EP Association Updating International Environmental Standards Following Admission of New Member Financial Institutions from China, Japan, Korea, Sweden and Taiwan
Following its annual meeting in São Paulo, Brazil, the Equator Principles Association (EP Association) announced plans to update its globally recognized risk management framework to reflect significant changes to the manner in which environmental and social impacts and risk mitigation strategies are recognized and managed by financial institutions, corporations, governments, non-governmental organizations (NGOs) and society.
The Equator Principles (EPs) were designed to provide a framework for assessing and managing environmental and social risk associated with project financing to provide a minimum due diligence standard and a monitoring protocol supporting responsible risk assessment and decision-making. Since their initial adoption, however, the EPs have seen broader application in relation to energy, extractive industries, infrastructure and other large-scale projects with significant potential to impact the environment and local communities, particularly for projects situated in developing economies.
While some NGOs and other observers have criticized the EPs for not imposing sufficiently rigorous mitigation standards, compliance or policing mechanisms, industry has become increasingly concerned with the potential for enhanced legal exposure resulting from any “gaps” between a project’s implementation and the commitments adopted through the EPs or other similar environmental and social responsibility protocols, which in many cases can become legally binding.
Large-scale projects such as mining, oil and gas exploration and development, pipelines and terminals, electric power generation and related infrastructure projects may pose the potential for adverse impacts to the environment or local communities if not properly managed. In response to growing international concern with ensuring responsible development, multilateral development organizations such as the World Bank and OECD member country Export Credit Agencies began to develop guidelines for appropriate management of environmental and social risks associated with such projects.
To address environmental NGO concerns that independent financial institutions also should proactively manage environmental and social risks, the World Bank Group’s International Finance Corporation (IFC) and several major international financial institutions developed the EPs in 2003. The EPs were first revised in 2006 to conform with the IFC Performance Standards on Environmental and Social Sustainability (IFC Performance Standards). Revision of the IFC Performance Standards in 2012, combined with pressure to strengthen environmental and social risk management protocols, resulted in another revision to the EPs in 2013 (EP3).
The EPs apply globally to EP Association member financial institutions (EPFIs), covering designated financial services for all industry sectors. Presently 92 EPFIs in 37 countries have adopted the EPs, covering the majority of international project finance debt within developed and emerging markets. And the past year saw a significant increase in their adoption, particularly by Asia-based institutions; new EPFIs joining the EP Association in 2017 include the Bank of Jiangsu (People’s Republic of China), Norinchukin Bank (Japan), Korea Development Bank (Republic of Korea), Swedish Export Credit Corporation (Sweden) and Taipei Fubon Commercial Bank (Taiwan ROC).
EPFIs commit to implementing the EPs through their environmental and social policies, procedures and standards for financing international projects, and through withholding project financing or loans on projects unless their client will comply with the EPs. While the EPs are not intended to apply retroactively, they can be applied to existing project expansions or upgrades where the proposed changes would result in significant environmental or social impacts or significant changes to existing project impacts or risks.
Reference to the EPs, or to other internationally accepted best environmental and social risk management practices such as the IFC Performance Standards, also has become increasingly common in governmental concessions or authorizations of projects in emerging markets and in contractual terms governing international commercial parties’ development of global projects with potential adverse environmental or social impacts. Key EP program elements include, among others:
- Conformance with host-country law and, in “non-designated countries” (typically developing or emerging economies), conformance with the IFC Performance Standards and the World Bank Group Environmental, Health and Safety Guidelines (WBG EHS Guidelines)
- Agreement to conduct a comprehensive Environmental and Social Impact Assessment (ESIA) to identify the project’s environmental and social impacts and risks
- Agreement to develop and maintain an Environmental and Social Management Plan (ESMP), including an “EP Action Plan” to mitigate identified project risks and impacts
- Agreement to abide by a robust stakeholder engagement process, including consultation protocols and grievance mechanisms
- Independent auditing or review of the ESIA documentation, monitoring and reporting
- Appropriate environmental and social responsibility reporting and transparency measures
- Commitment to decommission the project according to a decommissioning, closure or reclamation plan appropriately mitigating the project’s environmental and social impacts
Through their contractual imposition at the project finance and development phase, through the ministerial approval process or through a combination of the two, the EPs have greatly increased global attention and focus on corporate social responsibility standards. The EPs also have supported global convergence around common environmental and social standards through their deployment by multilateral development banks and export credit agencies.
The EP Association is an unincorporated association of member EPFIs, formed in 2010. An EP Association Steering Committee coordinates the administration, management and development of the EPs. Following its October 2017 annual meeting, the EP Association announced plans to commence a process to update the EP3 standards to reflect significant global changes to recognition and management of environmental and social risk by financial institutions, their clients, governments, NGOs and civil society.
The EP Association expects the EP3 revision process will take up to 18 months; the new EP4 standards are expected to reflect more rigorous environmental and social risk identification, mitigation, transparency and reporting protocols. Thus, perhaps ironically, corporate governance rather than legislative process has stepped in to define evolving international environmental and social risk mitigation standards and management protocols. It remains to be seen whether these enhanced global environmental and social responsibility standards will strike the appropriate balance between protection of human health and the environment and supporting responsible economic development, as well as how gaps in their implementation will be enforced both by governments and private parties.