Equator Principles – Part 2

5 months ago

Continuing our series linking the Equator Principles to effective ESG solutions, we move onto aspects of management and implementation of control measures. Please see the series overview, Applying the Equator Principles to ESG Impact Solutions, and Part 1 for a full introduction.

Following a series of comprehensive assessments and the analysis of a large-scale project’s local and regional context, the next step in implementing sustainable ESG solutions involves the selection application of optimized activities. The right combination of ESG investments will meet critical needs in-region, and by doing so will generate value for project operators, providers of capital, and local and regional stakeholder groups.

Moreover, integrating these various activities and tying them directly to project operations ensures that they are created and conducted in an efficient manner; it is this integration that allows companies and financiers to recognize created value, including increased ROI, that might otherwise be missed.

The optimization and implementation processes are heavily dependent on strong management systems and detailed work plans. These should be thorough enough to manage all risks and opportunities, but flexible and responsive enough to adapt to changes. While it may be difficult to anticipate the exact nature of the changes that will occur, it is still vital to be ready to anticipate and respond, particularly for large-scale projects that span years or even decades.

Principle 4 calls for the establishment of management systems and processes to address the ESG risks identified during the assessment process and, when applicable, for the submission of action plans covering remediation steps that may be necessary.

Principle 4: Environmental and Social Management System and Equator Principles Action Plan

For all Category A and Category B Projects, the EPFI will require the client to develop or maintain an Environmental and Social Management System (ESMS). Further, an Environmental and Social Management Plan (ESMP) will be prepared by the client to address issues raised in the Assessment process and incorporate actions required to comply with the applicable standards. Where the applicable standards are not met to the EPFI’s satisfaction, the client and the EPFI will agree an Equator Principles Action Plan (AP)…see the full text on Page 7 here.

Again, while this principle was written with the intent of protecting project financing, it is directly relevant to the implementation of optimal ESG solutions. Sustainable project success involves the identification and selection of the best possible combination of ESG activities and investments, and allowing these to be controlled by project management systems serves two purposes:

  1. It prevents the ESG activities from being viewed or handled as separate or standalone efforts, maintaining integration over time.
  2. It enables companies and financiers to more easily recognize the financial ROI and other benefits resulting from these activities, and to calculate that ROI as part of a project’s overall value. Merging “doing good” with “doing well” is a crucial philosophy in an increasingly transparent and connected world.

Even so, proper management systems and controls alone are not sufficient for effective implementation. Sustained stakeholder engagement is the backbone of long-term ESG success; there must be a philosophy of shared value and a recognition that mutual benefits across stakeholder groups result in positive outcomes greater than the sum of their parts. Principles 5 and 6 directly address this belief.

Principle 5: Stakeholder Engagement

…The EPFI will require the client to demonstrate effective Stakeholder Engagement as an ongoing process in a structured and culturally appropriate manner with Affected Communities and, where relevant, Other Stakeholders. For Projects with potentially significant adverse impacts on Affected Communities, the client will conduct an Informed Consultation and Participation process. The client will tailor its consultation process to: the risks and impacts of the Project; the Project’s phase of development; the language preferences of the Affected Communities; their decision-making processes; and the needs of disadvantaged and vulnerable groups. This process should be free from external manipulation, interference, coercion and intimidation…see the full text on Page 7  here.

Principle 6: Grievance Mechanism

…The EPFI will require the client, as part of the ESMS, to establish a grievance mechanism designed to receive and facilitate resolution of concerns and grievances about the Project’s environmental and social performance. The grievance mechanism is required to be scaled to the risks and impacts of the Project and have Affected Communities as its primary user. It will seek to resolve concerns promptly, using an understandable and transparent consultative process that is culturally appropriate, readily accessible, at no cost, and without retribution to the party that originated the issue or concern…see the full text on Page 8  here.

By supporting thoughtful, transparent engagement, companies and providers of capital can minimize or prevent conflicts, delays, shutdowns, and other adverse events that can cripple project operations.

Engagement also creates a collaborative atmosphere where multiple stakeholder groups recognize that each benefits from the project’s success. A transparent and objective grievance and reconciliation process prevents stakeholder marginalization and ensures fair play, something that is becoming increasingly important for growing numbers of individual and institutional investors.

The final post in the Equator Principles series discusses outputs stemming from the assessment, analysis, optimization, and implementation phases of ESG solutions. Continuing the focus on transparency, the final four principles address the importance of oversight, reporting, and sustained commitment to excellence.