The Equator Principles Association (EPA) has released the third version of the Equator Principles (EPs) for managing environmental and social risks in financing projects. They are largely the same as the draft EPs released for public consultation in August 2012 (see our e-bulletin here which discusses the draft in detail), but there have been some changes of which lenders and borrowers should be aware, particularly in relation to express exclusions of certain financial instruments from scope, relaxed public disclosure requirements, and human rights due diligence. The new EPs will come into effect on 4 June 2013, but the EPA will allow the previous version of the EPs to be used where the arrangement mandate is signed before the end of 2013.
The new EPs will take effect from 4 June 2013 for all products now in scope (i.e. project finance, project finance advisory services, and project-related corporate and bridge loans). They are not intended to have retroactive effect and the EPA has said that they will not apply to transactions where the arrangement mandate was signed before 4 June 2013.
The EPA has confirmed there will be a transitional period until 31 December 2013 during which time the previous version of the EPs may be used, but that the new EPs must be applied to all mandates signed from 1 January 2014. The EPA’s focus on the date of the mandate differs from the practice of lenders of applying the version of the EPs in effect at the date that the facility agreement is signed. During the transitional period, lead arrangers should therefore specify in the term sheet which version of the EPs will be used. For similar reasons, it also appears that amendments to existing facilities will not be required to comply with the new EPs.
Exclusion of export finance
In relation to the scope of the EPs, the only significant change from the August 2012 draft is the addition of an express exclusion of export finance in the form of supplier credit (as the borrower has no effective operational control) and other financial instruments that do not finance an underlying project such as asset finance, acquisition finance and general corporate loans.
Public disclosure requirements relaxed
The requirement under the August 2012 draft for the borrower to disclose its Environmental and Social Impact Assessment (ESIA) and environmental and social management plan online has been replaced with a minimum requirement to disclose a summary of the ESIA online. In practice, this is unlikely to go beyond disclosure requirements under local law in many countries.
Further, whilst the August 2012 draft required disclosure prior to project construction (potentially an issue for projects where EPs compliance and ESIA preparation have not been prioritised) the final text is silent as to the timing of disclosure. This may be covered in future EPA guidance, although this is not currently clear.
Human rights due diligence
Additional text has now been added to the preamble recognising the importance of human rights generally and the need to minimise adverse human rights impacts with express reference to the UN’s Protect, Respect and Remedy Framework for Business and Human Rights developed by Professor John Ruggie.
The EPs now also state that “in limited high risk circumstances” it may be appropriate for a borrower to complement its ESIA with specific human rights due diligence. Although this restates an identical requirement under the IFC Performance Standards, there is likely to be some uncertainty as to when this requirement applies and what exactly will be expected by way of due diligence. This may be addressed by further guidance from the EPA, but could be influenced by what the UN Guiding Principles on Business and Human Rights describe as human rights due diligence (assessing actual and potential human rights impacts, integrating and acting upon findings, tracking responses and communicating how impacts are addressed).
Applicable standards in developed and emerging markets
Under previous iterations of the EPs and the August 2012 draft, projects in high-income OECD countries were required to comply with local laws, whilst projects in other countries were also required to comply with the IFC Performance Standards and applicable World Bank EHS Guidelines. The EPA has now decided to designate specific countries where it considers compliance with local laws to be sufficient.
The EPA has published an initial list available here but this simply matches the list of high-income OECD countries. Whilst this means that there is no practical effect of this change, the EPA has indicated that there will be changes to the list but has not specified what these might be.
The August 2012 draft included a new express requirement for climate change issues to be addressed in due diligence and, for projects with high emissions of carbon dioxide equivalent, additional requirements to undertake alternatives analysis and to publicly report emissions. The EPA has now confirmed that it will be developing specific implementation guidance on these requirements, but has resisted calls for more robust climate change requirements.
No enforcement mechanism
As with previous versions, the new EPs do not provide any mechanism for enforcement (although borrowers are required to develop grievance mechanisms at project level for affected local communities). The inability to enforce compliance by financial institutions with the EPs has long been a criticism of NGOs and was raised during the consultation process and a formal enforcement mechanism suggested. However, the EPA has said that whilst individual institutions are free to establish their own mechanism, it does not consider a formal joint mechanism to be appropriate given the voluntary nature of the EPs.
For more information please contact Louise Moore, Partner, London, Adrian Cheng, Partner, Singapore, Kevin O’Connor, Senior Associate, London, Helena Anderson, Senior Associate, London and Fiona Curl, Senior Associate, Melbourne or your usual Herbert Smith Freehills contact.