Equator Principles

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By including this profile, the Initiative, its Supporting Institutions and the Secretariat do not endorse the activities described below nor the guidance and information provided in this profile.

Last updated: July 2018

Website: equator-principles.com/

Contact: secretariat@equator-principles.com

Summary: Launched in 2003, by 10 leading banks, the Equator Principles are a set of 10 Principles for financial institutions aiming at “determining, assessing and managing environmental and social risk in projects”[1], based on the policies and guidelines of the World Bank and International Finance Corporation (IFC). As of July 2018, 94 financial institutions have adopted the Equator Principles. An updated EP4 version was announced for August 2019 to better integrate E&S risks in a post-Paris Agreement environment and the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD).

What are the objectives of the initiative?

“The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making.”

There are ten Equator Principles, which are, if followed by the members, binding (Principle 8) for the members of the association. Yet, there is no possibility to enforce the respect of the Equator Principles by its signatories, other than morally.

The Equator Principles

Review and categorization: Categorization of a proposed project based on the magnitude of its potential environmental and social risks and impacts (based on the IFC categorization process).
Environmental and Social Assessment: Require the client to conduct an assessment process to address relevant environmental and social risks and impacts of the proposed project (for all category A and B projects[2]).
Applicable Environmental and Social Standards: Address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues.
Environmental and Social Management System and Equator Principles Action Plan: Require client to develop or maintain an Environmental and Social Management System (ESMS) for all category A and B projects.
Stakeholder Engagement: Require client to demonstrate effective stakeholder engagement (disclosure early during the project) as an ongoing process in a structured and culturally appropriate manner with affected communities and, where relevant, other stakeholders for all category A and B projects.
Grievance Mechanism: For all category A and, as appropriate, category B projects, require the client, as part of the ESMS, to establish a grievance mechanism designed to receive and facilitate resolution of concerns and grievances about the project’s environmental and social performance.
Independent Review: Independent review by an environmental and social consultant for all category A and, as appropriate, category B projects.
Covenants: Client will covenant in the financing documentation to comply with all relevant host country environmental and social laws, regulations and permits in all material respects.
Independent Monitoring and Reporting: Require the appointment of an independent environmental and social consultant to assess the project’s compliance with the Equator Principles after the financial close for all category A and, as appropriate, category B projects.
Reporting and Transparency: For all category A and, as appropriate, category B projects – client ensures that, at a minimum, a summary of the ESIA is accessible online; client publicly reports GHG emission levels (Scope 1 and 2).

Who launched it? Who is participating?

  • The EPs were launched in 2003 by 10 banks: ABN AMRO (Netherlands), Barclays (UK), Citigroup (US), WestLB (Germany), Crédit Lyonnais (France), Crédit Suisse (Switzerland), HypoVereinsbank (Germany), Rabobank (Netherlands), Royal Bank of Scotland (UK), Westpac (Australia).[3]
  • As of July 2018, 94 financial institutions in 37 countries have adopted the Equator Principles.
  • An EP Association was formed on 1 July 2010 and was instituted to ensure long-term viability and ease of management of the member EPFIs. 10 banks are part of the EP Association Steering Committee:
    • Chair: Standard Bank Group
    • Regional representatives:
    • Europe – Credit Suisse
    • Latin America – Itau Unibanco S/A
    • Asia-Oceana – Mizuho Bank, Ltd
    • North America – Export Development Canada
    • Middle East & Africa – FirstRand Limited
    • Management Support:
    • MUFG Bank, Ltd
    • Commonwealth Bank of Australia
    • ING
    • UK Export Finance. [4]

Why has this been put into place?

Major project financiers created the EPs in 2003 “In order to encourage responsible and sound environmental and social policies in project finance, and in response to criticism from affected communities and NGOs”.

“They are an example of a voluntary code of conduct based on the environmental and social standards of the World Bank Group. The IFC, the World Bank Group’s private sector lending arm, provided and continues to provide through its Performance Standards in Environmental and Social Sustainability (International Finance Corporation, 2012) much of the present base of the EPs’ environmental and social sustainability architecture.”[5]

What are the main work streams/areas of work?

The Equator Principles apply to all industry sectors and to four financial products: Project Finance Advisory Services; Project Finance; Project-Related Corporate Loans; Bridge Loans.

When joining the association financial institutions can, on a voluntary basis, join one of the following working groups: Designated Countries Working Group; Capacity Building & Training Working Group; Consistency; Scope; External Relations; Biodiversity; Climate Change; Social Risk.

The climate change working group “engages with the International Finance Corporation regarding implementation of their climate change strategy into the Performance Standards and to share good practice in climate risk management practices.” It is led by the Commonwealth Bank of Australia (CBA) and the Export Development Canada (EDC).[6]

What are outcomes of the initiative linked with the 5 Principles?

“The Equator Principles do not create any rights in, or liability to, any person, public or private. Financial institutions adopt and implement the Equator Principles voluntarily and independently, without reliance on or recourse to the IFC, the World Bank Group, the Equator Principles Association, or other EPFIs.”[7]

However, the EPs have “promoted convergence around common environmental and social standards”.

“The EPs have also helped spur the development of other responsible environmental and social management practices in the financial sector and banking industry and have provided a platform for engagement with a broad range of interested stakeholders, including non-governmental organisations (NGOs), clients and industry bodies.” [8]

Have intermediate or final reports / guidance been issued?

