No project in the world can be executed without funds. So, financial institutions must appraise projects for sustainability before approving a loan. The Equator Principles are a framework to assess a proposed project’s social and environmental risk. The principles can be adopted by any financial institution that meets the stated requirements. These institutions can then become members of the global community known as Equator Principles Financial Institutions (EPFIs). The EPFIs set the standard for sustainable financing of international projects.
What are the ten statements of the Equator Principles?
In 2020, the fourth (and latest) iteration of the Equator Principles was released. But, what are statements under the Equator Principles? Here is a breakdown for you.
Principle 1: Review and Categorisation
The first step EPFIs must take is carefully reviewing and putting a proposed project into categories. These categories are based on the International Finance Corporation’s (IFC) recommendations, and they determine the level of environmental and social risk of the project. The Equator Principles mention three categories which are:
Category A: projects with high environmental and social risks
Category B: projects with limited, often easily addressable risks
Category C: projects with minimal or no risks
The EPFI takes action based on the nature, scale and stage of the project.
Principle 2: Environmental and Social Assessment
To help categorise, the client (anyone applying for funding) must assess and declare the environmental and social risks of the proposed project. The proposal should include a project assessment document that complies with ESIA or a similar framework. It should suggest solutions that minimise, mitigate, and compensate for the risk to the climate or human rights due to the project.
Principle 3: Applicable Environmental and Social Standards
The EPFI works around the world in a range of diverse markets. Whether the project operates in a designated or a non-designated country, environmental and social legislation should be considered. The client should address the country’s laws, regulations and permits in their assessment document.
Principle 4: Environmental and Social Management System and Equator Principles Action Plan
Every category A and B project must have an Environmental and Social Management Plan (ESMP). The plan should contain standard-compliant action points that address the risks mentioned in the assessment. The client can use the Equator Principles Action Plan (EPAP), which outlines the EPFI’s standards.
The client should also develop and maintain an Environmental and Social Management System (ESMS) that tracks and evaluates the risk in a project’s sustainability standards.
Principle 5: Stakeholder Engagement
It is important to continue mitigating any risks for the duration of the project. The EPFI requires the client to show an ongoing stakeholder engagement process. The process should be structured, culturally sensitive, and involve the local communities, workers, and other stakeholders.
Projects that affect more vulnerable indigenous people require active consultation and participation from the affected communities in their preferred language. The consultation should follow the local and global legislation, the IFC’s Performance Standards, and it should remain free of manipulation, interference, coercion, and intimidation.
Principle 6: Grievance Mechanism
The established ESMS should also make provisions for grievances. The mechanism must be scalable to receive and resolve any concerns that arise as the project progresses. Again, any concerns should be resolved through a transparent and sensitive consultation.
Principle 7: Independent Review
An independent environmental and social consultant should then review the compliance of the assessment document with the Equator Principles. The independent review should evaluate the ESMPs, the ESMS, and the stakeholder engagement process and propose changes where needed.
Principle 8: Covenants
The Equator Principles are only effective if they are enforced. When the client’s proposal fails to comply with the covenants of the Equator Principles, the EPFI needs to propose remedial actions within a grace period. If the client still fails to comply, the EPFI reserves the right to take action.
Principle 9: Independent Monitoring and Reporting
Compliance is never a one-time deal. The project should continue to comply with the sustainability standards for the loan duration. The client should retain an independent environmental and social consultant to generate objective and regular reports. The EPFI then verifies these reports through established processes.
Principle 10: Reporting and Transparency
The Equator Principles require that both the clients and the EPFI remain accountable for the impact of the projects undertaken. For the client, it includes project-specific sustainability reports. On the other side, the EPFI must publicly report completed transactions (without violating confidentiality agreements).
While financing any new project, both the client and the EPFI must understand its large-scale impact. Responsible financing encourages accountability and drives projects that are less harmful to the climate, local ecosystems, and communities. Both clients and financial institutions can explore the ins and outs of sustainable finance through our free digital course. Only through responsible financing and the development of sustainable projects can we slow the effects of human activity on our planet.