The Equator Principles (EP) is an agreement amongst 76 global financial institutions (known as EP Financial Institutions or EPFI) to apply environmental and social standards to certain investment decisions. The third iteration of the EP (EP III) was released on May 14, 2013, and will take effect (with certain transition allowances) on June 4, 2013.

The release of EP III follows a major revision of the IFC Performance Standards on Environmental & Social Sustainability in 2012 (IFC Performance Standards), a set of guidelines that is incorporated by reference into the EP framework. Together, these changes mark an important evolution in best practice in environmental and social risk management of particular importance for both bankers and those seeking access to capital.

This article reviews the new ground rules of environmental and social risk management and considers some new trends that may begin to emerge. We also consider what risks and opportunities arise from these developments that should be considered by both financiers and those seeking finance who must comply with these frameworks to meet their business goals.

What’s new in EP III?

Expanded Scope

As before, EP III will apply to project financings of EPFI (EP signatories) over $10 million. The Equator Principles Association refers to the Basel II definition of project financing, which is:

“a method of funding in which the lender looks primarily to the revenue generated by a single project, both as a source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment and telecommunications infrastructure…”

The strategic review leading to EP III reviewed the definition of “project finance” in light of concerns that project financings with challenging environmental and social risks were being disguised as corporate loans to avoid application of Equator Principles. The recommendation of the strategic review was to widen the scope of the Equator Principles to apply to corporate loans where 50 per cent or more of the proceeds of that loan are being used to finance a single asset.

The final version of the EP III extends the scope of the agreement to apply to the following financial products:

  • Project Finance Advisory services where the total project capital costs are US$10m or more;
  • Project-Related Corporate Loans where the following all apply:
    • the majority of the loan relates to a single project over which the client has Effective Operational Control (either direct or indirect)
    • the total aggregate loan amount is not less than US$100m
    • EPFI’s individual commitment (before syndication or sell down) is at least US$50m
    • loan tenor is at least 2 years
  • Bridge Loans with a tenor of less than 2 years that are intended to be re-financed by Project Finance or a Project-Related Corporate Loan that is intended to meet the relevant criteria above.

The EP III framework will apply to these activities of EPFI on a going-forward basis (not retroactively), including expansions or upgrades of existing facilities if such expansions or upgrades may have significant environmental and social impacts or change the nature or degree of existing impacts assessed under prior versions of the EP.

A transition period is given for the implementation of EP III. EPFI are encouraged to adopt the new framework as soon as possible, and should apply it to all new transactions by January 1, 2014.

Emphasis on Legal Compliance in First Instance

Principle 3 now states that the assessment process should, in the first instance, address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues. This makes the assessment process primarily a legal compliance assessment, in the first instance. This specific legal compliance focus presents an opportunity for EPFI to streamline their EP assessment and diligence processes by integrating them with legal and regulatory compliance reviews for the same projects.

Application of IFC Performance Standards to be applied in “Non-Designated Countries”

Reference to “High-Income OECD” status has been removed in the EP III and replaced with the concept of “Designation.” “Designated Countries” are defined to include those countries deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment. Host-country laws are said to “meet the requirements of environmental and/or social assessments (Principle 2), management systems and plans (Principle 4), stakeholder engagement (Principle 5) and grievance mechanisms (Principle 6).” This means legal compliance in Designated Countries meets the requirements of the EP in these areas.

For projects in “Non-Designated Countries,” the assessment process must evaluate compliance with the then-applicable IFC Performance Standards and World Bank Group Environmental, Health and Safety Guidelines (EHS Guidelines).

The Equator Principles Secretariat intends to develop an approach for determining which countries are “Designated” and which are “Non-Designated” in the coming months. The list of Designated Countries will be published on the Equator Principles Secretariat website.

Public Disclosure of Environmental and Social Impact Assessment (ESIA) Summary

Under EP III, all Category A and (as appropriate) Category B projects will require the client to disclose at minimum a summary of the assessment or ESIA documentation prepared in relation to a project. These documents should be disclosed on the company’s website if one is available. This is scaled back from the August 2012 draft of EP III that required full disclosure of the ESIA as well as disclosure of the Environmental and Social Management Plan.

Disclosure should be provided to facilitate stakeholder engagement as early in the assessment process as possible and in any event before construction commences. Reporting to stakeholders should occur on an “ongoing basis.” The meaning of “ongoing basis” in the EP is not defined, although, by analogy, the IFC Performance Standards require public reporting by borrowers on an annual basis, or more frequently if appropriate in light of feedback from stakeholder engagement or grievances.

