Allens

International Business Obligations

Focus: Review of project financing principles

26 September 2012

In brief: The Equator Principles, which promote environmentally and socially responsible project financing, are in the process of being updated. Although, initially, it may seem that the revised principles will increase signatories' obligations, their enhanced alignment with other international standards will facilitate a streamlining of financial institutions' policies and processes. Partner Louise Jenkins (view CV) and Lawyers Catie Shavin and Loren Atkins report.

How does it affect you?

  • If adopted, the Equator Principles will apply to a broader range of project financing activities, including project-related corporate loans and bridging loans.
  • Further proposed changes that may affect Equator Principles members include:
    • greater transparency and reporting obligations;
    • greater emphasis on human rights due diligence; and
    • consideration and reporting of carbon emissions.
  • The draft updated principles (the draft EP III) raise the benchmark for environmental and social standards for project financing, and may influence policy, legal and regulatory developments in Australia and internationally.
  • The draft EP III is available for stakeholder consultation and public comment until 12 October 2012.

Background

Launched in 2003, and revised in 2006, the Equator Principles provide a framework for determining, assessing and managing environmental and social issues in the project finance sector. Financial institutions that adopt the Equator Principles (EPFIs) recognise that project financing performs an important role in financing development around the world, and that project financers may encounter complex environmental and social challenges, particularly in emerging markets.

When undertaking certain project financing activities, EPFIs commit to:

  • reviewing and categorising projects proposed to be financed based on the magnitude of potential environmental and social risks;
  • where a project is categorised as moderate or high risk, ensuring that:
  • the borrower undertakes a social and environmental assessment and, where appropriate, prepares an action plan;
  • the government, borrower or third-party expert consults with affected communities; and
  • the borrower establishes a grievance mechanism for affected communities,
  • reporting publicly about their Equator Principles implementation and experience at least annually.

The principles have been adopted by 77 financial institutions around the world, including several Australian banks and the Australian export credit agency, EFIC. (For an analysis of the introduction and early impact of the Equator Principles, see our Focus: The Equator Principles – Guidelines for Responsible Project Financing.)

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Proposed changes to the Equator Principles

The Equator Principles are being updated to implement certain recommendations made during a strategic review undertaken in 2010.

One of the key aims of the update is to ensure that the principles remain a relevant and practical risk management tool, and that they support sustainable financing objectives. The draft EP III also reflects the revised IFC Performance Standards and Sustainability Framework, which were launched in January of this year. (See also our earlier Focus on this topic.)

Key changes proposed in the draft EP III are outlined below.

Extending the scope

The Equator Principles currently apply only to project finance transactions with total capital costs of more than US$10 million. The draft EP III proposes that the principles will additionally apply to:

  • project finance advisory services for projects of more than US$10 million; and
  • certain project-related corporate loans and bridging loans.

This extension of the scope of the principles is intended to address the increasing variety of institutions active in the project financing market and the diversity of financing structures used.

Increased reporting and transparency obligations

The draft EP III requires EPFIs to report publicly significantly more information.

For example, the draft EP III requires EPFIs to publish environmental impact assessments online. It also requires EPFIs to report, on an annual basis, aggregate data on transactions screened under the Equator Principles and also specific data for projects that have reached financial close.

Alignment with other international standards

As noted above, the draft EP III has been developed to ensure consistency with the 2012 revision of the IFC Performance Standards, which EPFIs are required to implement. Significant changes include those relating to stakeholder engagement and grievance mechanisms.

Further, the draft EP III more closely aligns with key international human rights standards, such as the 2008 UN 'Protect, Respect and Remedy' Framework and the 2011 Guiding Principles on Business and Human Rights. (See also our Focus: UN endorses Guiding Principles for Business and Human Rights.) It emphasises EPFIs' responsibility to consider human rights when undertaking due diligence.

Carbon emission obligations

Where projects that emit more than 100,000 tonnes of carbon dioxide equivalent per year, the draft EP III requires analysis of alternative fuel sources and technologies and annual public reporting of the project's carbon emissions.

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Conclusion

If the draft EP III is adopted in its current form, EPFIs will be subject to increased obligations for projects financed. The updated Equator Principles are also likely to impact on policy and regulatory developments relating to project financing activities.

However, enhanced alignment between the Equator Principles and other international standards, including the IFC Performance Standards and the Guiding Principles on Business and Human Rights, may assist financial institutions to streamline their policies and processes and ensure compliance with their legal and other obligations.

A stakeholder consultation and public comment process regarding the draft EP III is currently open, and is due to conclude on 12 October 2012. Comments on the draft EP III can be submitted either directly to the EP Secretariat1 or via the submission form on the Equator Principles Website.

It is proposed that the updated Equator Principles will be formally launched in January 2013.

Footnotes
  1. Via email to ep3@equator-principles.com.

For further information, please contact:

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