The Equator Principles: Time to Take Stock
Posted 19/12/2019 by Ray Powell
Back in 2003, the World Bank launched a new risk management framework called the Equator Principles. The Principles comprised a set of voluntary guidelines, to be followed by financial institutions as a means of ensuring the natural and social responsibility of any large-scale development project.
A decade and a half since the framework was announced, it’s time to take stock. How has the world of infrastructure responded to the Principles, and what’s next?
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.
|Equator Principle Requirement||Note|
|1.||Review and categorize each project:
Category A: Projects with potentially significant
adverse environmental and social risks and/or
impacts that are diverse, irreversible or unprecedented
Category B: Projects less severe than Category A with
impacts that are few in number, generally site
specific, largely reversible and readily addressed
through mitigation measures
Category C: with minimal or no adverse
environmental and social risks and/or impacts
|Now included in scope: all |
expansions and upgrades of an
Language added regarding the initial
assessment of human rights and
|2.||Preparation of Environmental and Social Impact|
Assessment (Cat A & B), Human Rights risks and
impacts, Climate Change risk assessment including
assessment of projects where emissions are expected
to be more than 100,000 tonnes of CO2 equivalent
|Strengthened requirements around|
human rights assessment, impact on
indigenous peoples, climate change
risk assessment, and biodiversity
|3.||Compliance with applicable Environmental & Social|
Standards, local laws, regulations and permits.
|Now includes for projects located |
in Designated Countries, the need to
evaluate any project-specific risks
against relevant IFC Performance Standards
|4.||All Category A&B projects should have an|
Environmental & Social Management System Plan
(ESMP) incorporating actions required to comply with
|An Equator Principles Action Plan|
EPAP) will be prepared where the
applicable standards are not met
|5.||Demonstrate effective stakeholder engagement for|
all Cat A&B projects by informed and structured
consultation with affected communities, workers and
the needs of disadvantaged and vulnerable groups
in their local language.
|Amended requirements on the|
independent environmental and
social consultation process with
|6.||All Category A and some Category B projects to have|
a culturally appropriate and readily accessible, no
cost, non-retribution grievance mechanism.
|Grievance mechanisms should be|
scaled to the risks and impacts of a
|7.||All Category A and some Category B projects to|
engage an independent environmental and social
consultant to independently review Equator
|The independent consultant will also|
recommend suitable EPAP remedies
|8.||Put in place covenants to abide by and comply with|
the ESMP and EPAP during construction and
operation of the Project and provide periodic reports
|Remedial actions may be imposed to |
bring a project back into compliance
|9.||All Category A and some Category B projects to have|
independent monitoring & reporting post Financial
|Reporting at least annually|
|10.||All Category A and some Category B to have a|
summary of the ESIA accessible and available on-line
with annual reports on GHG emission levels during
the operational phase.
|ESIA to include human rights risk|
Recommendation that non-sensitive
biodiversity data is shared with
Global Biodiversity Information Facility