The Equator Principles are a set of voluntary environmental and social guidelines for project finance that commit adopting Equator Banks, including the ANZ, Westpac, ING, HSBC, JP Morgan Chase, Citigroup and the Royal Bank of Scotland, to reject finance applications for projects that fail to meet the guidelines.
While project financing decisions have traditionally centered on profitability, the Principles require project financiers to play a role in ensuring projects are developed in a socially responsible manner, that reflect sound environmental practices. The central concept of the Principles is that negative impacts on project-affected ecosystems and communities should be avoided, and where they are unavoidable, they should be reduced, mitigated and/or compensated.
The Principles conceived in 2002, and launched in 2003 and 2006, are modelled on the World Bank's environmental standards, and the International Finance Corporation's social policies. Major banks accounting for more than three quarters of current project loan market volume, have adopted the Principles. They have arguably become the de facto standard for dealing with the potential social and environmental effects of project finance.
Some non-governmental organisations have criticised the Principles for failing to produce real change and allowing projects to be financed, that should have been rejected, such as the Sakhalin-II oil and gas project in Russia.
The Equator Principles state that adopting banks will only provide loans directly to projects in certain circumstances. An environmental assessment must be prepared for finance applications for projects of medium, or high- risk, in terms of their environmental or social effect. The assessment addresses issues such as:
baseline environmental and social conditions;
compliance with relevant domestic and international law;
sustainable development and use of renewables;
protection of human health, cultural properties, and biodiversity, including endangered species and sensitive ecosystems;
OH&S, fire prevention and life safety;
general socio-economic impacts;
land acquisition and land use, involuntary resettlement;
impacts on indigenous peoples and communities; and
consideration of feasible environmentally and socially preferable alternatives.
Based on the assessment, Equator Banks negotiate an 'Environmental Management Plan' with the borrower on mitigating monitoring and managing those risks. If the borrower defaults, the bank may take corrective action, which can ultimately result in cancellation and repayment.
The revised Equator Principles launched in 2006, represent an important shift in project finance decision making requiring operators to account for the adverse social and environmental costs of their projects. In this way, financiers have created a role for themselves in promotion of environmental stewardship, and socially responsible development.
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This legal update is an overview of existing eligible project activities and new project types proposed to be developed.
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