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出版物
Development finance facilities: Prospects for APAC
Sponsors and project developers across the renewables and energy transition space are currently facing a challenging macroeconomic environment.
Middle East | 出版物 | 九月 2020
Published in the Oath Magazine, October 2020, to access click here.
A revision to the Equator Principles, known as EP4, will come into effect on October 1, 2020, reflecting increased focus on sustainability and sustainable finance, and environmental, social and governance (ESG) issues globally. EP4 expands the types of financial products to which the Equator Principles apply and may introduce more onerous requirements for project financing in developed countries.
EP4 is the result of a commitment on the part of the signatories to the Equator Principles to update the principles based on their implementation experience and emerging best practices. It is clear that ESG best practice is developing rapidly, as is regulation.
The Equator Principles were created in 2003 to be used as a global risk management framework providing a common baseline and framework for financial institutions to identify, assess and manage environmental and social risks when financing projects. The Equator Principles have, however, expanded and developed over the years with the release of updated versions. The latest update (EP4) was released on November 18, 2019, and will come into effect on October 1, 2020.
The Equator Principles are intended to serve as. The Principles provide a minimum standard for due diligence, monitoring, and reporting to support responsible risk decision-making by the project lenders.
Financial institutions that adopt the Equator Principles commit to implementing them in their internal environmental and social policies, procedures and standards for financing projects, and agree to withhold financing where clients will not, or are unable to, comply with the Equator Principles.
There are currently 110 Equator Principles Financial Institutions (or EPFIs) in 38 countries that have officially adopted the Equator Principles according to The Equator Principles Association’s website and this number has been steadily growing since their creation in 2003.
While the Equator Principles may not be black letter law, they are internationally recognized guidance which are considered by many stakeholders as the benchmark for analysing, monitoring and mitigating environmental and social risk.
The Equator Principles apply globally to all industry sectors and to the financial products described below:
The nature of the studies, assessments, and reporting required vary with the category of project being financed:
The Equator Principles are well known to project finance lawyers, developers and bankers involved in EPFI-funded projects in “Non-Designated Countries” – i.e. countries in the developing world.
When the Equator Principles were first created, they were based on another set of well-known international sustainability standards: the International Finance Corporation, or ‘IFC’, Performance Standards.
The IFC Performance Standards are an established and well-respected framework for ensuring sustainable development in developing countries. The Equator Principles have always been aligned with the IFC Performance Standards and have made compliance with those standards mandatory for projects in all Non-Designated Countries.
However, for Designated Countries, which consist of the high-income, OECD countries around the world, the comparatively robust environmental, social and regulatory laws and protections present in those countries are considered to provide sufficient risk management and sustainability standards, such that compliance with domestic jurisdiction laws in Designated Countries was considered sufficient to be aligned with the Equator Principles.
Under EP4, compliance with domestic laws is still required for projects in Designated Countries. However, at the same time, EP4 moves beyond the clear distinction that existed between Designated and Non-Designated Countries under the previous versions of the Equator Principles.
In recognition of concerns that domestic laws and regulations in Designated Countries may in some cases fall short of international standards, EP4 will now make projects in Designated Countries equally subject to evaluation against IFC Performance Standards, where the specific risks associated with the project warrant it.
This means that, under EP4, compliance with local laws and regulatory processes may not be the only assessment required of a project in a Designated Country; as of October 1, 2020, the project may now also require evaluation against relevant IFC Performance Standards.
EP4 also brings some other notable changes from EP3, such as:
The Equator Principles are not intended to be a one size fits all checklist. They are intended as a risk management tool to assist financial institutions and industry to determine, assess and manage environmental and social risk in projects. As much as there may be a desire to eliminate these risks entirely, it is not always possible and there are practical matters to take into account.
In the projects space, discussion around the requirements of the Equator Principles and other environmental and social guidance is common, and can be a source of lengthy discussions between financial institutions and project sponsors as they work to find an agreed path to manage environmental and social risks. These conversations are not necessarily contentious, however they can highlight the importance that stakeholders place on these issues.
To meet the standards that will be imposed when EP4 comes into effect, EPFIs and their borrowers will need to consider such things as:
It is telling that 110 of the world’s financial institutions have signed up to EP4, and there are many high-profile stakeholders who have publicly announced their focus on, and commitment to, sustainability.
There is ever-increasing attention being paid by project lenders to how projects may contribute to Climate Change and its associated risks, to social harms, and how the rights and interests of Indigenous Communities are being addressed when it comes to major projects around the world.
EP4, when it comes into effect, promises to be another significant step in this progression – where financial institutions and their borrowers recognize a shared responsibility for reducing environmental and social risks and impacts of projects.
Norton Rose Fulbright is one of the very few international law firms in the Middle East which can advise clients on ESG issues in this region.
If you have any questions, feel free to get in touch with our team.
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Sponsors and project developers across the renewables and energy transition space are currently facing a challenging macroeconomic environment.
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