UK: A Matter of Principle

Last Updated: 5 October 2006
Article by Vanessa Havard-Williams

Originally published May 2006

River deep, mountain high – the spread of Equator

In March the 41 Equator Banks (http://www.equator-principles.com/principles.shtml) released a new version of the Equator Principles for consultation. The updated text is due to apply from July 2006.

The Equator Principles draw substantially from the guidelines and policies of the IFC (http://www.ifc.org/) and the revision has been triggered by a major policy review by the IFC. The now global reach of the Equator Banks means that the effect of that revision will be felt far beyond Washington. The vast majority of commercially financed projects involve some Equator Banks.

It is essential therefore for any project sponsor to understand and take account of the requirements of the Equator Principles. In particular:

  • US$10 million threshold. In future the Equator Principles will apply to projects worth US$10 million+. They will also apply to expansions or upgrades of existing Projects involving significant extra impacts.
  • Extension to financial advisor role: The signatories have extended the application of the Principles to their project finance advisory activities. They commit to making sponsors aware of the Principles and ask that clients state their intention to adhere to the Principles in any financing.
  • Environmental AND social impact assessment. The revised principles expressly address social as well as environmental impacts. Projects with potentially adverse impacts will need an Environmental and Social Impact Assessment (ESIA) addressing key issues, risks and mitigation actions. Equator Banks may want this reviewed by independent consultants.
  • New IFC standards to apply in low/middle income countries1. In these jurisdictions the banks will also expect the assessment to establish overall project compliance with the new IFC performance standards2, as well as other more technical IFC and World Bank environmental and health and safety guidelines. The eight new performance standards set objectives in relation to such matters as the assessment process itself, resettlement, impact on indigenous peoples, and biodiversity. They put an increased emphasis on environmental and social management systems and contractor management. To achieve compliance, project teams will need to spend time and money on these issues much earlier.
  • Public consultation. The requirements regarding public consultation are wide ranging and are triggered very early, arising first when the ESIA is being scoped, and recurring through the different project phases.
  • High visibility issues. Project impacts on indigenous people, resettlement requirements and community dependency on the project all require very early identification and active management. Similarly potential impacts on biodiversity (e.g. endangered species, habitats) will likely attract a high degree of lender and NGO scrutiny There is often a shortage of expertise on these issues, so engage your specialist early.
  • Action plans. The Equator Principles require a Project action plan which sets out the mitigation measures developed in the ESIA. Compliance with the action plan is covenanted, so the plan needs to be carefully crafted, with commitments that the sponsor understands and believes it can fulfil.
  • Environment and social covenants. Sponsors are required to covenant compliance with local laws and permits and their action plan, production of regular information to lenders and sometimes also to the public, and where relevant, to decommission in accordance with an agreed plan. Given the breadth of commitments encompassed by these covenants, sponsors need to consider how to manage the risk of default both as a practical matter and contractually, bearing in mind the capacity of a default to impact the financing (e.g. loss of rights, drawstop etc).
  • Reporting by Equator Banks – each bank will report publicly on its implementation of the Equator Principles including the number of transactions screened and categorisation of each transaction.

Footnotes

1 Defined by reference to the World Bank Development Indicators Database.

2 These replaced the existing IFC Safeguard Policies from 30 April 2006.

This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters.

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