Ten years after their launch, a third version of the Equator Principles, the Equator Principles III (EP III), was adopted by the Equator Principles Association on 14 May 2013. EP III is more robust than its predecessors and of wider scope, creating new compliance challenges for lenders that have signed up to the Equator Principles, and for borrowers seeking financing for projects within the ambit of EP III.

What are the Equator Principles?

The Equator Principles are a set of social and environmental guidelines to which a number of financial institutions, known as Equator Principles Financial Institutions (EPFIs), have voluntarily agreed to be bound. By adopting the Equator Principles, EPFIs commit to finance only those projects that comply with them.

When is EP III effective?

EP III is effective for new mandates entered into on or after 4 June 2013, although transitional arrangements enable EPFIs to continue to apply the previous version of the Equator Principles for new transactions where the mandate is signed before the end of 2013.

On which transactions does EP III apply?

There have been concerns in the past that projects with challenging environmental and social risks were being characterised as corporate loans to avoid the application of the Equator Principles. To address this, EP III applies not only to the types of transaction covered by its predecessors, but also to the following new areas:

  1. project finance advisory services where the total capital costs are over US$10million;
  2. project-related corporate loans over US$100million:
    • with a tenor of more than two years;
    • where the majority of the loan is to a single project the borrower effectively controls; and
    • where the EPFI's commitment is at least US$50million; and
  3. bridge loans for less than two years which will be refinanced by loans that meet the criteria at (2) above.

Greenhouse gases: an "alternatives analysis"

Where the greenhouse emissions of a project (both directly and from off-site energy used on the project) are anticipated to exceed 100,000 tonnes of CO2 annually, the borrower must undertake an "alternatives analysis". This involves an assessment of technically and financially feasible options to reduce greenhouse gases at all stages of the project. In carbon intensive industries such as thermal power and steel mills, comparisons should be to other viable technologies used in the same industry or region. Project operators are encouraged to report emissions over 25,000 tonnes of CO2 annually and are required to report for higher risk projects emitting over 100,000 tonnes annually in the operational phase.

Public disclosure

As well as the requirements to disclose CO2 emissions, for the highest risk projects EP III also requires the disclosure of at least a summary of the Environmental and Social Impact Assessment, preferably on the company's website. This is to facilitate stakeholder engagement early in the project process. EP III also requires EPFIs to disclose annually information on the number of their EP transactions and their implementation processes. On projects where these disclosure requirements apply, EPFIs should ensure that the borrower consents in the finance documents to the required disclosure by the EPFIs.

Legal compliance first

There is an increased emphasis in EP III on assessing legal compliance at an early stage with host country environmental and social laws and regulations. Addressing this element of legal due diligence early in the process creates the opportunity for a more streamlined approach to EP assessments, along with the usual legal and regulatory compliance assessment.

Is the project in a "Designated Country"?

For projects in "Designated Countries" (currently 31 specified countries with robust environmental and social frameworks), compliance with the host country laws will meet the requirements of EP III in a number of key areas. For projects in all other countries ("Non-Designated Countries"), the assessment process will involve compliance with the IFC Performance Standards and the World Bank Environmental, Health and Safety Guidelines.

Human rights due diligence and stakeholder engagement

For projects in "Designated Countries" (currently 31 specified countries with robust environmental and social frameworks), compliance with the host country laws will meet the requirements of EP III in a number of key areas. For projects in all other countries ("Non-Designated Countries"), the assessment process will involve compliance with the IFC Performance Standards and the World Bank Environmental, Health and Safety Guidelines.

In addition, the borrower may have to implement a culturally appropriate "Informed Consultation and Participation" process with stakeholders, particularly considering the needs of disadvantaged and vulnerable groups. For projects affecting indigenous peoples, this process is expanded to achieve the "Free, Prior and Informed Consent" of such groups through participation in decision making and a focus on achieving agreement.

What does this mean for EPFIs?

If they have not done so already, EPFIs should:

  • revisit and update their internal policies, procedures and checklists in light of the requirements and scope of EP III; and
  • put in place appropriate systems to verify compliance with EP III obligations and for the annual disclosure of information contemplated for EPFIs by EP III.

EPFIs should also ensure that, for projects to which EP III is applicable:

  • Environmental Impact Assessments fully reflect the requirements of the host state, EP III and (where relevant) the IFC Performance Standards, the World Bank Environmental, Health and Safety Guidelines and the OECD Common Approaches for Export Credits and Environmental and Social Due Diligence; and
  • Equator Principles provisions within finance documents are scrutinised closely for compliance with the requirements of EP III and the relevant categorisation of the project for Equator Principles purposes.

Law stated as at 9 July 2013