So, you are confident you can make a business case to your financier as to why they ought to invest in your mining project. You are also sure your project will meet regulatory requirements of local governments. It is a good start, but thanks to a paradigm shift in global regulation of mining activity, it is probably not enough. To get a project off the ground, many mining proponents will also need to demonstrate compliance with the environmental and social regulations of their financiers in accordance with the Equator Principles (EP).
What are the Equator Principles?
The EP is an agreement amongst more than 75 of the world's leading banks and financial institutions to apply international regulations and conduct due diligence to manage "environmental" (meaning resource efficiency, pollution prevention, biodiversity and management of living natural resources) and "social" (meaning labour, OHS, indigenous rights, human rights, resettlement and cultural heritage) risks for projects they finance. The third iteration of the EP (EP III) is set to be released in 2013 and by all accounts it will look much different from previous versions, increasing the compliance requirements on mining companies seeking financing from EP banks.
A complex layer of Environmental and Social Regulations for miners
While there are only 10 EP principles, they incorporate by reference the detailed requirements of host country regulations and the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability (IFC Performance Standards) and the World Bank Environmental Health and Safety Guidelines (EHS Guidelines). Together, these regulatory frameworks establish literally thousands of rules based requirements and guidelines for companies to comply with. The rules apply to any industry, but special environmental, health and safety rules exist for the mining sector.
Banks as the new regulators
Under the EP, financial institutions sit in the role of "regulator" overseeing EP implementation for a financed project. This role overlaps and inter-relates with State based regulation of the same activities by local governments.
No "tick the box" exercise
The EP require financial institutions to apply a process of due diligence to ensure that their clients (i.e. corporations receiving financing) actually comply with the rules. This involves impact assessments, management plans and action plans to mitigate identified risks. Compliance with the EP is very "back end" loaded, requiring financial institutions to implement monitoring and review processes that are applied over the life of the financed project. There are hard consequences for borrower non-compliance. Unwillingness or inability of a project proponent to comply with the EP will limit access to capital and can even result in disinvestment or an event of default where investment has already occurred.
Expansion of the EP and related requirements in 2013
The new EP III will be more expansive than earlier versions, covering more types of financings and including disclosure and reporting requirements on environmental and social risks and management processes. There will also be specific reporting requirements for reporting Greenhouse Gas emissions on projects and requirements and for an alternatives analysis where emissions exceed certain thresholds. As in previous versions of the EP, borrowers will con-tinue to be required to implement grievance mechanisms and engage in formalized stakeholder engagement with workers and local communities.The release of EP III follows a major revision of the IFC Performance Standards in 2012. The new IFC Performance Standards and therefore the EP now require Free Prior and Informed Consent (FPIC) of indigenous communities in certain circumstances, human rights due diligence and the application of labour standards throughout supply chains, among many other requirements.
The EP compliance process creates legal risks that are easily overlooked. The process requires legal compliance, diligence and reporting on legal compliance that can bring additional scrutiny from regulators. Public disclosures required by the EP give rise to legal implications from a securities, privacy and confidentiality perspective. The EP are enforced through covenants in the legal documentation that structures financings. Non-compliance with the EP may cause an event of default. These characteristics create complex risks (reputational and legal) for both EP banks and their clients. It is still a very open question what exactly these risks entail and how they should be addresses, but the potential legal ramifications means that knowledgeable legal counsel should be actively engaged in (even overseeing) the EP compliance process.
Regulatory compliance for Access to Capital
In the post EP world, bankers are the new global regulators of environmental and social practices and regulatory compliance is the qualifying condition for investment by EP banks. With the release of the expanded EP III, this new paradigm will only be reinforced. Adapting to this new world may therefore require a rethinking of business strategy, whereby regulatory compliance is viewed as a critical step in ensuring continued access to capital.
First published on canadianminingjournal.com June 2013.
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