Equator Principles – Part 3

4 weeks ago

Building on the series overview, Part 1 and Part 2, this final segment in our Equator Principles review focuses on reporting, transparency, and sustained commitment to ESG solutions.

A notable theme in the final four principles is that of independence, mandating that companies undertaking large-scale projects engage independent entities to assist in reporting and other functions over time. This should not be construed to mean that companies themselves are incapable of proper, transparent reporting. Instead, this theme speaks directly to an ongoing problem in stakeholder engagement and project management.

Principle 7: Independent Review

…An Independent Environmental and Social Consultant, not directly associated with the client, will carry out an Independent Review of the Assessment Documentation including the ESMPs, the ESMS, and the Stakeholder Engagement process documentation in order to assist the EPFI’s due diligence, and assess Equator Principles compliance…An Independent Review by an Independent Environmental and Social Consultant is required for Projects with potential high risk impacts including, but not limited to, any of the following: adverse impacts on indigenous peoples; Critical Habitat impacts; significant cultural heritage impacts; and large-scale resettlement…see the full text on Page 8 here.

Principle 8: Covenants

An important strength of the Equator Principles is the incorporation of covenants linked to compliance. For all Projects, the client will covenant in the financing documentation to comply with all relevant host country environmental and social laws, regulations and permits in all material respects…to comply with the ESMPs and Equator Principles AP during the construction and operation of the Project in all material respects; to provide periodic reports in a format agreed with the EPFI; and to decommission the facilities, where applicable and appropriate, in accordance with an agreed decommissioning plan…see the full text on Page 9 here.

Principle 9: Independent Monitoring and Reporting

To assess Project compliance with the Equator Principles and ensure ongoing monitoring and reporting after Financial Close and over the life of the loan, the EPFI will…require the appointment of an Independent Environmental and Social Consultant, or require that the client retain qualified and experienced external experts to verify its monitoring information which would be shared with the EPFI. For Projects where an Independent Review is required under Principle 7, the EPFI will require the appointment of an Independent Environmental and Social Consultant after Financial Close, or require that the client retain qualified and experienced external experts to verify its monitoring information which would be shared with the EPFI.…see the full text on Page 10  here.

Principle 10: Reporting and Transparency

…The client will ensure that, at a minimum, a summary of the ESIA is accessible and available online. The client will publicly report GHG emission levels (combined Scope 1 and Scope 2 Emissions) during the operational phase for Projects emitting over 100,000 tonnes of CO2 equivalent annually…The EPFI will report publicly, at least annually, on transactions that have reached Financial Close and on its Equator Principles implementation processes and experience, taking into account appropriate confidentiality considerations…see the full text on Page 10  here.

It is frequently the case that companies and other stakeholder groups have differing objectives. Even companies that engage properly and meet best practices may suffer a disconnect between how they think they’re doing and how other stakeholder groups judge their performance. By introducing an objective evaluator, companies and their financiers apply third-party credibility that is critical to perceived objectivity.

Moreover, allowing a third party to oversee aspects of reporting and other transparency measures clearly demonstrates a sustained commitment to meeting the needs and objectives of all stakeholder groups, to the extent possible. Finally, an independent party allows company resources to remain focused on technical elements of the project and other tasks with which they have experience and expertise.

These principles also demonstrate the importance of regular reporting. While this is certainly the case for project finances, it is no less true for sustained ESG solutions. Companies must view ESG activities as investments. Selecting an optimal combination of these activities necessarily means investing in local and regional environments, social considerations, and aspects of governance, although companies and financiers should work to maintain clear delineation between the role of company and that of government, especially in developing regions.

With that caveat in mind, these investments require long-term monitoring, both to ensure that plans stay on track, and to be better able to quantify the benefits and ROI stemming from ESG solutions. Validating that the solutions are working as intended, and quantifying the nature of the resulting positive impacts improves a company’s reputation, facilitates future access to capital and financing, and helps reassure all stakeholder groups that their needs and objectives will be considered.

This type of monitoring and evaluation, resulting in comprehensive reporting, is also a source of data that can be benchmarked against baseline information to more clearly demonstrate improvements, eliminate activities and programs that prove to be sub-optimal, and adapt more effectively to changes over time.

Taken as a whole, the ten Equator Principles, designed for the management and oversight of project financing, are broadly applicable to larger ESG considerations. Companies interested in meeting the requirements set forth by these principles would do well to fully understand the operational and financial advantages conveyed by adhering to their best practices.

Proper planning, collaboration with expert third parties, and proper application of the assessment, management, and monitoring processes help maximize a project’s value and sustained success within its respective context.