Third Gen Equator Principles (EPIII) is Out – What’s New?
EPs are financial industry benchmark for determining, assessing and managing environmental and social risk in projects. Have EPs come a long way or are you, like BankTrack, underwhelmed?
Key EP Development Milestones
2002 - Nine banks and IFC spearhead development of the EPs.
2003 - Launch of EP framework (EPI) by 10 Financial Institutions
2006 - Revision of EPs to consult and adopt the newly launched IFC Performance Standards
2010 - Initiate Strategic Review of EPs (in parallel to update of IFC Performance Standards)
2010 - EP Association formed and Summary Report of Strategic Review published
June 2013 - EP Association formally launches EPIII and celebrates 10th anniversary of EPs (confetti!)
In October 2002, a core group of nine banks, including ABN Amro, Barclays, Citi and WestLB, together with the International Finance Corporation (IFC, part of the World Bank Group), spearheaded the development of this banking industry framework. It was largely a pegging process of adopting the widely used environmental and social requirements and guidelines of the IFC.
The second generation Equator Principles – or EPII - were released in July 2006. Once again, they were pegged to the IFC. This time, it was to IFC’s newly adopted Performance Standards which came into effect in April 2006 (see here for more background). The changes in EPII included a lowering of the application threshold from US$50 million to US$10 million, the inclusion of Project Finance Advisory Services, and increased transparency requirements for Equator Banks.
The Third Generation Equator Principles (or EPIII) emerged as a result of a self-imposed Strategic Review. This was initiated in 2010. The outcome of this review includes the adoption of a new governance structure: the Equator Principles Association. A summary of the Strategic Review was published in mid-2011. However, it took over two more years to develop, consult, approve and launch the EPIII.
What are some of the changes in EPIII?
The scope of EPIII was expanded to go beyond project finance and related advisory services. It now includes project-related corporate loans and bridge loans.
EPIII now explicitly requires that, for projects which are expected to generate more than 100,000 tonnes of CO2 equivalent annually, alternatives analysis will need to be conducted.
Some of the EPIII’s newly adopted terminology includes so-called Designated and Non-Designated Countries. The former refers to a list of countries deemed to have robust environmental and social governance, legislation systems and institutional capacity. In projects located in such Designated countries (say, Canada), no comparison against or covenanting of IFC Performance Standards is deemed necessary.
As before, the EPs address the capacity limitations at most Equator Banks by requiring that, for all Category A and, as appropriate, Category B projects, an Independent Environmental and Social Consultant will carry out an Independent Review in order to assist the Equator Banks with their due diligence process, and assess Equator Principles compliance.
Increased transparency requirements for Equator Banks include the requirement publication of project names through the Equator Principles Association website. This has rule has been qualified and is:
- applicable only to Project Finance transactions that have reached Financial Close,
- subject to obtaining client consent,
- subject to applicable local laws and regulations, and
- subject to no additional liability for the EPFI as a result of reporting in certain identified jurisdictions.
As an Equator Bank or one of their clients, do you feel that EPIII is a good step forward? Or are you uncomfortable with the changes and related requirements? Or do you feel a bit like
You may also be interested in these previous blog entries:
Interested in learning more about the Equator Principles (EPIII) and IFC Performance Standards? Click here for brochure on courses offered by Prizma.