Greenhouse Gases Alternatives Analysis and Reporting

Under the finalized EP III, the borrower will be required to undertake an “alternatives assessment” wherever Greenhouse Gas (GHG) direct (scope 1) and indirect (scope 2) emissions for a project are anticipated to be more than 100,000 tonnes of CO2 equivalent annually. This may coincide with any alternatives analysis required by a regulatory permitting process.

The alternatives analysis process requires evaluation of “technically and financially feasible and cost-effective options” to reduce GHG during the design, construction and operation of the project. Evidence of this must be provided by the client through documentation (presumably to the lender).

Alternatives analysis is already required by the IFC Performance Standards, which are incorporated by reference into the EP framework. These obligations are not reduced by the EP III.

Alternatives analyses in high carbon intensity industries such as thermal power, cement and lime manufacturing, integrated steels mills, base metal smelting and refining and foundries, should include comparisons to other viable technologies used in the same industry, country or region with the relative energy efficiency of the selected technology.

For all Category A and (“as appropriate”) Category B projects (in all countries) the borrower will be required to report greenhouse gas emission levels during the operational phase for projects emitting over 100,000 tonnes of CO2 equivalent annually. Clients are to be encouraged to report emissions over 25,000 tonnes annually. This requirement can be satisfied by regulatory requirements or voluntary reporting mechanisms like the Carbon Disclosure Project.

The borrower must quantify direct emissions from the facilities owned or controlled within the physical project boundary (referred to as “Scope 1” emissions) as well as indirect emissions associated with the off-site production of energy used by the project (referred to as “Scope 2” emissions).

Increased Scope of Labour and Working Conditions Requirements

The IFC Performance Standards establish specific labour standards and occupational health and safety diligence requirements in relation to primary supply chain employees and contracted workers and fair treatment of migrant workers. Requirements are also set out for fostering workers organizations in jurisdictions where there is substantial interference in workers’ freedom of association.

Human Rights Due Diligence

The new IFC Performance Standards now state that in “limited high risk circumstances” it may be appropriate for the client to complement its environmental and social risks and impacts identification process with specific human rights due diligence. The work of the United Nations Special Representative of the Secretary-General on Business and Human Rights, John Ruggie, is referenced, namely the “Protect, Respect and Remedy” Framework and associated Guiding Principles. This requirement is also expressly referenced in the final EP III.

According to the framework, to “respect” human rights means businesses must recognize a private duty to address human rights issues, even in the context of state actions that are not in accordance with international legal norms. This may necessitate consideration of human rights issues when negotiating host-country agreements, stabilization clauses or concessions. Such agreements should not be drafted in a way that could interfere with the human rights of parties potentially affected by the project or interfere with the state’s legitimate efforts to meet its human rights obligations. When negotiating stabilization clauses companies should not seek to impose economic or other penalties on the state party in the event that the state introduces laws that are of general application and reflect international good practice in areas such as health, safety, labour, the environment, security, non-discrimination, and other areas that concern business and human rights.

Free Prior and Informed Consent (FPIC)

Since the implementation of the new IFC Performance Standards in January 2012, Category A projects and projects affecting “Indigenous Peoples” additionally require the implementation of a process of “Informed Consultation and Participation” and in some cases a process of “Free Prior and Informed Consent,” consistent with Performance Standard 7 of the IFC Performance Standards. Compliance with law, including those laws implementing host-country obligations under international law, is specifically required.

The FPIC requirement is stronger than most national legal regimes and is drawn from international instruments such as the United Nations Declaration on the Rights of Indigenous Peoples, which recognize that indigenous peoples must participate in the development of projects likely to affect them, as an element of sustainable development.

What stays the same in EP III?

Overall Purpose of the EP

As in previous iterations, EP III requires Equator Principles signatories, referred to as EPFI, to not provide loans over the applicable monetary thresholds mentioned above to projects where the borrower will not or is unable to comply with the social and environmental requirements of the EP. As before, the EP III applies globally to all industry sectors.

Review and Categorization

EP III continues to require all signatory EPF to conduct a preliminary assessment of the level of environmental and social risks associated with a project and to categorize that risk as either Category A (significant risks), B (limited risks) or C (minimal or no risks).

Categorization of projects is a highly discretionary and inexact process. The process of categorization used in the EP is derived from the categorization approach of the IFC, set out in the IFC “Policy on Environmental and Social Sustainability.” As applied by the IFC, project categorization is not intended to be a “once and for all” exercise and will typically be reviewed on a regular basis, at least annually or wherever changes to the project occur that could affect the level of environmental and social risk of a project.

Environmental and Social Impact Assessment

An assessment or ESIA is still required by the EP III, taking a variety of possible forms from full-scale to limited ESIA or targeted audits. ESIA must be developed for all Category A and B projects, providing an evaluation of the environmental and social risks of the project.

