Equator Principles (EPIII) Implementation Note
Shortly after Mizuho Bank took over as the first Asian chair of the Equator Principles Association, the EP Association published the
- Scope of the EPIII, clarifying the very nuanced types of transactions which fall within the (revised) scope of the EPIII
- Climate Change related issues, ranging from analysis of alternatives to clients’ GHG reporting expectations
- Reporting and disclosure requirements, ranging from those applying to Equator Banks to their clients/projects
Consider disclosure and reporting requirements. Recently, I highlighted a recent study by Olaf Weber, who holds the
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
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.