Changes To Equator Principles Introduce New Requirements In Relation To Human Rights, Climate Change And Indigenous Peoples For Project Debt

On 18 November 2019, the Equator Principles Association published version four of the Equator Principles (EP4), updating the international baseline for the identification, assessment and management of environmental and social risks in international project finance debt markets. The changes, which take effect on 1 July 2020, include the application of the Equator Principles to a broader range of financial products, a greater degree of consistency between high income OECD countries and other jurisdictions and substantive new requirements in relation to human rights, climate change and impacts on Indigenous Peoples.

Specifically, the introduction of EP4 will require the majority of sponsors to prepare:

a Human Rights Impact Assessment prepared with reference to the UN Guiding Principles on Business and Human Rights (UNGP); a Climate Change Risk Assessment aligned with the 'physical risk' and 'transition risk' categories of the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD); and for projects with specific impacts on Indigenous Peoples, an evaluation of the consultation with Indigenous Peoples against the requirements of host country laws and the IFC Performance Standards (IFC PS), including whether the free, prior and informed consent (FPIC) of affected Indigenous Peoples has been obtained. These key changes, each of which has been clarified since publication of the consultation draft of EP4, will have the most significant impact on project financings in jurisdictions which do not require UNGP-aligned social impact assessments, TCFD-aligned climate change assessments or mandate FPIC-aligned Indigenous engagement outcomes. In these jurisdictions, which will include a number of high-income OECD countries, there will be a material divergence between what is required to obtain host country project permits and what is required to satisfy EP4.

Sponsors will need to familiarise themselves with the requirements of EP4 and ensure that their approach to environmental and social impact assessment adequately meets the updated requirements. In particular, sponsors in high income OECD countries should ensure that they understand the extent of any divergence between the domestic requirements and EP4 in order to avoid delays in project financing.

Lenders, in familiarising themselves with EP4, should consider their position in relation to a number of discretionary elements (including the application of EP4 to financial products below the thresholds or otherwise outside of the scope of EP4, the level of assessment documentation required for the wide range of projects with limited adverse environmental and social impacts and their approach in circumstances where a sponsor is not able to demonstrate FPIC) and prepare to communicate their policy positions ahead of the commencement of EP4. Lenders should also consider whether they may wish to start applying EP4 ahead of the 1 July 2020...