EP III emphasizes in Principle 3 that an assessment, first and foremost, should assess legal and regulatory compliance for all projects. In “limited high-risk circumstances” the assessment process should also include specific human rights due diligence. GHG alternatives analyses are also required, as discussed above.

Application of Environmental and Social Standards and Regulations

EP III continues to require compliance with relevant host-country laws, regulations and permitting requirements that pertain to environmental and social matters as a primary requirement.

For projects taking place in “Designated Countries,” the EP requires additional compliance with the “then applicable” IFC Performance Standards and the World Bank Environmental, Health and Safety Guidelines (EHS Guidelines).

There are eight IFC Performance Standards incorporated by reference into the EP:

  • Assessment and Management of Environmental and Social Risks and Impacts: requiring ESIA, stakeholder engagement, the development of action plans and Environmental and Social Management Systems (ESMS).
  • Labour and Working Conditions: setting standards for the management of human resources, including workers’ organizations, occupational health and safety, child and forced labour practices, and the establishment of grievance mechanisms.
  • Resource Efficiency and Pollution Prevention: including the management of emissions such as greenhouse gases, pollution of land, air, or water.
  • Community Health, Safety, and Security: requiring safe design, hazardous materials management, and emergency preparedness, as well as risk management of the use of security services interacting with local communities.
  • Land Acquisition and Involuntary Resettlement: establishing standards to be applied where there is expropriation of land and/or resettlement of communities affected by a project.
  • Biodiversity Conservation and Sustainable Management of Living Natural Resources: establishing requirements to manage and mitigate impacts on habitats and ecosystems.
  • Indigenous Peoples: requiring consultation with affected indigenous communities, including, in some circumstances, to the point of Free Prior and Informed Consent of indigenous peoples as part of the stakeholder engagement process.
  • Cultural Heritage: establishing requirements for the identification, management, and protection of local cultural heritage (intellectual property) that may be affected by project activities.

The EHS Guidelines represent an example of what is referred to as “Good International Industry Practice” in the management of environmental and health and safety issues. There are general EHS Guidelines addressing environmental practice, occupational and community health and safety practice and construction and decommissioning. There are also numerous industry-specific EHS Guidelines.

These standards must be met, with any deviation justified “to the EPFI’s satisfaction.” As noted, in addition to the IFC Performance Standards and EHS Guidelines, diligence on compliance with host-country laws, including laws implementing host-country obligations under international law, is required by the IFC Performance Standards and the EP.

Environmental and Social Management System, Management Plan and Action Plan

EP III still requires the development by the borrower of an Environmental and Social Management System, which is composed of policies, procedures, organizational, training and stakeholder engagement requirements.

In addition, the borrower must develop an Environmental and Social Management Plan (ESMP) to address issues raised in the ESIA and incorporating actions to comply with the applicable standards. Where the ESMP is not adequate, an additional document called an Action Plan (AP) will be developed to address gaps to the EPFI’s satisfaction in line with applicable standards.

Stakeholder Engagement

For all Category A and Category B projects, the borrower must demonstrate effective and ongoing “stakeholder engagement” with affected communities and other stakeholders, taking into account disadvantaged and vulnerable groups. Clients must take account of and document the results of the stakeholder engagement process, including agreed actions.

Grievance Mechanisms

For all Category A and B projects the borrower must create a “grievance mechanism” as part of the ESMS, designed to receive and facilitate resolution of concerns about the project’s environmental and social performance. Grievance mechanisms for workers are also required by the IFC Performance Standards.

Independent Review

For Category A and (“as appropriate”) Category B projects an “Independent Environmental and Social Consultant” not directly associated with the borrower will carry out an independent review of the assessment, ESMP, ESMS and consultation process findings.

The purpose is to assist the EPFI’s due diligence efforts and assess overall EP and legal compliance, and to propose a suitable AP capable of bringing the project into compliance or to indicate when compliance is not possible.

For Project-Related Corporate Loans, an independent review is required for projects with high-risk impacts (such as adverse impacts on indigenous peoples, critical habitat impacts, significant cultural heritage impacts or large-scale resettlement).


The EP III continues to require EPFI to include covenants in financing documents regarding EP implementation. At least three covenants of borrowers are required requiring the borrower to:

  • comply with the ESMPs and AP (where applicable) during the construction and operation of the project in all material respects;
  • provide periodic reports in a format agreed with the EPFIs (with the frequency of these reports proportionate to the severity of impacts, or as required by law, but not less than annually), prepared by in-house staff or third-party experts that document compliance with the ESMPs and AP (where applicable) and;
  • provide representation of compliance with relevant local, state and host-country environmental and social laws, regulations and permits; decommission the facilities, where applicable and appropriate, in accordance with an agreed decommissioning plan.

