The Equator Principles: Time to Take Stock

Changing Landscapes

First, it’s clear that the Principles have made a significant impact. Today, most of the world’s leading financial institutions have signed up to the Equator Principles methodology, in a bid to comply with certain environmental and social standards. These standards build on the 2015 Paris Accord, the UN Guiding Principles on Human Rights, and the United Nations Sustainable Development Goals. But what does that mean on a practical level?

 We’re seeing an increased corporate focus on sustainable and ethical business practices, exemplified by the emergence of new Environmental, Social, and Governance (ESG) criteria to screen potential investments. New assessment tools from financial advisors and rating agencies are helping to ascertain where companies, sectors, and even specific projects sit within the ESG hierarchy.

ESG’s Winners and Losers

 The results of these new ESG criteria are now becoming clear. It’s no surprise that sectors such as fossil fuel mining, nuclear power, and animal exploitation industries are feeling the backlash from socially-conscious investors. Meanwhile, ESG-compliant investments are providing higher rates of return, with lower risk.

Conducting its own research, Fitch recently found the energy sector to perform particularly poorly in ESG tests – due largely to its environmental impact. Conversely, renewables, transportation, and water projects had more favourable results. A recent report for Principles for Responsible Investment has stated that carbon-intensive firms such as coal producers could lose 44% of their market value whilst companies in the same sector that transition to low-carbon technology such as renewables could grow 104%.

In a review of its investment portfolio, Goldman Sachs found that non-technical reasons such as ESG outrank cost, contractual, and technical reasons in terms of project delays.

What next for The Equator Principles?

The Equator Principles Association recognise that its own criteria must change as the world changes around us. Only by readily adapting and modernising will the Principles maximise their impact. Thus, in June 2019, the Association announced the fourth edition of the Equator Principles (EP4). EP4 goes live on July 1 2020.

One notable change in EP4 includes a more significant role for human rights. In practice, this requires greater and more meaningful consultation of indigenous peoples, where they are affected by proposed works. There are also changes to scope and applicability of the Principles, as well as updated advice relating to climate.

With increasing global awareness of climate on both political and social stages, it’s anticipated that the Equator Principles should continue to grow and adapt, in-line with evolving demands and more ambitious state targets.

Regardless of future developments, it remains essential for those in the business of infrastructure financing to maintain a clear knowledge and understanding of the Equator Principles, in their most up-to-date state.

To that end, a closer look at the proposed key changes in EP4 is provided in the table below.