Managing Lender Liability in Equator Principles Implementation - Regulatory Offences

The Equator Principles III ("EP III") states that: "As financiers and advisors, we work in partnership with our clients to identify, assess, and manage environmental and social risks and impacts in a structured way, on an ongoing basis." It is well known that lender liability for environmental and social matters may arise from operational or managerial control by a lender over a project, or where a lender aids and abets regulatory offences of their borrowers. This article considers the risks associated with regulatory prosecutions of an Equator Principles Financial Institution (EPFI), acting as auditors and possibly co-managers of environmental and social risk management of their borrowers. We also consider management strategies, including the role of legal professional privilege. This article is part three of a three part look at managing lender liability in EP implementation.  The first article looked at post-loan legacy liabilities, and the second at third party beneficiary rights in the EP context.

Managing Lender Liability in Equator Principles Implementation - Third Party Beneficiary Rights in Contract Law

I read an interesting and provocative journal article by Marissa Marco, published in the Fordham International Law Journal in 2011, entitled "Accountability in International Project Finance: The Equator Principles and the Creation of Third-Party Beneficiary Status for Project-Affected Communities".  The article discusses the law on third party beneficiary rights under US contract law and considers whether the provisions of the Equator Principles (EP) relating to Affected Communities might create enforceable rights for those communities under those principles.

This article will discuss this issue and suggest a risk management strategy for EP Financial Institutions (EPFI - i.e. EP signatories) addressing and managing such risks in Equator Principles implementation.

Final Equator Principles III and the August 2012 Draft - What are the differences?

Some of the main differences are:

1. Elimination of the High Income OECD threshold for application of the IFC Performance Standards in the final version. Now there is a concept of "Designated Countries" which basically has the same effect but is not based on high income status;

2. Only a summary of an ESIA rather than full disclosure of the ESIA and ESMP is required in the final version;

3. In the final version only a "majority" of a corporate loan meeting the appropriate thresholds must be tied to a project, that caveat wasn't in the draft;

4. New emphasis in principle 3 that compliance with relevant host country laws, regulations and permits are to be address "in the first instance" in Assessments;

5. Some changes to Appendix B setting out EPFI reporting requirements;

6. More specific reference to the Guiding Principles on Business and Human Rights due diligence requirement.

Update: Equator Principles III is approved and launched - new trends and a strategy rethink

The Equator Principles (EP) is an agreement amongst 76 global financial institutions (known as EP Financial Institutions or "EPFI") to apply environmental and social standards to certain investment decisions. The third iteration of the EP (EP III) was released on May 14, 2013 and will take effect (with certain transition allowances) on June 4, 2013.

The release of EP III follows a major revision of the IFC Performance Standards on Environmental & Social Sustainability in 2012 (IFC Performance Standards), a set of guidelines that is incorporated by reference into the EP framework. Together, these changes mark an important evolution in best practice in environmental and social risk management of particular importance for both bankers and those seeking access to capital.

This article reviews the new ground rules of environmental and social risk management and considers some new trends that may begin to emerge. We also consider what risks and opportunities arise from these developments that should be considered by both financiers and those seeking finance who must comply with these frameworks to meet their business goals.

International Financial Law Review: The Sustainability Case Under the Equator Principles

The third iteration of the Equator Principles (EP) framework will be released in the first quarter of 2013. Like its predecessors, the revised framework will have substantial implications for billions of dollars in international financings. It will also reinforce the importance of environmental and social reviews in addressing legal and reputational risks facing Equator Principles Financial Institutions (EPFI). It makes it timely to reconsider the critical role legal counsel have in EP implementation.  This article examines the "sustainbility case" approach to Equator Principles implementation and the role of legal and regulatory oversight of that process. See article link HERE

What's the Goal of the Equator Principles: Managing Credit Risk or Regulating "Do No Harm"? The World Bank CAO Opines

The World Bank's Compliance Advisor Ombudsman (CAO) completed a Compliance Audit of IFC's Financial Sector Investments, releasing a report on October 10, 2012 (CAO Audit). The CAO Audited a Sample of IFC Investments in Third-Party Financial Intermediaries.  One critique of the IFC's own approach to implementation of the IFC Performance Standards on Environmental and Social Sustainability (IFC Performance Standards) was the application by the IFC of two potentially contradictory aims in its environmental and social diligence: "Do No Harm" and "Credit Risk". The same contradictory aims affect the application of the Equator Principles (EP) by EP Financial Institutions (EPFI). 

This article argues that for the sake of clarity and effectiveness, the regulatory nature of the EP and IFC Performance Standards must be fully recognized and permeate the EP implementation process, while credit risk objectives should be considered quite secondary to the real dynamic of EP implementation as a private regulatory process.

CAO Compliance Audit of IFC's Financial Sector Investments

On February 5, 2013, the World Bank Compliance Advisor Ombudsman (CAO) released its audit of IFC's financial sector investments, together with IFC's official response.

• The CAO Audit of a Sample of IFC Investments in Third-Party Financial Intermediaries, October 10, 2012 can be found here.
   
• The IFC's Response to the Report on Audit of a Sample of IFC Investments in Third-Party Financial Intermediaries, January 31, 2013 can be found here. 


• The CAO Appraisal of IFC's Investment Projects in the Financial Sector, June 27, 2011 report can be found here.

The key CAO findings summarized in this post are derived from the CAO's press release. 

I will discuss these findings along with the IFC's approach to environmental and social risk management in Financial Intermediary relationships in future posts. Read on for the summary of the report...