Ultimately, if the borrower is not in compliance with these covenants the EPFI should work with the borrower on remedial actions to achieve compliance. Where non-compliance persists beyond a grace period, the EPFI may exercise remedial rights set out in contractual documentation. EPFI commit to not providing financing to clients that cannot or will not comply with the EP.

Independent Monitoring and Review

For all Category A and (as appropriate) Category B projects an independent advisor must still be appointed by the EPFI or borrower to ensure ongoing monitoring of compliance and reporting to the EPFI over the life of the loan, following financial close. The same process is applied for Project-Related Corporate Loans wherever an independent review is required.

Reporting and Transparency

The EP III continues to set out specific requirements for public reporting of environmental and social data, including a summary of the ESIA and specific reporting requirements in relation to greenhouse gas emissions noted above. Requirements for annual reporting by EPFI of EP activity are also specified.

Trends to watch

Growing Legal Implications for Banks

EP III places clear emphasis on the primacy of legal and regulatory compliance in addition to compliance with the best practices of the IFC Performance Standards and EHS Guidelines. In implementing the EP, an EPFI oversees, audits and interrogates the compliance of its clients in relation to these rules as a “private regulator” of its clients' environmental and social performance.

By holding themselves out publicly as private regulators of their clients' environmental and social performance and publicly reporting on environmental and social compliance, EPFI take on both reputational and legal risks beyond the inherent risks of the project financing. The business case for doing so is the EPFI's interest in mitigating the reputational, legal and financial risks associated with poor environmental and social performance of its clients. The challenge will be to ensure the legal risks of acting as a private regulator of clients’ environmental and social performance are effectively managed.

To manage such risks and avoid duplicated efforts and added costs, an integrated diligence approach may emerge as a best practice trend, whereby environmental and social assessment and due diligence for the purposes of the EP is rolled into legal and regulatory due diligence for a project. The ability to streamline and integrate EP due diligence processes into legal due diligence is facilitated greatly by the primacy placed on legal and regulatory compliance in Principle 3 of the new EP.

Specialist “Equator Principles Bank” Role in Project Finance?

EPFI have diverse approaches to the management of environmental and social risks and implementation of the EP. Some banks have a highly decentralized approach, where implementation of the EP is managed by lending officers, with support from centralized risk management teams for higher-risk projects. At other EPFI, environmental and social risk management is more centralized. Centralized risk management teams may specialize only in environmental and social risk issues, or be staffed by generalist credit risk management personnel. Some EPFI utilize advisory centres that provide technical support to front-line business managers or lending officers who are ultimately responsible for EP compliance. Legal compliance officers may have dotted-line oversight of this process. The question becomes whether the current approach is adequate for this purpose, particularly where multiple banks are involved in a project financing through a syndicate of financiers.

Despite the complexity of the process, EP implementation is not typically managed by a single “EP bank” in the same manner as other major project-related risks, like documentation and insurance. Instead, banks often rely on so-called technical experts to provide ad hoc advice on EP implementation. This is likely due to a perception that the risks of EP implementation are not a sufficiently major risk category on project financing deals as to warrant assignment to a single responsibility centre.

A new trend that may emerge post-EP III is an effort towards increased standardization of EP implementation strategies, which in turn could lead to increased specialization and the evolution of an “EP bank” role in project financing. The advantages of such an approach would include: consistency in application of the EP framework; more effective management of legal and reputational risks; economies of scale in the development of EP expertise to the benefit of the industry; and competitive advantage for banks that can leverage their expertise in the EP space to obtain deals.

Sustainable Finance 2.0 – Application to Capital Markets

While it is beyond the scope of the EP, some EPFI have also voluntarily begun to apply the IFC Performance Standards and EP approach in capital markets and underwriting contexts. The objective in doing so is to facilitate proper disclosure of sustainability issues to the market prior to listing, to meet market expectations. There may be an inherent tension between these objectives and competing legal considerations about market disclosure.

To be successful, the right balance needs to be struck through cooperation between strategic business and legal advisors, to tell the story of the listing company and make the case for sustainability to the market. This is an area that continues to evolve but reflects the increasingly pervasive use of non-state frameworks for sustainability management in finance.


The EP III framework presents an opportunity for all EPFI and project proponents to review their EP compliance strategies, to identify both risks and opportunities for enhanced sustainability. The new EP will also create new compliance challenges for borrowers seeking financing, particularly in the energy, mining and infrastructure industries. As these standards and their interrelationship with law and regulation continue to evolve, both financiers and their clients will need to consider these additional compliance issues as part of their legal and regulatory due diligence efforts.