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Monday, December 17, 2012

What stays (essentially) the same in EP III?

The following items remain the same in EP III according to the draft that was released in August 2012.  The final draft will be released in early 2013. So, what will likely stay the same?  Read more to find out...
Overall Purpose of the EP

As in previous iterations, EP III requires Equator Principles signatories, referred to as EPFI, to not provide loans over the applicable monetary thresholds ($10 million in the case of project finance) to projects where the borrower will not or is unable to comply with the social and environmental requirements of the EP.

Review and Categorisation

EP III continues to require all signatory EPFI to conduct a preliminary assessment of the level of Environmental and Social risks associated with a project and to categorize that risk as either Category A (significant risks), B (limited risks) or C (minimal or no risks).

Categorisation of projects is a highly discretionary and inexact process. The process of categorization used in the EP is derived from the categorization approach of the IFC, set out in the IFC “Policy on Environmental and Social Sustainability”. As applied by the IFC, project categorisation is not intended to be a “once and for all” exercise and will typically be reviewed on a regular basis, at least annually or wherever changes to the project occur which could affect the level of Environmental and Social risk of a project.

Environmental and Social Impact Assessment

An Environmental and Social Impact Assessment (ESIA or Assessment) is still required by the EP III, taking a variety of possible forms from full-scale to limited ESIA or targeted audits. ESIA must be developed for all Category A and B projects, providing an evaluation of the environmental and social risks of the project.

Application of Environmental and Social Standards and Regulations

For Projects taking place in High-Income OECD countries (as defined by the World Bank Development Indicators Database), EP III continues to require compliance with relevant host country laws, regulations and permitting requirements that pertain to environmental and social matters. For projects taking place in other (non-High Income OECD) countries, the EP requires compliance with the “then applicable” IFC Performance Standards and the World Bank Environmental, Health and Safety Guidelines (EHS Guidelines).

There are eight IFC Performance Standards incorporated by reference into the EP:
  • Assessment and Management of Environmental and Social Risks and Impacts: requiring ESIA, stakeholder engagement, the development of action plans and Environmental and Social Management Systems (“ESMS”).
  • Labour and Working Conditions: setting standards for the management of human resources, including workers’ organizations, occupational health and safety, child and forced labour practices, and the establishment of grievance mechanisms.
  • Resource Efficiency and Pollution Prevention: including the management of emissions such as greenhouse gases, pollution of land, air, or water.
  • Community Health, Safety, and Security: requiring safe design, hazardous materials management, and emergency preparedness, as well as risk management of the use of security services interacting with local communities.
  • Land Acquisition and Involuntary Resettlement: establishing standards to be applied where there is expropriation of land and/or resettlement of communities affected by a project.
  • Biodiversity Conservation and Sustainable Management of Living Natural Resources: establishing requirements to manage and mitigate impacts on habitats and ecosystems.
  • Indigenous Peoples: requiring consultation with affected indigenous communities, including, in some circumstances, to the point of Free Prior and Informed Consent (“FPIC”) of indigenous peoples as part of the stakeholder engagement process.
  • Cultural Heritage: establishing requirements for the identification, management, and protection of local cultural heritage (intellectual property) that may be affected by project activities.
Moreover, the EHS Guidelines represent an example of what is referred to as “Good International Industry Practice” (GIIP) in the management of environmental and health and safety issues. There are general EHS Guidelines addressing environmental practice, occupational and community health and safety practice and construction and decommissioning. There are also numerous industry specific EHS Guidelines.

These standards must be met, with any deviation justified, “to the EPFI’s satisfaction”. In addition to the IFC Performance Standards and EHS Guidelines, compliance with host-country laws, including laws implementing host-country obligations under international law is required by the IFC Performance Standards and EP.

Environmental and Social Management System, Management Plan and Action Plan

EP III still requires the development by the borrower of an Environmental and Social Management System (ESMS) which is composed of policies, procedures, organizational, training and stakeholder engagement requirements. In addition, the Borrower must develop an Environmental and Social Management Plan (ESMP) to address issues raised in the ESIA and incorporating actions to comply with the applicable standards. Where the ESMP is not adequate, an additional document called an Action Plan (AP) will be developed to address gaps to the EPFIs satisfaction in line with applicable standards.

Stakeholder Engagement

For all Category A and (“as appropriate”) Category B projects, the borrower must demonstrate effective and on-going “stakeholder engagement” with Affected Communities and other stakeholders, taking into account disadvantaged and vulnerable groups. Grievance Mechanisms For all Category A and B projects the borrower must create a “grievance mechanism” as part of the ESMS, designed to receive and facilitate resolution of concerns about the project’s environmental and social performance.

Independent Review

For Category A and (“as appropriate”) Category B projects an “Independent Environmental and Social Consultant” not directly associated with the borrower will carry out an independent review of the Assessment, ESMP, ESMS and consultation process findings.

The purpose is to assist the EPFI’s due diligence efforts and assess overall EP and legal compliance, and to propose a suitable AP capable of bringing the project into compliance or to indicate if compliance is not possible.

For Project-Related Corporate Loans, an independent review is required for projects with high risk impacts, or at the discretion of the EPFI for other Category A or B Project-Related Corporate Loans.


The EP III continues to require EPFI to include covenants in financing documents regarding EP implementation. At least four covenants of borrowers are recommended, requiring the borrower:

  • to comply with all relevant host country environmental and social laws, regulations and permits in all material respects;
  • to comply with the ESMPs and AP (where applicable) during the construction and operation of the Project in all material respects;
  • to provide periodic reports in a format agreed with the EPFIs (with the frequency of these reports proportionate to the severity of impacts, or as required by law, but not less than annually), prepared by in-house staff or third party experts that document compliance with the ESMPs and AP (where applicable) and provide representation of compliance with relevant local, state and host country environmental and social laws, regulations and permits;
  • to decommission the facilities, where applicable and appropriate, in accordance with an agreed decommissioning plan.
Ultimately, if the borrower is not in compliance with these covenants the EPFI should work with the borrower on remedial actions to achieve compliance. Where non-compliance persists beyond a grace period, the EPFI may exercise remedial rights set out in contractual documentation.

Independent Monitoring and Review

For all Category A and (as appropriate) Category B projects an independent advisor must still be appointed by the EPFI or borrower to ensure on-going monitoring of compliance and reporting to the EPFI over the life of the loan. The same process is applied for Project Related Corporate Loans wherever an Independent Review is required.

Reporting and Transparency

The EP III will continue to set out specific requirements for public reporting of environmental and social data including the ESIA and ESMP and specific reporting requirements in relation to greenhouse gas emissions. Requirements for annual reporting by EPFI of EP activity are also specified.

In a new development, under the draft EP III, for all Category A and (“as appropriate”) Category B projects (in all countries) the borrower will be required to report greenhouse gas emission levels during the operational phase for projects emitting over 100,000 tonnes of CO2 equivalent annually. This requirement can be satisfied by regulatory requirements or voluntary reporting mechanisms like the Carbon Disclosure Project.

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