Australia: Equator Principles - for project-related corporate loans - Version 4 released for public comment

Increased focus on human rights, climate change and impacts on Indigenous communities

The Equator Principles Association released a draft of the proposed 4th version of the Equator Principles (EP4) on June 24, 2019. The draft is accessible here.

Norton Rose Fulbright were retained by the Equator Principles Association to conduct a global legal review of the draft.
The following alert provides an overview of the major changes proposed in EP4.

What are the Equator Principles?

The Equator Principles (EPs) are a risk management framework for financial institutions to identify, assess and manage environmental and social risks when financing projects. The EPs apply globally to all industry sectors and defined financial products.

The Equator Principles Association reviews and updates the EPs from time to time in order to reflect ongoing learning and emerging good practice.

Proposed Amendments

The following amendments are being proposed by the Equator Principles Association:

  1. Scope of applicability

The EPs apply to certain financial products above specified value thresholds.

EP4 proposes to decrease the threshold for in-scope Project-Related Corporate Loans to US$50 million. That amount represents the aggregate of any Equator Principles Financial Institution's (EPFI) loan amount and its individual commitment (before syndication or sell down). There has also been an addition to the scope of applicability of the EPs in the form of Project-Related Refinancing and Project-Related Acquisition Financing provided the following criteria are met:

  1. the underlying Project was financed in accordance with the EPs;
  2. there has been no material change in the scale or scope of the Project; and
  3. the Project is not yet completed.

EP3 currently contains an exception for Project-Related Corporate Loans for sovereign borrowers for certain projects. This exception is proposed to be removed in EP4 for all Category A Projects (projects that are likely to have significant environmental and social impacts) and, as appropriate, Category B Projects (projects that have limited adverse impacts).

  1. Applicable standards in designated vs. non-designated countries

Currently, principle 3 of the EP3 includes a list of 'designated countries', which are high income OECD countries, where compliance of a Project with local host country laws will be sufficient. The proposed amendments in EP4:

  1. clarify that EPFIs will be evaluating the specific risks of each Project to determine whether any IFC Performance Standards could be used as guidance to address those risks; and
  2. require EPFIs to include a review of how a specific Project meets each of the EPs in any Category A and Category B Projects' due diligence.
  1. Human rights and social risk

The preamble of EP4 stipulates EPFIs will fulfil their responsibility to respect human rights consistent with the UN Guiding Principles on Business and Human Rights. Principle 2 of EP4, (Environmental and Social Assessment), strengthens the language on human rights, and states that an assessment of adverse human rights impacts should be included in any environmental and social impact assessment (ESIA).

2 text options are presented in relation to the concept of Free, Prior and Informed Consent (FPIC) for stakeholder consideration and feedback:

  1. option 1 outlines the need to engage in a meaningful consultation with affected Indigenous Peoples with a goal to achieve their FPIC. Further action is considered where consent has not been achieved at the time of EPFI's due diligence; or
  2. option 2 requires a demonstration by the client to the EPFI's satisfaction that FPIC is obtained.
  1. Climate change

The role of the EPFIs with respect to the 2015 Paris Climate Change Agreement is recognised in EP4. This includes the need for availability of climate-related information in line with the recommendations of the Task Force on Climate-related Financial Disclosures.

Principle 2 of EP4 introduces a climate change assessment as part of ESIA or other Assessment:

  1. for Category A and some Category B Projects the climate, change assessment will include consideration of relevant physical risks;
  2. 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, the climate change assessment will include consideration of relevant transition risks and the completion of an alternatives analysis to evaluate less Greenhouse Gas (GHG) intensive alternatives.

Principle 10 of EP4 introduces the requirement of public reporting on an annual basis on GHG emission levels.

Consultation and feedback

An initial round of consultation with key stakeholders was undertaken in 2018. The results of those consultations can be found on the Equator Principles website or by clicking here.

A second round of external consultation will take place between July and August 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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