Effective June 4, the members of the Equator Principles Association voted to amend and strengthen the Equator Principles to include consideration of the effects of major projects on climate. The Equator Principles are voluntary standards designed to guide banks in their evaluation and management of the environmental and social risks presented by loans used to finance large projects. The Equator Principles are based on Performance Standards developed by the International Finance Corporation ("IFC"), part of the World Bank Group. The Principles provide that member banks will give loans only to covered projects that meet its 10 principles.
At their core, the Equator Principles provide that lending banks will require borrowers associated with major projects to assess the environmental and social risks of their proposed projects and to address issues raised by the assessment. At a minimum, borrowers must comply with the laws of the host country that pertain to environmental and social issues. If the host country is not one of the 31 countries designated as having robust environmental and social governance programs, the borrower must also comply with the IFC Performance Standards on Environmental and Social Sustainability and with the World Bank's Environmental, Health and Safety Guidelines. Most of the designated countries are in Europe. The United States and Canada currently are the only designated countries in North and South America. Australia, New Zealand, Japan, the Republic of Korea, and Israel are also designated countries.
Changes in 2013
The Equator Principles were originally adopted in 2003 by a group of international private sector banks and were revised in 2006. As discussed in The Climate Report, a 2012 draft proposed significant changes to the 2006 Equator Principles. After the changes were adopted in June 2013, the Equator Principles for the first time specifically address climate change.
The preamble to the Equator Principles now provides that the negative impacts of a project on climate should be avoided where possible, and if the impacts are unavoidable, they should be minimized, mitigated, and/or offset. The Principles also provide that projects with expected annual emissions greater than 100,000 tons of carbon dioxide equivalent are to conduct an alternatives analysis for options that generate lower greenhouse gas emissions.
An annex also sets out specific reporting requirements related to greenhouse gas emissions. Under these requirements, the borrower is to report publicly on an annual basis the greenhouse gas emission levels during the operational phase of the project if the project emits more than 100,000 tons of carbon dioxide equivalent annually. Borrowers are encouraged to report publicly on projects emitting more than 25,000 tons of carbon dioxide equivalent annually, which may be an indication of a lower future reporting threshold. The public reporting requirement can be satisfied via regulatory requirements for reporting. While not specifically mentioned, U.S. EPA and California reporting requirements regarding carbon dioxide equivalent emissions may meet this requirement.
Other changes to the 2006 Equator Principles significantly expanded their coverage. The 2006 Principles applied to Project Financing (where a lender generally considers a single project) and Project Finance Advisory Services, in both cases where the total project capital costs are $10 million or more. The 2013 Principles now also apply to Project-Related Corporate Loans (also generally related to a single project) that meet certain conditions, including a total aggregate loan amount of at least $100 million, and to short-term (less than two years) Bridge Loans that are intended to be refinanced by Project Finance or Project-Related Corporate Loans. Other changes include expanded reporting requirements, such as a requirement to annually report covered transactions that have closed, and a requirement that each bank report on its process and experience in implementing the Principles.
Transition
The 2013 Equator Principles do not apply to transactions signed before June 4, with the caveat that they apply to an expansion or upgrade of an existing project taking place after June if the changes may create new significant environmental and social risks. While the effective date of the revised Principles was June 4, there is a transition period out to December 31. The 2006 Principles can be applied to new transactions up to December 31, but signatories are encouraged to apply the 2013 revision as soon as possible. The 2013 Principles should be applied to all new transactions after 2013.
Impact
The number of banks that have agreed to implement the Equator Principles has increased to 79 throughout the world, including five U.S. banks (Bank of America, Citigroup, Export-Import Bank, JPMorganChase, and Wells Fargo). While the Principles apply only to the largest loan transactions and have been formally adopted by only some lenders, they are establishing the precedent of lending institution consideration of climate change issues in loan evaluation and management. This could have the effect of channeling loan financing toward projects that minimize their greenhouse gas emissions.
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