1) The study examines banks' adoption of the voluntary Equator Principles (EP) for managing environmental and social risks in project financing. 2) It finds that banks are more likely to adopt the EP when collaborating with other banks that have already adopted, indicating peer pressure and piggybacking effects. 3) However, banks are less likely to adopt if they can piggyback on EP banks in project financing deals without adopting themselves, suggesting the EP has not become a true industry standard.

1. Equator Principles Adoption:
Peer Pressure or Piggybacking?
Bos, J.W.B., Contreras, M.G., Kleimeier, S.
m.contreras@maastrichtuniversity.nl
School of Business and Economics
Finance Department
Maastricht University

2. We study adoption of voluntary codes of conduct, the Equator
Principles, by banks in a setting in which banks cooperate.

3. What are the Equator
Principles?

4. Set of voluntary codes of conduct for market
self-regulation.
Address environmental and social issues in project
finance operations.
Response to NGO-led campaigns accusing banks of
supporting project financing with negative social and
environmental consequences.

5. The EP provides with tools and mechanisms to manage
environmental and social risks.
Projects are categorized prior to financing.
Members prepare annual reports on their activities.
Standardized way of financing.

8. Expected benefits of adopting the
Equator Principles

9. Brand benefits and product differentiation
Credibility boosts
Increased corporate profitability
Better market access
Positive signal mechanism
Pre-empt boycotts, and signal responsible conduct
Reputation mechanism

10. 2003 2004 2005 2006 2007 2008 2009 2010
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Year
%ofBanksAdoptingtheEP

11. Why not adopt the Equator
Principles?

12. Low reputation risk
Other practices in place
Economies of scale
Opportunity costs

13. Banks adopting the EP tend to be
Headquartered in countries with strong
governance/institutions/CSR profiles (Wright and
Rwabizambuga, 2006; Bondy et.al., 2004)
The largest in the market (Saunders and Allen, 2002;
Saha and Darnton, 2005; Wright and Rwabizambuga,
2006; Scholtens and Dam, 2007)
Multinational banks operatings transnationally (Wright
and Rwabizambuga, 2006)
In the spotlight

14. Number of EP Adoptors # Adoptors 2010 Rule of Law
2003 2004 2005 2006 2007 2008 2009 2010 Market Size 2010
North America 8
U.S.A. 1 1 2 4 4 4 4 4 0.04 1.63
Canada 1 1 2 3 4 4 4 4 0.21 1.81
South America 4
Brazil 0 2 2 2 2 2 2 2 0.67 0.00
Chile 0 0 0 0 1 1 1 1 1.00 1.32
Colombia 0 0 0 0 0 1 1 1 1.00
Europe 26
Netherlands 2 2 3 3 3 3 5 6 0.67 1.81
France 1 1 1 1 2 3 3 4 0.22 1.51
United Kingdom 3 3 3 3 3 4 4 4 0.19 1.76
Germany 0 0 0 0 0 0 0 1 0.02 1.62
Africa & Middle East 5
South Africa 0 0 1 1 1 1 3 3 0.60 0.11
Egypt 0 0 0 0 0 0 1 1 0.13 -0.12
Oman 0 0 0 0 1 1 1 1 0.50 0.64
Asia & Oceania 7
Japan 1 1 2 2 3 3 3 3 0.06 1.33
Indonesia 1 1 1 1 1 1 1 1 0.11 -0.64
Australia 1 1 1 2 3 3 3 3 0.18 1.76
Total 30 38 44 53 62 70 77 80 0.20

15. We take a different approach

16. The corporate loan market is a market of cooperations

17. Banki ——– Bankj
Peer pressure
Piggybacking
Social pressure



Adopt/Not Adopt

18. 1 2 3 4 5 6 7 8
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
t
S
i
(t)
Equator Bank
j
= 0
Equator Bank
j
= 1

19. Table 1 : Estimation 1
This table presents the estimation results from our Cox Proportional Hazards regression.
Clustered standard errors by bank pair and time. Ties=exact. Unbalanced panel.
Hazard Ratios
Base Model Controls
(1) (2)
# Equator Relationships 1.047*** 1.209***
[0.005] [0.0177]
Peer Pressurej 1.721*** 1.016
[0.078] [0.063]
Equator Peer Pressurej 3.149*** 1.732**
[0.271] [0.315]
Piggybacking 0.694*** 0.806***
[0.040] [0.036]
Social Pressurei 1.008*** 1.009***
[0.000] [0.001]
Country Riskj 1.000
[0.002]
Country Riski 1.108***
[0.011]
Dodgy Dealt 0.959
[0.074]
Dodgy Dealt−1 0.435***
[0.114]
Top SL Lenderi 1.870***
[0.072]
Country lending concentrationi Yes
Industry lending concentrationi Yes
p- values in brackets
* p < 0.05, ** p < 0.01, *** p < 0.001

20. Explanation Test Result
CSR country profile Bloomberg ESG Country
Risk 2010
Other sources of social
pressure
Dodgy Deals from Bank
Track
Bank characteristics Size: Large vs. Small (Syn-
dicated Loans)
Country lending spe-
cialization
Country lending concentra-
tion
Developed vs. Developing
country lending concentra-
tion

