Equator Principles (EPIII) Implementation Note

Complexity of Equator PrinciplesShortly after Mizuho Bank took over as the first Asian chair of the Equator Principles Association, the EP Association published the Equator Principles Implementation Note. It provides a valuable reference for Equator Banks and practitioners, such ESIA consultants, Independent Engineers, expert witnesses in international arbitration, and assurance providers. It also highlights the new complexities of the expanded - but qualified - scope of EPIII, and associated reporting requirements.

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The Equator Principles Implementation Note is structured around three modules:

  1. Scope of the EPIII, clarifying the very nuanced types of transactions which fall within the (revised) scope of the EPIII
  2. Climate Change related issues, ranging from analysis of alternatives to clients’ GHG reporting expectations
  3. Reporting and disclosure requirements, ranging from those applying to Equator Banks to their clients/projects

The Equator Principles Implementation Note sheds light on many frequently asked questions, some of which we experience during our EPIII training courses, and in discussions with colleagues and clients.

Consider disclosure and reporting requirements. Recently, I highlighted a recent study by Olaf Weber, who holds the Export Development Canada Chair in Environmental Finance, The study was not very complementary about the self-reporting of Equator Banks under EPII, the previous version of the Equator Principles (see here: Equator Banks get poor Marks on Transparency and Disclosure). The study suggests that only about half of the Equator Banks reported annually as proposed in the Equator Principles guidelines, and only two of the nearly 80 Equator Banks disclose "all" the information required by the Equator Principles reporting guidelines.

While many Equator Banks may not fully agree with Olaf Weber’s analysis, my sense is that the expanded scope of the latest version (third generation) of the Equator Principles (EPIII), including a nuanced segmentation of size, project and transaction type deemed to be within or outside of the scope of EPIII, will further complicate reporting by Equator Banks.

Let’s take a closer look. The Equator Principles is meant to be applied by Equator Banks globally, to all industry sectors and to four financial products:

  • Project Finance Advisory Services
  • Project Finance
  • Project-Related Corporate Loans
  • Bridge Loans

This seems simple enough, except that there are a series of thresholds and criteria which must be satisfied to make a transaction or project finance advisory service fall within the scope of the Equator Principles. Such a determination typically requires an understanding of the amount of funding involved, the use of proceeds for a particular project, presence of effective operational control, etc. One level deeper, when looking at the applicability if the IFC Performance Standards around which the Equator Principles were developed, one would also need to understand other aspects. For example, is the underlying project located in a so called “designated country” or “non-designated country” (see: How do you apply the Equator Principles and IFC Performance Standards in Canada?), or 'disregarding' such important distinctions if the deal involves export credits and credit guarantees agencies which follow the OECD Common Approaches.

The Equator Principles Implementation Note provides a series of useful examples – or tests - to help determine if a proposed financing or advisory service falls within the scope of the Equator Principles. I leave you with the following three examples (followed by answers) related to a proposed corporate loan for multiple projects or uses:

Example 1: US$200m corporate loan to Corporation ‘A’ where the EPFI’s individual commitment is US$60m. The loan will be used to finance Project ‘W’ (US$150m) and Project ‘X’ (US$50m).

Example 2: US$180m corporate loan to Corporation ‘B’ to finance Project ‘Y’ (US$60m), Project ‘Z’ (US$50m), and refinancing debt (US$70m).

Example 3: US$120m loan to Corporation ‘C’ who has three Projects in the feasibility phase.

And now scroll down for the answers...

 

 

 

Answer to Example 1: Project ‘W’ is within the scope of the Equator Principles because more than 50% of the use of proceeds is directed to Project ‘W’. Project X’ is not within the scope of the Equator Principles.

Answer to Example 2: As none of the Projects receive more than 50% of the total loan amount, none are within the scope of the Equator Principles.

Answer to Example 3: Neither the Project costs nor the use of proceeds for each Project have been identified, therefore the loan would not be within the scope of the Equator Principles.

How easy was it for you to determine if the three examples noted above would fall within the scope of the Equator Principles? Now, try to also imagine the due diligence and reporting complications as these deals are developed in a dynamic ‘real world’ context: changing project definitions and use of proceeds, expanding or contracting of institutions involved in the deal, changing size or timing of funding appetites, and feasibility studies firming up to clear project definitions before loans are closed or disbursed.

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