Singapore – ESG And Responsible Project Financing: A Primer On The Equator Principles 4.

environmental and social risks and impacts in its area of influence. For other projects, a limited or focussed environmental or social assessment may suffice. An assessment and the assessment documentation must include assessments of potential adverse human rights impacts and climate change risks.

The client should refer to the UNGP when assessing human rights risks and impacts, and a climate change risk assessment should be aligned to the climate physical risk20 and climate transition risk21 categories of the Task Force on Climate-related Financial Disclosures (“TCFD”). An overview of a climate risk assessment is found in Annex A of EP4. Amongst other things, the overview suggests that an assessment should consider the Project’s compatibility with the host country’s national climate commitments, as appropriate; the EP however do not require that the EPFI only finances a project if it is compatible with such national commitments.

Principle 3 — Review of Assessment Process and Risks and Impacts

The assessment process should, in the first instance, comply with relevant host country laws that pertain to environmental and social issues. The EPFI’s due diligence must also include for all Category A and B projects, review and confirmation by the EPFI of how the project and transaction meet each of the Principles. In addition, the EPFI must, with support from the independent environmental and social, where applicable (see Principle 7), evaluate the project’s compliance or justified deviation from the applicable standards.

These standards vary depending on whether the host country is a designated or non-designated country, and in most instances, designated countries are OECD members and World Bank high income countries.

For projects in non-designated countries, the applicable standard refers to the applicable IFC Performance Standards on Environmental and Social Sustainability22 and the World Bank Group’s Environmental, Health and Safety Guidelines.23

For projects in designated countries, the applicable standard is the relevant host country’s laws pertaining to environmental and social issues. The EPFI must also consider for all Category A and, as appropriate, Category B projects in designated countries, with the support of the independent environmental and social consultant, whether one or more IFC Performance Standards could be used to address the specific risks for such projects.

Presumably, the underlying thinking for applying different standards to designated and non-designated countries is that while the legislation system and institutional capacity in non-designated countries generally fall short of applicable IFC Performance Standards, those of designated countries are at least as good as those of the Performance Standards. The application of separate standards for designated and non-designated countries was criticised24 amidst concerns and mass protests related to projects hosted in designated countries, such as the high-profile Dakota Access pipeline project in the United States, and the explicit additional requirement to 

consider specific risks for projects in designated countries was added to the standard for designated countries to address these criticisms.

Principle 4 — Management of Risks and Impacts

For all Category A and B projects, the EPFI must require the client to develop and/or maintain an environmental and social management system (“ESMS”),25 comprising policy, identification of risks and impacts, management programmes, organisation capacity and competency, emergency preparedness and response, stakeholder engagement, and monitoring and review. The client must also prepare an environmental and social management plan (“ESMP”)26 to address issues raised in the assessment process and incorporate actions required to comply with the applicable standards. Where the applicable standards are not met to the EPFI’s satisfaction, the client and the EPFI must agree to an Equator Principles Action Plan (“EPAP”)27 to outline gaps and commitments to meet the EPFI’s requirements in line with the applicable standards.

Principle 5 — Stakeholder Engagement

For all Category A and B projects, the EPFI must require the client to demonstrate effective stakeholder engagement with affected communities, workers, and where relevant, other stakeholders in a structured and culturally appropriate manner. 28 For projects with potentially significant adverse impacts on affected communities, the client must conduct an informed consultation and participation process. 29 To facilitate stakeholder engagement, the client must make the appropriate assessment documentation readily available to the stakeholders in the local language and in a culturally appropriate manner. The client must take account of and document the results of the stakeholder engagement process.

Indigenous Peoples

All projects affecting indigenous peoples must be subject to a process of informed consultation and participation, and will need to comply with the rights and protections for indigenous peoples contained in relevant national law. Further, in the special circumstances as set out in PS7 paras 13 to 17 that require the Free, Prior and Informed Consent (“FPIC”) of affected indigenous peoples,30 the EPFI must require a qualified independent consultant to evaluate the consultation process with indigenous peoples, and the outcomes of that process, against the requirements of host country laws and PS7. If a process of good faith negotiations that meets the consultation requirements of PS7 has been followed and documented, but it is not clear if FPIC has been achieved, the EPFI must determine, with supporting advice from the consultant, whether this qualifies as a justified deviation from the requirements of PS7, and whether the client should pursue additional corrective actions to meet the objectives of PS7. 

Principle 6 — Grievance Mechanisms

For all Category A and, as appropriate, Category B Projects, the EPFI must require the client, as part of the ESMS, to establish effective grievance mechanisms which are designed for use by affected communities and workers, as appropriate, to receive and facilitate resolution of concerns and grievances about the project’s environmental and social performance. The client must inform affected communities and workers about the grievance mechanisms in the course of the stakeholder engagement process.31 However, there are no requirements for EPFIs to set up their own grievance mechanisms, and neither has the EPA set up any grievance mechanism, to receive and facilitate resolution of concerns of individuals or communities affected by projects covered by the EP.32

Principle 7 — Independent Review

For all Category A and, as appropriate, Category B projects, an independent environmental and social consultant must carry out a review of the assessment process including the ESMPs, the ESMS, and the stakeholder engagement process documentation in order to assist the EPFI’s due diligence and determination of EP compliance. The consultant will also propose or opine on a suitable EPAP capable of bringing the project into compliance with the EP, or indicate whether there is a justified deviation from the applicable standards.