In June 2013, the Association published the third and current version of the Equator Principles, including a detailed overview of the ten Principles as well as the implementation requirements mandatory for signatory financial institutions.

The Equator Principles have also published a number of different guidance notes and best practices for the implementation of the ten Principles.

Currently, the EP Association is working on an update of the 10 Principles, to be published in August 2019. The reasons stated for this update are the following: “The approach of FIs, regulators, clients and civil society to E&S risks in finance is rapidly changing. In particular, participants reflected on the important implications of the Paris Agreement, challenges in implementation of FPIC, and the recently released Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.” It is also planned that after the ongoing revision the “EP4” “will consider the key issues of scope of applicability, human rights (inclusive of the rights of Indigenous Peoples), and climate change, amongst others”.

Calendar and milestones

* equator-principles.com/ep4/

Associated Supporting institutions of the Climate Action in Financial Institutions Initiative:

The following supporting institutions of the Climate Action in Financial Institutions Initiative have adopted the Equator Principles and are annually reporting on their implementation as “Equator Principles Financial Institutions”.

[1] equator-principles.com/about/

[2] Category A: Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented.; Category B: Projects with potential limited adverse environmental and social risks and/or impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures.

[3] unepinquiry.org/wp-content/uploads/2016/02/The_Equator_Principles_Do_They_Make_Banks_More_Sustainable.pdf

[4] equator-principles.com/governance-management/

[5] unepinquiry.org/wp-content/uploads/2016/02/The_Equator_Principles_Do_They_Make_Banks_More_Sustainable.pdf

[6] equator-principles.com/working-groups/

[7] equator-principles.com/wp-content/uploads/2017/03/equator_principles_III.pdf

[8] equator-principles.com/about/

Links with the 5 Voluntary Principles for Mainstreaming Climate Action

This section aims to support discussions on the implementation of the 5 voluntary Principles for Mainstreaming Climate Action. Information provided in this section is for reference only; the Climate Action in Financial Institutions Initiative, its Supporting Institutions and the Secretariat do not endorse the activities nor the guidance and information provided in this section.

Equator Principles Financial Institutions “recognize the importance of climate change, biodiversity, and human rights, and believe negative impacts on project-affected ecosystems, communities, and the climate should be avoided where possible.”[1]

[1] equator-principles.com/wp-content/uploads/2017/03/equator_principles_III.pdf

The first Equator Principle, recommends to categorise each project based on the environmental and social categorisation process of the International Finance Corporation (IFC).

“The categories are:

Category A – Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented; Category B – Projects with potential limited adverse environmental and social risks and/or impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and Category C – Projects with minimal or no adverse environmental and social risks and/or impacts.”

Principle 2 (Environmental and Social Assessment) states that for “all Category A and Category B Projects, the EPFI will require the client to conduct an Assessment process to address, to the EPFI’s satisfaction, the relevant environmental and social risks and impacts of the proposed Project (which may include the illustrative list of issues found in Exhibit II). The Assessment Documentation should propose measures to minimise, mitigate, and offset adverse impacts in a manner relevant and appropriate to the nature and scale of the proposed Project.

[…]

For all Projects, in all locations, when combined Scope 1 and Scope 2 Emissions are expected to be more than 100,000 tonnes of CO2 equivalent annually, an alternatives analysis will be conducted to evaluate less Greenhouse Gas (GHG) intensive alternatives.”

The guidance note for the implementation of the Equator Principle 2 states that “the alternatives analysis requires the evaluation of technically and financially feasible and cost-effective options available to reduce project-related GHG emissions during the design, construction and operation of the Project in relation to both Scope 1 and Scope 2 Emissions.

For Scope 1 Emissions, this analysis will include consideration of alternative fuel or energy sources if applicable. Where an alternatives analysis is required by a regulatory permitting process, the analysis will follow the methodology and time frame required by the relevant process. For Projects in high carbon intensity sectors, the alternatives analysis will include comparisons to other viable technologies, used in the same industry and in the country or region, with the relative energy efficiency of the selected technology.

High carbon intensity sectors include the following, as outlined in the World Bank Group EHS Guidelines: thermal power, cement and lime manufacturing, integrated steel mills, base metal smelting and refining, and foundries.

Following completion of an alternatives analysis, the client will provide, through appropriate documentation, evidence of technically and financially feasible and cost-effective options. This does not modify or reduce the requirements set out in the applicable standards (e.g. IFC Performance Standard 3).”

The third Equator Principle lay out Minimum Reporting Requirements for Equator Principles Financial Institutions (EPFI) in Annex B:

“The EPFI will report annually and as per the requirements detailed in all of the sections below. […]

The EPFI will report on its implementation of the Equator Principles, including:

  • The mandate of the Equator Principles Reviewers (e.g. responsibilities and staffing);
  • The respective roles of the Equator Principles Reviewers, business lines, and senior management in the transaction review process;
  • The incorporation of the Equator Principles in its credit and risk management policies and procedures.

For the first year of Equator Principles adoption, the EPFI will provide details of its internal preparation and staff training. After the first year, the EPFI may provide details on ongoing training of staff if considered relevant.”