Revised Equator Principles may make projects more costly to finance

Revised Equator Principles may make projects more costly to finance

December 12, 2019 | By Bob Comer in Denver

The Equator Principles are perhaps the most widely used private international financing standards seeking to influence environmental and social “sustainability” in big project development.

Following recent revisions, they have become more probing and may now apply to more projects than before. The new version is version 4.

For example, it lowers the funding level necessary to apply from $100 million in aggregate project financing to $50 million on an individual lender basis. Thus, if a group of institutions is lending, each lender making a commitment of at least $50 million would be expected to make project compliance with the Equator Principles a condition to funding the loan.

Version 4 — called EP4 — expands the reach in other ways as well. The prior version of the Equator Principles applied through host country laws to projects in the Organization for Economic Co-operation and Development (OECD) list of “designated countries.” This includes the United States, Canada, Iceland, Chile, Australia, New Zealand, Japan, Korea, Israel and most of Europe. However, EP4 creates some new compliance requirements for projects in these previously, largely unaffected countries.


More than 100 financial institutions from 38 countries that provide advisory services and project financing subscribe to the Equator Principles. They are all members of an Equator Principles Association that exists to “encourage [developers] to address potential or adverse risks and impacts identified during the Project Development Lifecycle.”

The financial institutions — called EPFI lenders — have all pledged their support for the objectives of a series of non-governmental organization programs.

These programs include the United Nations (UN) sustainable development goals, the UN Guiding Principles on Business and Human Rights, the UN Declaration for the Rights of Indigenous Peoples, the 2015 Paris climate accord, the recommendations of a task force on climate-related financial disclosures, the World Bank Group environmental, health and safety guidelines and the International Finance Corporation performance standards on environmental and social sustainability.

The individual financial institutions decide whether there is project compliance, at times in consultation with outside experts.

Project developers must commit to comply with the host country law and the EP4 process.

For transparency and accountability purposes, EPFI lenders must report at least annually on a variety of metrics. New information sharing expectations among financial institutions are included in EP4, as well.


EP4 applies “globally and to all industry sectors.”

It is applied by financial institutions when offering various types of services for new projects, project expansions and upgrades.

The types of services include advisory services or loan or other financing commitments to projects where total project capital costs are expected to exceed US$10 million. EP4 also comes into play where project-related corporate loans are being made with a tenor of at least two years, the lender has made an individual commitment of at least US$50 million and the borrower has direct or indirect control over project operation. It also applies to bridge loans of less than two years in duration.

EP4 also applies to project-related refinancing and acquisition financing where the underlying project was financed under the Equator Principles framework, there has been no material change in project scale or scope, and project completion has not occurred.

Financial institutions classify each project into three categories “based on the magnitude of potential environmental and social risks and impacts, including those related to human rights, climate change, and biodiversity.”

Projects in category A have the most significant potential adverse environmental and social consequences: the potential consequences are diverse, irreversible or unprecedented.

Projects in category B have potential limited adverse environmental and social risks that are few in number, generally site-specific, largely reversible and readily addressed through mitigation.

Projects in category C have minimal or no adverse environmental and social consequences.

EP4 creates a middle category of higher risk category B projects that will be treated similarly to category A projects and lower risk category B projects that “could be treated in a lighter regime.”

Basic Requirements

Developers of category A and some category B projects must prepare an environmental and social impact assessment — called an ESIA — along with any necessary specialized studies, to the satisfaction of the EPFI lender. A more focused assessment not rising to the level of an ESIA may be prepared for category C and some category B projects.

Project finance and project-related corporate loans for category A and some category B projects require that an independent consultant review how the ESIA or other assessment is prepared. This includes vetting environmental and social management systems, environmental and social management plans and stakeholder engagement documentation to assist the bank or other lender with its due diligence.

Covenants about compliance must be included in the loan documentation.

Independent monitoring and reporting are required to assure compliance after closing on the financing.

Assessments must include human rights impacts based on the UN Guiding Principles on Business and Human Rights (paragraphs 17-21).

A climate change risk assessment is required for all category A projects, some category B projects and all projects with greenhouse gas emissions of 100,000 tons of CO2 equivalent annually from direct emissions within the project boundary and from indirect emissions associated with off-site production of energy used by the project. The assessment also must consider climate transition risks and project alternatives with lower greenhouse gas emissions.

EP4 also calls for mitigation of residual effects, suggesting the potential for the bank or other lender to require a “no-impact” protocol. This could include compensatory mitigation, which could lead to a protracted negotiation process over the level of mitigation for both environmental and social issues.

The assessment must cover compliance with host country laws that pertain to environmental and social issues. For all category A and B projects globally, the bank or other lender must confirm that the project meets the EP4 principles. This review may require supporting advice from independent consultants. For projects in OECD non-designated countries, the assessment must also comply with IFC performance standards and the World Bank Group environmental, health and safety guidelines. For projects in OECD designated countries, there are new, potentially significant EP4 process and outcome requirements that now apply. One example is free, prior and informed consent for indigenous peoples over project funding authorization. In its review of the assessment, the EPFI lender may evaluate compliance and determine there is a justified deviation from the applicable standards or undertake additional due diligence in addition to host-country laws to address risks.

Other Obligations

For category A and B projects, EP4 requires the borrower to maintain an environmental and social management system and an “effective grievance mechanism.” It also requires the borrower to demonstrate effective stakeholder engagement in a structured and culturally appropriate manner with affected communities, workers and other stakeholders.

Projects that affect indigenous peoples are subject to additional obligations. There must be a process of informed consultation and participation, compliance with host country law and host country obligations under international law. Where free, prior and informed consent to the project is required from the indigenous peoples, a qualified independent consultant or legal advisor must usually be retained to evaluate the consultation and consent processes with the indigenous peoples. In some cases, the stakeholder or indigenous peoples engagement may be the responsibility of the host government. In such cases, the developer must collaborate with the responsible government throughout the process.

In closing, EP4 contains a disclaimer. It provides that in the case of “a clear conflict” between host country law and the requirements of EP4, “host country [law] shall prevail.”

EP4 is scheduled to take effect in July 2020. Implementation guidance is anticipated before then.