Principle 8 — Covenants

For project finance and project-related corporate loans, the client must covenant in the financing documentation to comply with all relevant host country environmental and social laws, regulations and permits in all material respects. For all Category A and Category B projects, the client must also covenant in the documentation to,

1. (a)  Comply with the ESMPs and EPAP (where applicable), during the construction and operation of the project in all material respects;

2. (b)  Provide periodic reports that document compliance with the ESMPs and EPAP;

3. (c)  Provide representation of compliance with relevant local, state and host country environmental and social laws, regulations and permits; and

4. (d)  Decommission the facilities, where applicable and appropriate, in accordance with an agreed decommissioning plan.

The loan documentation will also need to define the environmental and social standards applicable to the project; and spell out the conditions precedent before a request may be made for drawdown or a disbursement of a loan, and the events of default.33

Where a client does not comply with its environmental and social covenants, the EPFI must work with the client on remedial actions to bring the project back into compliance. If the client fails to re-establish compliance within an agreed grace period, the EPFI must reserve the right to exercise remedies, including calling an event of default, as considered appropriate.

For project-related refinance and project-related acquisition finance, EPFIs must take reasonable measures to ensure that all existing environmental and social obligations continue to be included in the new financing documentation.

Principle 9 — Independent Monitoring and Reporting

For project finance and project-related corporate loans involving Category A or, as appropriate, Category B projects, the EPFI will require independent monitoring and reporting by an independent environmental and social consultant. Alternatively, the EPFI must require the client to retain qualified and experienced external experts to verify its monitoring information, which will be shared with the EPFI. 

Principle 10 — Reporting

 

Client Reporting

 

The client must ensure that, at a minimum, a summary of the ESIA is accessible and available online and that it includes a summary of human rights and climate change risks and impacts when relevant. The client must report publicly, on an annual basis, GHG emission levels (combined Scope 1 and Scope 2 Emissions, and, if appropriate, the GHG efficiency ratio) during the operational phase for projects emitting over 100,000 tonnes of CO2 equivalent annually. The EPFI must encourage the client to share commercially non-sensitive project-specific biodiversity data with the Global Biodiversity Information Facility and relevant national and global data repositories.

 

EPFI Reporting

 

The EPFI must, at least annually, report publicly on transactions that have reached financial close and on its EP implementation processes and experience. The minimum reporting requirements are set out in Annex B of EP4.

 

Concluding Remarks

 

The EP seek to facilitate the transition to sustainable development by ensuring that the environmental and social risks and impacts of large-scale projects are systematically identified and addressed at the planning, design, construction, and operation phases. EP4 has strengthened the Principles in a number of ways, including broadening the scope of financial products covered and lowering the monetary threshold for the Principles to apply to certain products; adding additional requirements to the applicable standards for the review of projects hosted in designated countries; adding requirements in relation to the FPIC of affected indigenous peoples; and adding requirements for climate change risk assessments in accordance with the TCFD recommendations. The Principles have their shortcomings and limitations, and will no doubt continue to be subject to reviews and revisions in the future.

 

Ultimately, the EP are first and foremost a risk management framework for EPFIs, but EPFIs can collectively also complement (but not replace) the role of public regulators by implementing the EP requirements. There are costs to financial institutions and their clients for implementing the EP that may render a project uncompetitive in the short term, and this may pose a barrier to financial institutions voluntarily adopting the Principles, or EPFIs implementing the EP strictly.34 However, as more financial institutions, including those in this region,35 become convinced that responsible financing contributes to their own value, the EP will only grow in relevance and impact over time. 

 

 

 

 

For further information, please contact:  

 

Liew Kai Zee, Partner, Shook Lin & Bok

kaizee.liew@shooklin.com

1 The Equator Principles, November 2019, <https://equator-principles.com/wp-content/uploads/2019/11/The-Equator-Principles-November- 2019.pdf>.
2 The EP’s glossary of terms explains that a project is a development in any sector at an identified location, and includes an expansion or upgrade of an existing operation.

3 EP4, Preamble para 2.
4 EP4, Preamble para 2.
5 The EP’s glossary of terms describes human rights as those rights described in international standards aimed at securing dignity and equality for all; and as a minimum are those expressed in the Universal Declaration of Human Rights, the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights and the principles concerning fundamental rights set out in the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work.
6 The EPFIs make no mention of their role in aligning their financing of projects to the objectives of the Paris Agreement, but instead focus only on their role in improving the availability of climate-related information.
7 EP4, Preamble para 2.
8 EP4, Preamble para 3.
9 EP4, Disclaimer.
10 The EP4’s glossary of terms refers to “project-related advisory services” as the provision of advice on the potential financing of a development where one of the options may be project finance.