Friday, June 28, 2013

Equator Principles III – “Good news for the environment and for communities around the world”?


On May 14, 2013, the members of the Equator Principles Association have published the third version the Equator Principles. Is this good news for the environment and for communities around the world, as the association’s press release says on its first page?

I have read these principles last week – first, because they are part the documents “you must have read” when you work in this area and, second, to learn something about environmental aspects of project finance. I have succeeded on the first point but, unfortunately, got pretty disappointed on the second point.

But let’s go step by step:

The Equator Principles Financial Institutions commit to finance only those projects that comply with the Equator Principles. So good, so far – But what are the Equator Principles?

In short, they address environmental and social risk in project finance transactions. These transactions not only include project finance as such, but also project related advisory services, corporate loans, and bridge loans.


Scope of application

The application of the Equator Principles depends on the size of the financial services: In case of project finance, connected advisory services, and connected bridge loans, the project capital costs must be at least 10 MUSD. In case of project-related corporate loans and connected bridge loans, the total aggregate loan amount must be at least 100 MUSD.

At first glance, this seems curious: Small projects can pollute, big projects cannot? Obviously not! The idea is more to avoid substantial administrative costs for small projects.


Principles

In total, there are 10 Equator principles:

  • Review and categorization: Depending on the degree of environmental and social risks involved, projects can enter into category A, B, or C.

  • Environmental and social assessment: Adequate, accurate, and objective evaluation and presentation of environmental and social risks and impacts for category A and B projects.

  • Applicable environmental and social standards: Compliance with host country laws, regulations, and permits / International Finance Corporation Performance Standards on Environmental and Social Sustainability

  • Environmental and Social Management System and Equator Principles Action Plan: I must simply quote here. I honestly don’t understand what this is about.

[…] Further, an Environmental and Social Management Plan (ESMP) will be prepared by the client to address issues raised in the Assessment process and incorporate actions required to comply with the applicable standards. Where the applicable standards are not met to the EPFI’s satisfaction, the client and the EPFI will agree an Equator Principles Action Plan (AP). The Equator Principles AP is intended to outline gaps and commitments to meet EPFI requirements in line with the applicable standards.”

  • Stakeholder Engagement: This intends to include affected communities.

  • Grievance Mechanism: This mechanism intends to receive and facilitate the resolution of concerns and grievances about the project’s environmental and social performance.

  • Independent Review of category A and, as appropriate, category B projects.

  • Covenants: This refers to environmental and social engagements taken by the borrower in the financing documentation.

  • Independent Monitoring and Reporting by and independent environmental and social consultant after financial close.

  • Reporting and Transparency: This requires the final client to disclose environmental information online.


To make it even more theoretical, the Equator Principles are applied only indirectly. As a matter of fact, the participating banks shall implement them in their own internal environmental and social policies. Process rules that are implemented in internal policies – welcome to the world of banking!


Let’s finish with two quotes underlining the beauty of English administrative language:

The EPFI will require that the Assessment process evaluates compliance with the applicable standards as follows: […].”

The Assessment process will establish to the EPFI’s satisfaction the Project's overall compliance with, or justified deviation from, the applicable standards.”


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