Equator Principles – Part 1
Principle 1: Review and Categorization
When a Project is proposed for financing, the EPFI will, as part of its internal environmental and social review and due diligence, categorize it based on the magnitude of its potential environmental and social risks and impacts. Such screening is based on the environmental and social categorization process of the International Finance Corporation (IFC).
Using categorization, the EPFI’s environmental and social due diligence is commensurate with the nature, scale and stage of the Project, and with the level of environmental and social risks and impacts…see the full text on Page 5 here.
In Part 1, we cover the first three of the ten principles. This subset addresses some of the preparatory measures involved when considering financing for a large-scale project, and offers specific steps that financial institutions can take to assess and manage associated risks.
Principle 1 calls for an initial review of the project, which is assigned to one of three categories based on the severity of potential social and environmental risks: Category A for projects with significant risks, Category B for those with limited risks, and Category C for those with minimal risks.
While this categorization process may be somewhat subjective based on a given financial institution’s risk tolerance or perspective, it is nevertheless a necessary exercise in order to fully understand how a project should be managed.
Principle 1 directly aligns to the first step of effective ESG management. To develop effective and sustainable ESG solutions, a comprehensive baseline must be established. Functionally, this means that all available information must be collected and analyzed, and where gaps exist, new data must be gathered to fill in the blanks. Simply put, good decisions stem from accurate informational inputs, and a proper situational assessment is the initial requirement.
This assessment, which includes factors such as actual and potential financial, social, environmental, and governance-related risks, builds the local or regional context; understanding how a given project fits into this context is critical to sustainable success and maximizing value.
Principle 2: Environmental and Social Assessment
For all Category A and Category B projects, the EPFI will require the client to conduct an Assessment process to address, to the EPFI’s satisfaction, the relevant environmental and social risks and impacts of the proposed Project. The Assessment documentation should propose measures to minimize, mitigate, and offset adverse impacts in a manner relevant and appropriate to the nature and scale of the proposed Project…see the full text on Page 5 here.
Principle 3: Applicable Environmental and Social Standards
The Assessment process should, in the first instance, address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues. EPFIs operate in diverse markets: some with robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment; and some with evolving technical and institutional capacity to manage environmental and social issues…see the full text on Page 6 here.
The Assessment process itself also encompasses the elements detailed in Principles 2 and 3.
- Principle 2 mandates sufficient environmental and social assessments that identify, describe, and plan to mitigate relevant risks.
- Principle 3 covers the requirement to work with local, regional, and national government and other governance-related elements to ensure application of best practices and adherence to appropriate standards.
Collectively, these two Principles comprehensively address all three ESG components—the chief requirement for effective ESG solutions.
Only by addressing environmental, social, and governance issues as an integrated set of risks can operating companies, financiers, and other stakeholders fully understand and manage risks and threats. But perhaps more importantly, doing so also allows them to capitalize on opportunities to protect and create value, both in terms of financial ROI and in terms of broader ESG benefits for the Project’s region.
Despite being aimed at the process of project financing, these principles are highly relevant to the development and execution of ESG impact solutions.
In Part 2 of the series, we discuss Principles 4 to 6, which govern aspects of management and implementation of control measures.