Six years after its last update, a third update to the Equator Principles (EP) has been released for stakeholder consultation.  Member institutions began discussions on the proposed changes to the principles in July last year, with the aim of broadening their impact and improving disclosures under the voluntary project finance code.

“The third update to the Equator Principles is the culmination of a long process” says Leonie Schreve, director, head of environmental and social risk at ING and chair of the EP association steering committee, “We wanted to reflect new standards and changes in the market place, particularly changes to the IFC [International Finance Corporation] performance standards and UN guiding principles on business and human rights, as well as address the findings of our own internal strategic review.”

The principles are a framework for identifying, assessing, and managing environmental and social risks in project finance transactions, and were created in 2003 at the instigation of the then-heads of project finance and ABN Amro. They are based on the IFC’s performance standards on environmental and social sustainability, though the IFC does not explicitly endorse the principles, and on the World Bank environmental, health, and safety guidelines. To date, 77 financial institutions have adopted the principles.

In 2006, the principles were updated to include project finance advisory services as well as project financing, to reflect changes to the IFC standards, and to lower the minimum debt threshold from $50 million to $10 million. One of the changes proposed under the principles third version is to expand the scope of the principles beyond pure project finance. Project-related corporate loans are included for single projects that have a loan tenor of at least two years, a total aggregate loan amount of at least $100 million, an individual institution initial exposure of at least $50 million and where the borrower has 'effective operational control' over the project.

Bridge loans with a tenor of less than two years that are intended to be refinanced with project finance debt or a project-related corporate loan are also included in the proposals. According to Schreve:  “There are more and more relevant transactions that are not pure project finance and therefore not subject to the current principles, and it is hoped that this change will catch such relevant transactions.”

“We have been advocating this for a while,” says Amanda Starbuck, energy and finance director at the Rainforest Action Network (RAN), “under the current princples only a small section of deals were being caught, and it is good to see the remit expanding.” Pressure from RAN on Citigroup over Citi’s project finance activities was one of the factors in Cit’s development of the principles.

The third version of the principles also sets out new and detailed requirements for the analysis, quantification and reporting of greenhouse gas emissions, based on the updated IFC performance standards. Significantly, for projects which are expected to emit more than 100,000 tonnes of CO2 equivalent annually, borrowers will be required to investigate low greenhouse gas alternatives for the proposed project, consider alternative fuel or energy sources and report publically on greenhouse gas emissions. “This is another step in the right direction” says Starbuck, “but we would have liked it go further, for example setting up emission reduction targets across company portfolios or including emission reduction schemes.”

“A key consideration in the third version of the principles was the changes in membership that have taken place since 2003” says Schreve, “We’ve become much more global and wanted to reach out to more members in countries such as China, India and Russia, that meant we had to make sure the standards were not too onerous.”

The final major change proposed by EPIII is an increase in reporting, disclosure and transparency requirements.  Members are required to report on the transactions they have screened and how the principles are implemented, borrowers are also required to report about the impact assessment they have conducted, management plans they have developed, stakeholder engagement they have conducted and any actions resulting from community consultation. The latest principles draft also requires members to disclose the names of the projects they finance online and requires borrowers to make any assessments and corresponding environmental and social management plans available publicly online – subject to borrowers consent.

“We would have liked to have seen a mandatory listing of project names and companies” says Starbuck “but it is obviously a delicate balancing act between getting stringent guidelines and membership approval. On the whole the draft addresses a lot of areas of existing deficiency and the EP’s are the strongest set of environmental and human rights guidelines in the project finance sphere that exist at the moment.”
 
EPIII are now open for comments during a 60-day consultation process. The secretariat hopes that the revised draft will be released by the beginning of next year.

A copy of the draft, information about planned meetings, and a comment submission for can be found at the secretariat's web page