts of the activities of financiers and borrowers.

Importantly, sustainable development in the financing sector seeks to incorporate social,

environmental and economic considerations in investment activities with their effect on
people, the planet and profits. It is a case of considering financial and non-financial issues
concurrently. The increased use of project finance allows for the continued penetration of
industry best practices, especially in jurisdictions where domestic law is silent on social
and environmental responsibility, or where lip service is paid to social and environmental
responsibility. The influence of the Performance Standards on sustainable development
can also be felt in the area of commercial bank project financing, with commercial banks
basing the EPs upon the IFC Performance Standards. While adoption on its own does
not necessarily guarantee positive results, it represents a step forward in advancing the
sustainable development agenda. By basing the EPs on the Performance Standards and
applying it to the project financing portfolio, financiers are helping to further promote
sustainable development.

104 N. Gulrajani, ‘The Art of Fine Balances: The Challenge of Institutionalizing the Comprehensive Develop-
ment Framework inside the World Bank’, in D. Stone and C. Wright (eds), The World Bank and Governance:
A Decade of Reform and Reaction (Routledge: Oxford, 2006).
105 This approach was contained in the IFC Sustainability Framework 2006. See IFC, above n. 38 at para. 8.
106 See World Bank Group, above n. 103 at 3.
107 IFC, above n. 2 at 1.
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Through the diffusion of its policies and standards, the IFC promotes sustainable devel-
opment by ensuring that its partners, clients and the clients of signatories to the EPs
consider the social and environmental impacts of financed projects and aim to nullify,
mitigate or compensate for any adverse impacts.

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