A new version of the Equator Principles came into effect yesterday. The new Equator Principles have been extended in scope and impose new requirements on financial institutions and export credit agencies. For the first time, they include express requirements regarding human rights.

Equator Principles III (“EPIII”) continues to apply to project finance, but has been expanded to cover project-related corporate loans (including buyer credit from an export credit agency), bridge loans, and advice on developments that may involve project finance. EPIII imposes new requirements for borrowers to perform due diligence on a project’s human rights impacts, evaluate and report on greenhouse gas emissions, and negotiate with indigenous peoples affected by a project.

Although EPIII was designed to come into effect on 4 June 2013, it applies to all new transactions from 1 January 2014. In the meantime, previous versions of the Equator Principles may still be used, and for this reason parties entering into project finance contracts before 31 December 2013 should state clearly whether EPIII applies.

Background

The Equator Principles Association is made up of 79 financial institutions and export credit agencies, known as Equator Principles Financial Institutions (“EPFIs”). Since 2003, EPFIs have committed to applying the Equator Principles to assess environmental and social risk in projects that they finance.

EPFIs undertake not to finance projects where the borrower has not complied, or is unable to comply, with the EPFI’s own environmental and social policies and procedures (which are based on the Equator Principles’ standards). Borrowers are required to covenant in the financing documents that they will comply with EPIII requirements as well as environmental and social laws in the project’s host country.

For financiers : expanded scope

EPIII continues to apply to project finance transactions with a total project capital cost of US$10 million or more.

However, financiers should be aware that EPIII has also been expanded to cover three other finance products:

  • Project Finance Advisory Services where the total project capital cost is US$10 million or more.
  • Project-Related Corporate Loans where (1) the total loan amount is US$100 million or more, (2) the majority of the loan is related to a single project over which the borrower has effective operational control (either directly or indirectly), (3) the individual EPFI commits at least US$50 million, and (4) the loan tenor is two years or more. This includes buyer credit from export credit agencies, but excludes supplier credit from export credit agencies, asset finance, acquisition finance and other loans that do not finance the underlying project.
  • Bridge Loans with a tenor of less than two years that are intended to be refinanced by Project Finance or a Project-Related Corporate Loan.

For borrowers : new requirements

Borrowers should be aware of a number of new requirements imposed by EPIII:

  • Environmental and Social Impact Assessment of projects that may have adverse environmental and social risks should consider additional factors, including respect of human rights and labour issues. This Assessment must evaluate a project’s compliance with International Finance Corporation and World Bank standards (except for projects in 31 “Designated Countries” from the OECD, where compliance with domestic laws is sufficient), and may require independent review.
  • Specific human rights due diligence may be required in limited “high risk” circumstances. However, EPIII does not define when these circumstances will arise. The Preamble to EPIII refers to the United Nations Guiding Principles on Business and Human Rights (“Guiding Principles”), which were endorsed by the UN Human Rights Council in 2011. The Guiding Principles provide a “how to” guide for companies undertaking due diligence to identify, prevent, mitigate and account for human rights impacts.
  • Evaluate options to reduce greenhouse gas emissions if a project is expected to produce annual greenhouse gas emissions of more than 100,000 tonnes of CO2.
  • Ensure effective engagement with local communities directly affected by a project, and where necessary with government or NGOs. Where indigenous peoples may be affected, borrowers must undertake an in-depth consultation and obtain those peoples’ free, prior and informed consent, following the International Finance Corporation’s recommended negotiation process. Borrowers must also establish an appropriate grievance mechanism to address concerns about the project’s environmental and social impact.
  • Public reporting by borrowers of a summary of their project’s Environmental and Social Impact Assessment (to be made available online) and annual emissions levels if their project emits over 100,000 tonnes of CO2 equivalent annually, and by EPFIs of completed transactions involving the Equator Principles (annually).

Click here to access EPIII.