The Equator Principles, "a credit risk management framework for determining, assessing and managing environmental and social risk" in project finance deals, arose from a 2002 meeting in London among nine international banks and the International Finance Corporation of the World Bank.
Equator Principles Financial Institutions ("EPFI") voluntarily agree not to provide "project related loans and project finance advisory services to projects where the borrower will not, or is unable to comply with, the Equator Principles."
The latest draft of the Equator Principles, known as "EP3," was published for stakeholder comment on August 13, 2012 and provides, for the first time, risk management tools whereby project finance lenders are able to ensure that climate change is addressed as a key aspect of the identification, assessment, and management of environmental risk in large, complex, and expensive projects. EP3 was launched following a strategic review with the aim that the Principles continue to be the "gold standard" in environmental and social risk management in the financial sector.
EP3 contains a host of changes that aim to improve transparency in EPFI compliance reporting and to ensure that the Principles take account of increasing global awareness of environmental, social, and human rights issues. The key changes in EP3, from an environmental perspective, are as follows:
Environmental and Social Assessment and Independent Monitoring. For each project categorized as A or B (i.e., those that involve at least a limited potential of environmental and social risk), an EPFI will still develop and maintain certain social and environmental assessment documentation concerned with identifying, assessing, and managing environmental risk. The environmental assessment documentation must demonstrate that the borrower has considered various environmental factors at the project level, such as energy efficiency, protection and conservation of biodiversity, pollution prevention, and waste management.
EP3 states that an independent environmental and social consultant, not directly associated with the borrower, is to be appointed to ensure compliance with the assessment process and, in certain cases, may need to state that the project cannot be made Equator Principle-compliant. In addition, to improve EPFI compliance transparency, various environmental assessment documents must now be disclosed online.
Applicable Environmental Standards. EP3 clarifies which environmental standards are generally applicable to a project based on the location of the project. For projects located in non-OECD countries and OECD countries that are not designated as high-income, EPFIs are required to comply with the applicable International Finance Corporation ("IFC") Standards and IFC Environmental Health and Safety Guidelines in their Equator Principle-compliance assessments. Projects located in high-income countries, on the other hand, must comply with relevant host country laws, regulations, and permits, as these are generally considered to meet or exceed the requirements of the Equator Principles
Greenhouse Gas Emissions. Where greenhouse gas emissions are expected to exceed 100,000 tons annually on a project, an analysis of alternatives—in line with the IFC Performance Standards on Environmental and Social Sustainability—must now be undertaken by the EPFI, addressing less carbon-intensive fuel sources and technologies. Once completed, the borrower is under an obligation to provide evidence of technically and financially feasible and cost-effective options to reduce greenhouse gas emissions during the design, construction, and operation of the project. Borrowers must now report these emissions publicly.
EP3 is expected to be published in final form by January 2013