What are the "Equator Principles"?
Launch of the "Equator Principles"
Large–scale development projects such as oil/gas development, mining, power plants, dams etc. often include significant adverse impacts on the natural environment and/or local communities.
For example, in 1980s the Sardar Sarovar Project, which involved construction of dam on the Narmada River in mid–western India, was severely criticized worldwide for its adverse environmental and social impacts. Built in order to provide electricity and irrigation water to downstream regions, the construction of this dam resulted in the forced dislocation of more than 200,000 indigenous people living along the upstream districts, without provision of sufficient compensation or means of livelihood restoration. To ensure justice to the people displaced, international NGOs undertook Narmada relief campaign, due to which financial assistance to the project, provided by the World Bank and Official Development Assistance (ODA) of the Japanese government was aborted.
Amidst such growing interests in the environmental and social impacts, by the late 1990s, multilateral development financial organizations such as the World Bank and Export Credit Agencies of OECD member countries came up with their respective environmental and social guidelines to appropriately manage environmental and social risks associated with such large–scale projects. However, only a handful of private financial institutions were implementing environmental and social reviews at that time. Therefore, environmental NGOs started demanding that the private financial institutions independently manage environmental and social risks as more attention was given to CSR in terms of environmental issues.
To address these demands and concerns, in October 2002, ABN AMRO and the International Finance Corporation (IFC) – organization in charge of private projects for the World Bank Group, invited major international financial institutions engaged in project finance activities, to assemble in London with the intention to come up with environmental and social risks management guidelines for private financial institutions. As a result of this meeting, Citigroup, ABN AMRO, Barclays, and West LB in collaboration with IFC, created a framework of managing environmental and social risks. The Equator Principles (EP) were thus formulated in June 2003.
The EP were first revised in July 2006, to align it with the IFC Performance Standards (April 2006). Further revision of IFC Performance Standards in 2012 and the need to strengthen environmental and social risks management, resulted in the launch of third version of the EP (EP III) in June 2013.
Most recently, EP4 was launched in November 2019 considering the international trends. EP4 newly apply to a broader range of transactions and requires further environmental and social assessments such as climate change and human rights.
Column: Origin of the name "Equator Principles"
The initial founders of the Equator Principles (EP) wanted the adoption of the EP to be a globally applicable (to financial institutions in the northern and southern hemispheres) and the equator seemed to represent that balance perfectly – hence the name, Equator Principles.
Summary of the Equator Principles
The Equator Principles (EP) are a set of voluntary guidelines adopted by financial institutions to ensure that large scale development or construction projects appropriately consider the associated potential impacts on the natural environment and the affected communities.
Equator Principles Financial Institutions (EPFIs) formulate their own environmental and social guidelines to comply with the Equator Principles framework, which in turn confirms compliance with the underlying IFC Performance Standards and World Bank Group EHS Guidelines. EPFIs also establish internal management systems to ensure that clients implement their projects in consideration with the environment and society. Under these management systems, EPFIs will assess the environmental and social impacts of large–scale projects and will incorporate compliance with the EP as a condition of lending.
Column: From the Preamble of the Equator Principles (excerpt)
- As financiers and advisors, we work in partnership with our clients to identify, assess and manage environmental and social risks and impacts in a structured way, and on an ongoing basis.
- We, the Equator Principles Financial Institutions (EPFIs), have adopted the Equator Principles in order to ensure that the Projects we finance and advise on are developed in a manner that is socially responsible and reflects sound environmental management practices.
- We will not provide Project Finance, Project–Related Corporate Loans to Projects or Project–Related Refinance and Project–Related Acquisition Finance to Projects which do not comply with the relevant Equator Principles requirements. As Bridge Loans and Project Finance Advisory Services are provided earlier in the Project timeline, we will request that the client communicates its intention to adhere to the requirements of the Equator Principles when subsequently seeking long term financing.
As mentioned above, the Equator Principles (EP) are aimed to direct the "flow of funds" towards environmentally and socially responsible projects. The EP benefit not only the local communities but also the clients and the financial institutions by promoting sustainable development.
For full text of the Equator Principles, refer to The Equator Principles and related documents (English/Japanese).
Scope of the Equator Principles
The Equator Principles (EP) apply globally and to all industry sectors.
The EP apply to the following five financial products:
- Project Finance Advisory Services where total Project capital costs are USD 10 million or more.
- Project Finance with total Project capital costs of USD 10 million or more.
- Project–Related Corporate Loans (including Export Finance in the form of Buyer Credit) where all three of the following criteria are met:
i. The majority of the loan is related to a Project over which the client has Effective Operational Control (either direct or indirect).
ii. The total aggregate loan amount and the EPFI's individual commitment (before syndication or sell down) are each at least USD 50 million.
iii. The loan tenor is at least two years.
- Bridge Loans with a tenor of less than two years that are intended to be refinanced by Project Finance or a Project–Related Corporate Loan that is anticipated to meet the relevant criteria described above.
- Project-Related Refinance and Project-Related Acquisition Finance, where all of the following three criteria are met:
i. The underlying Project was financed in accordance with the Equator Principles framework.
ii. There has been no material change in the scale or scope of the Project.
iii. Project Completion has not yet occurred at the time of the signing of the facility or loan agreement.
The Equator Principles – applicable environmental and social standards
Equator Principles Financial Institutions (EPFIs) will confirm that the project, if under the EP scope, complies with all the applicable host country environmental and social laws, as well as the IFC Performance Standards and the World Bank Group EHS Guidelines.
IFC Performance Standards
The IFC Performance Standards (IFC PS), which summarize the standards for pollution prevention, conservation of the natural environment and the protection of the human rights of local inhabitants and workers, consist of the following eight items.
PS1 – Assessment and Management of Environmental and Social Risks and Impacts
PS2 – Labor and Working Conditions
PS3 – Resource Efficiency and Pollution Prevention
PS4 – Community Health, Safety and Security
PS5 – Land Acquisition and Involuntary Resettlement
PS6 – Biodiversity Conservation and Sustainable Management of Living Natural Resources
PS7 – Indigenous Peoples
PS8 – Cultural Heritage
- For full text of the IFC Performance Standards, refer to IFC official website.
World Bank Group EHS Guidelines
The World Bank Group EHS Guidelines are Environment, Health and Safety guidelines for projects, designated by the World Bank Group. The Guidelines consist of the General EHS Guidelines, common to all industries, and 62 Industry–specific EHS Guidelines. The pollution control standards presented in these guidelines are utilized as standards not only by the IFC but also by the multilateral financial institutions and the Export Credit Agencies of the OECD member countries.
For full text of the World Bank Group EHS Guidelines, refer to IFC official website.
Launch of the Equator Principles 4 (November 2019)
Formerly only project finance and project finance advisory services were under the Equator Principles (EP) scope. In June 2013, the third version of the EP (EP III) was launched, which expanded the scope of the EP to include project–related corporate loans.
Furthermore, the fourth version of the EP (EP4) was launched in November 2019. The key points are;
- Expanded scope to include Project–Related Refinance and Acquisition Finance partially.
- Added emphasis on climate change, through Climate Change Risk Assessment requirements.
- Added emphasis on human rights, through additional due diligence requirements on Indigenous Peoples' rights in developed countries.
Equator Principles Financial Institutions have expanded to more than 100 institutions. One may say that the EP have become the de facto standard for financial institutions.