21. Bank origin Geography of lending Dodgy Deals Bank Size
(1) (2) (3) (4) (5) (6)
# Equator Relationships 1.035 *** 1.041 *** 1.069 *** 1.015 ** 1.074 *** 1.095 ***
[0.006] [0.006] [0.009] [0.006] [0.010] [0.011]
Peer Pressurej 1.852 *** 1.809 *** 1.026 1.614 *** 0.986 1.000
[0.082] [0.080] [0.058] [0.075] [0.059] [0.058]
Equator Peer Pressurej 2.321 *** 2.332 *** 2.317 *** 3.465 *** 2.264 ** 2.045 **
[0.267] [0.266] [0.320] [0.297] [0.362] [0.332]
Piggybacking 0.761 *** 0.759 *** 0.736 *** 0.76 *** 0.742 *** 0.791 ***
[0.045] [0.045] [0.034] [0.040] [0.034] [0.034]
Social Pressurei 1.007 *** 1.007 *** 1.008 *** 1.005 *** 1.008 *** 1.004 ***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Country Riskj 1.003 **
[0.002]
Country Riski 1.017
[0.002]
Lending in developingi 0.810 ***
[0.043]
Lending in developingj 1.068 **
[0.030]
Dodgy Dealt 1.748 *** 1.619 ***
[0.025] [0.037]
Dodgy Dealt−1 1.800 *** 0.911 **
[0.028] [0.042]
Top SL Lenderi 2.392 ***
[0.045]
Country lending concentrationi Yes Yes
Industry lending concentrationi Yes Yes Yes

22. Explanation Test Result
CSR Country Profile Bloomberg ESG Country
Risk 2010
Correcting image Dodgy Deals from Bank
Track
Bank characteristics Size: Large vs. Small (Syn-
dicated Loans)
Country lending spe-
cialization
Country lending concentra-
tion
Developed vs. Developing
country lending concentra-
tion

23. In conclusion

24. Voluntary codes of conduct, such as the Equator Principles
(EP) are a source of reputation for banks in a setting of
repeated interactions. However,
Banks piggyback on adopting banks and do not adopt
the EP.
Banks do adopt the EP when the EP bank they
cooperate with has a strong influence on the
non-adopting banks.
Banks do adopt the EP when the losses from damaged
reputation are higher than the costs of adopting.
Adoption of such voluntary code of conduct is contingent
on the duration of continuous collaboration with EP
banks.

25. EP adoption has slowed down since its inception in 2003
Piggybacking through collaboration explains this slow
down
Regardless of country of origin, country/industry
lending specialization, size, involvement in dodgy deals,
piggybacking offers a way for banks to participate in
Equator-led project financing without adopting the EP.
This implies that the EP is far from becoming an
industry standard in responsible lending.

27. Extra Slides
For all syndicated loans
Average Estimation
Equator Non-Equator
Syndicate Syndicate
Log[Deal Amount] 18.7207 18.3631 0.1908 ***
Number of Arrangers 2.7859 1.6092 0.3090 ***
Fees 11.3644 12.6583 -0.0013 ***
Pricing (Drawn) 93.2611 126.6088 -0.0018 ***
Pricing (Spread) 121.9537 155.4485 -0.0001 ***
Multiple Tranches 0.1107 0.0510 0.9095 ***
Number of tranches 28232 26484

28. Extra Slides
For project finance loans
Average Estimation
Equator Non-Equator
Syndicate Syndicate
Log[Deal Amount] 19.2092 18.7686 0.3913 ***
Number of Arrangers 3.5750 1.9038 0.2796 ***
Fees 27.2547 29.2276 -0.0022
Pricing (Drawn) 151.0141 139.9679 0.0003
Pricing (Spread) 181.0678 151.5510 0.0012
Multiple Tranches 0.1063 0.0769 -0.2426
Number of tranches 160 150

29. Extra Slides
Descriptive Statistics
Variable Mean S.D. Minimum Maximum
# Equator Relationships 3.203 2.266 0.000 14.000
Co-arrangement with Equator Bankj 0.165 0.371 0.000 1.000
Log[Degree Banki] 5.976 1.704 0.693 8.468
Cumulative Project Finance Deals 30.463 45.068 1.000 268.000
Banki Importance for Bankj 0.069 0.1514 0.000 1.000
Banki Importance for Equator Bankj 0.005 0.038 0.000 1.000
Npairs = 9,037

30. Extra Slides
Piggybacking
Year Equator & Two Equator Non- Equator &
Non-Equator Bank Banks Non-Equator Bank
2003 0.2743 0.0203 0.7054
2004 0.2679 0.0219 0.7102
2005 0.3171 0.0255 0.6574
2006 0.3547 0.0432 0.6021
2007 0.3927 0.0637 0.5436
2008 0.4200 0.0871 0.4928
2009 0.4427 0.1117 0.4456
2010 0.4569 0.1259 0.4172