New 'Equator Principles' will extend environmental assessment to more project finance arrangements

Out-Law News | 16 May 2013 | 11:58 am | 3 min. read

A new version of the 'Equator Principles', which establish an environmental and social risk management framework for project financiers, will cover a wider range of funding arrangements.

The third version of the Equator Principles (EP III) (24-page / 306KB PDF) will take effect from 4 June, and should be applied to all new transactions from 1 January 2014. The new principles will apply to project-related corporate loans and short-term 'bridge' loans, in addition to project financing arrangements.

Environment and energy law expert Eluned Watson of Pinsent Masons, the law firm behind, said that the new principles would have "important implications, risks and opportunities" for both lenders and those seeking financial capital for projects.

"Since the Equator Principles were first launched in 2003, the number of financial institutions that have adopted them has increased from 10 to 76, the global scope of the Equator Principles has extended and the project finance market has changed," she said. "This has now been reflected in a set of Equator Principles that are more robust, significantly extended in scope and which offer a set of social and environmental standards that take into account changing market practices and emerging global environmental and social concerns."

"There will be important implications, risks and opportunities for banks and those seeking financial capital for projects. Borrowers will need to get to grips with the new requirements quickly in order to ensure finance is secured for projects within the required timescales. EP III will particularly impact complex international projects such as large infrastructure and energy projects. There will be additional compliance issues to take into account, together with an increased emphasis on more onerous regulatory and legal due diligence issues," she said.

The Equator Principles are a voluntary set of standards for determining, assessing and managing social and environmental risk in project finance. They were developed by a group of international private sector banks, and launched in June 2003. Financial institutions which apply the Equator Principles, known as Equator Principles Financial Institutions (EPFIs), have committed not to provide loans to projects where the borrower will not or is unable to comply with certain social and environmental standards.

Consultation on the latest version of the Equator Principles began in 2010 and involved members of the EP Association, clients, industry bodies, NGOs and investors. EP III revises and updates the last approved version of the Equator Principles, which was published in 2006.

EP III will continue to apply to project finance arrangements over $10 million, provided by EPFIs. They will also now apply to certain corporate loans, following concerns that project finance arrangements with challenging environmental and social risks were being disguised as these types of transactions in order to avoid application of the Equator Principles. Corporate loans running for at least two years, where the majority of the loan is related to a single project and the total aggregate loan amount is at least $100m will now fall within the scope of the Equator Principles, as will bridge loans running for no longer than two years that are intended to be refinanced by project finance or a project-related corporate loan.

The updated Principles set out new requirements on managing climate change impacts, including a new requirement for lenders to carry out an 'alternatives analysis' where the project will emit over 100,000 tonnes of carbon dioxide equivalent annually. This analysis should consider technically and financially feasible and cost-effective options available to reduce project-related greenhouse gas emissions during the design, construction and operation of the project. There will also be increased information-sharing and public disclosure requirements.

The new rules take effect from 4 June. However, transitional arrangements will operate until the end of 2013 where EPFIs need "further internal preparation time", the EP Association Steering Committee said. EP III will not apply retrospectively to transactions that were signed off before 4 June, but will apply to expansions and upgrades of existing facilities where the proposals may have significant environmental or social impacts of their own or "change the nature or degree of existing impacts" assessed under previous versions of the Equator Principles, the Committee said.

Committee chair Leonie Schreve said that the revised Principles were "good news for the environment", and for local communities likely to be affected by economic development.

"For ten years, the EP framework has helped ensure that the environmental and social impacts of large scale project finance deals are minimised and managed responsibly," she said. "The approval of EP III will mean many more projects will be captured under the EP framework, which has been welcomed by financial institutions who want to manage environmental and social risk better."