Equator Principles

From Open Risk Manual

Definition

The Equator Principles (EP) is a voluntary financial industry benchmark for determining, assessing and managing environmental and social risk (ESG Risks) in Project Finance[1].

Objective

The core objective of adopting the EP is that negative impacts on project-affected ecosystems and communities should be avoided where possible. If unavoidable, negative impacts should be reduced, mitigated and/or compensated for appropriately.

Adopters of the principles should be able to better assess, mitigate, document and monitor the credit and reputational risk associated with financing projects.

History

The Equator Principles where formally launched in Washington DC on 4 June 2003. They were based on existing environmental and social policy frameworks established by the International Finance Corporation. The principles evolved over the years (on June 4 2023 was the 20th anniversary) and currently version 4 (2020) is applicable.

Adoption of the Equator Principles has grown from the original 10 adopters in 2003, to 78 at the time of the 10th anniversary in 2013, and as of 2023 stands at 138 entities in 38 countries.

Governance

The Equator Principles Association is an unincorporated association of member Equator Principles Financial Institutions (EPFIs) whose objective is the management, administration and development of the EP. The association was formed in 2010 to ensure the long-term viability and ease of management of the member EPFIs. It is governed by a Steering Committee, which is supported by a Secretariat. The secretariat is responsible for:

  • responding to all internal and external enquiries
  • managing communications (including the EP website)
  • providing advice and assistance with regards to adoption
  • reviewing and publishing all EPFI reporting
  • supporting workplans for the EP Association Working Groups and Steering Committee; and
  • day-to-day management and administration of the EP Association.

Scope

Financial institutions adopt the Equator Principles to ensure that the *Projects* they finance are developed in a socially responsible manner and reflect sound environmental management practices (Project Finance is a method of financing in which the lender looks primarily to the revenues (cash flows) generated by the Project, both as the Source of Repayment and as security for the Credit Exposure). Project finance concerns typically the long-term financing of infrastructure and industrial projects.

In terms of geographical scope, the Equator Principles apply globally. In terms of type of economic development activity, they applies to all industry sectors. In term of financial activities, the Equator Principles apply to the Financial Products described below, typically used when supporting a new economic Project:

  • Project Finance Advisory Services where total Project capital costs are US$10 million or more.
  • Project Finance with total Project capital costs of US$10 million or more.
  • Project-Related Corporate Loans where all of the following three criteria are met:
    • The majority of the loan is related to a Project over which the client has Effective Operational Control (either direct or indirect).
    • The total aggregate loan amount and the lender's individual commitment (before syndication or sell down) are each at least US$50 million.
    • The loan Tenor is at least two years.
  • A Bridge Loan with a tenor of less than two years that is intended to be refinanced by Project Finance or a Project-Related Corporate Loan that is anticipated to meet the relevant criteria described in 2 and 3 above.
  • Project-Related Refinance and Project-Related Acquisition Finance, where all of the following three criteria are met:
    • The underlying Project was financed in accordance with the Equator Principles framework.
    • There has been no material change in the scale or scope of the Project.
    • Project Completion has not yet occurred at the time of the signing of the facility or loan agreement.


The Equator Principles are not intended to be applied retroactively, but EPFI's will apply the Principles to the financing of expansions or upgrades of an existing Project.

Statement of Principles

The benchmark consists of 10 distinct principles that are summarized in the table and expanded upon in individual entries (links in the first column)

Principle Description Summary
EP1 Review and Categorisation Introduction of three broad categories (A, B, and C) based on the magnitude of potential environmental and social risks and impacts. In turn the precise assessment, documentation and other management actions required to apply the Principles as laid out in further principles depends on this classification.
EP2 Environmental and Social Assessment The client is required to conduct an appropriate Assessment process, propose measures to minimise, mitigate, and where

residual impacts remain, to compensate/offset/remedy for risks and impacts to Workers, Affected Communities, and the environment.

EP3 Applicable Environmental and Social Standards Address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues.
EP4 Environmental and Social Management System and Equator Principles Action Plan For all Category A and Category B Projects the client must develop and / or maintain an Environmental and Social Management System and prepare an Environmental and Social Management Plan.
EP5 Stakeholder Engagement For all Category A and Category B Projects the client to demonstrate effective Stakeholder Engagement (including e.g. an informed consultation process)
EP6 Grievance Mechanism For all Category A and, as appropriate, Category B Projects the client must establish effective grievance mechanisms (to receive and facilitate resolution of concerns and grievances).
EP7 Independent Review For all Category A and, as appropriate, Category B Projects, an Independent Environmental and Social Consultant, will carry out an Independent Review of the Assessment process.
EP8 Covenants Incorporation of covenants linked to compliance. These will ensure that for projects where the client is not in compliance the EPFI (lender) will work with the client on remedial actions. Ultimately the EPFI reserves th right to call an event of default if the client is not compliant with the covenants.
EP9 Independent Monitoring and Reporting For all Category A and, as appropriate, Category B Projects in order to assess Project compliance with the Equator Principles after Financial Close and over the life of the loan, the lender will require independent monitoring and reporting.
EP10 Reporting and Transparency Both lender and client must adhere to specific disclosure requirements. Clients must ensure that at a minimum relevant summaries are available online. The lender will at least annually report on closed transactions and Equator principles implementation processes.

Disclaimers

  • The Equator Principles is a baseline and framework for developing individual, internal environmental and social policies, procedures and practices. The Equator Principles do not create any rights in, or liability to, any person, public or private.
  • Financial institutions adopt and implement the Equator Principles voluntarily and independently, without reliance on or recourse to the IFC, the World Bank Group, the Equator Principles Association, or other EPFIs. In a situation where there would be a clear conflict between applicable laws and regulations and requirements set out in the Equator Principles including confidentiality obligations, the laws and regulations of the relevant host country prevail.

References

  1. The Equator Principles, July 2020, available from www.equator-principles.com