Pursuit of Responsible Investment Practices Beyond ESG: The Equator Principles Help Guide International Investment and Finance Projects | Sullivan & Worcester

Recently we talked about the restart of the Prosper Africa Initiative of the Biden administration, the aim of which is to increase trade between US companies and African countries and to encourage investment across the African continent. We also identified several factors, such as infrastructure and funding risk, that should be considered by US companies interested in opportunities in Africa. Given the increased global emphasis on sustainable project development, which includes environmental, social and governance (ESG) criteria, US companies considering investing in Africa must also familiarize themselves with the Equator Principles (EPs), a tool to Assessment and management of environmental and social risks in projects.[1]

More than 100 financial institutions and export credit agencies in 37 countries around the world have voluntarily adopted EPs. These institutions, including JPMorgan Chase & Co, Standard Chartered PLC, UK Export Finance, TD Bank Financial Group, Wells Fargo Bank, NA, and the Ex-Im Bank of the United States,[2] Applying EPs to facilitate the consideration of environmental and social risks and project impacts and the pursuit of sustainable environmental and social performance to achieve improved financial, environmental and social outcomes, especially in infrastructure and industrial projects. Access to finance often depends on the fulfillment of the DPs[3]. Like the ESG movement, which was launched in large part by the United Nations through its support for the principles of responsible investment, the EPs are also guided by the goals of the United Nations, such as its goals for sustainable development.[4]

The EPs apply globally and to all industrial sectors, including financial products such as project finance advisory services and project finance that meet certain thresholds. For project finance and project finance advisory services, EPs apply when the total cost of capital of the project is $ 10,000,000 or more. The DPs have 10 guiding principles, of which this article focuses on the following four: Principle 1: Review and Categorization; Principle 2: environmental and social assessment; Principle 3: Applicable environmental and social standards; and Principle 8: Covenants.[5] Based on Principle 1, Review and Categorization, the project must be categorized – denoted as A, B, or C. Category A refers to projects with “potentially significant negative environmental and social risks and / or impacts that are multiple and irreversible “. or unprecedented; “Category B refers to projects with” potentially limited adverse environmental and social risks and / or impacts that are low in number, generally site-specific, largely reversible and easily addressed by mitigation measures “; and Category C refers to projects with “minimal or no adverse environmental and social risks and / or impacts”.[6]

Principle 3, Applicable Environmental and Social Standards, discusses the importance of identifying and addressing the relevant host country laws, regulations and permits relating to environmental and social issues.[7] Principle 3 has two routes for projects: projects in designated countries and those in non-designated countries. Projects in Designated Countries apply the relevant host country laws, regulations and permits to the project. In non-designated countries, the environmental and social audit (Principle 2) assesses compliance with the performance standards of the International Finance Corporation (“IFC”) for ecological and social sustainability,[8] and the World Bank Group’s Environment, Health and Safety (EHS) guidelines.[9] The EHS guidelines serve as a technical reference to the IFC performance standards and contain examples of Good International Industry Practice (GIIP) that indicate performance levels and measures that are normally acceptable for projects in Non-Designated Countries. The list of 34 designated countries[10] covers a number of countries in Europe[11] in addition to Australia, Canada, Chile, Israel, Japan, New Zealand, the Republic of Korea, and the United States. Countries are categorized as designated if they are assigned “robust environmental and social policies, legislative systems and institutional capacities to protect their people and the environment”. While projects in non-designated countries must comply with the guidelines of the IFC and the World Bank, Principle 8 of the EPs (covenants) further states that the customer “is obliged to comply with all relevant environmental and social laws and regulations of the host country, and permits in all relevant issues. ”Regardless of whether the project is located in a designated or non-designated country, the standards identified and referenced in the DPs ultimately represent the minimum standards adopted and do not exclude any additional standards that could be imposed by other project participants.

As a hypothetical example, the following provides an overview of what a company that wants to comply with the EPs can expect. Suppose a company, EnergyCo, wants to use a technology that extracts minerals from mining waste in an African country. In order to implement the technology, a number of costly elements must be considered financially, such as: B. Engineering, procurement and construction costs (EPC) and obtaining permits. EnergyCo can leverage the technology for this process, but may not have the financial resources or investors to provide capital for all phases of the project. Thus, loan guarantees and / or financing through an export credit agency may be the avenue available to pursue the project. If the financial institution accepted the EPs, the EPs would apply if the project met the various thresholds. If the EPs are applied, this project would likely be classified as a Category A or B project as it involves the treatment and transport of hazardous substances that can lead to higher emissions of air pollutants and the discharge of wastewater. In addition, the nature of the project raises a number of other environmental and social issues. If the project was classified in either Category A or Category B, DPs would require an environmental and social assessment (Principle 2) to be carried out to further determine the potential risks and impacts of the project.

In addition, as mentioned above, Principle 3 may impose additional considerations depending on whether the project is in a designated or non-designated country. Because no African country is on the list of designated countries[12], the International Finance Corporation (“IFC”) performance standards for environmental and social sustainability and the World Bank Group’s environmental, health and safety guidelines – in this case the EHS guidelines for mining.[13] Potential environmental issues related to mining activities that EnergyCo may encounter include water use and quality, waste containment, handling of hazardous materials, and impacts on land use, biodiversity, air quality, noise and vibration, landscape, and energy consumption. EnergyCo may also consider introducing guidelines for occupational health and safety, as well as community health and safety, such as safe transportation routes and protocols that require proper handling of waste materials.

In addition to the IFC and World Bank guidelines, EnergyCo must undertake, in accordance with Principle 8 of the EPs, to comply with all relevant environmental and social laws, regulations and permits of the host country “in all essential matters”. This agreement would include obtaining all necessary permits for mining (treatment, recovery, recycling, storage, etc.) as well as compliance with applicable air quality emissions and any restrictions on the discharge of wastewater.

While meeting the multiple requirements in EPs may seem daunting for companies looking to take advantage of opportunities in other parts of the world, in reality the EPs are just one aspect of a growing sustainability movement forcing companies to get involved in infrastructure projects as behave responsible environmentalists, take positive account of the social impact of their activities and meet the expectations of new models of corporate governance. Companies that develop the tools to meet ESG standards and the experience and knowledge required to navigate the EPs will enhance their ability to successfully participate in programs like Prosper Africa.

[1] https://equator-principles.com/about/

[2] https://equator-principles.com/members-reporting/

[3] See for example “Sustainability In Export Finance – Leveraging Export Finance to support the delivery of the SDGs” ICC White Paper September 2021

[4] https://equator-principles.com/wp-content/uploads/2020/05/The-Equator-Principles-July-2020-v2.pdf. These goals are designed to avoid or minimize negative impacts on ecosystems, communities and the climate, while protecting human rights in accordance with the United Nations Guiding Principles on Business and Human Rights.

[5] The 10 principles are: (1) review and categorization; (2) environmental and social assessment; (3) Applicable environmental and social standards; (4) Environmental and Social Management System and Action Plan on the Equator Principles; (5) stakeholder engagement; (6) grievance mechanism; (7) Independent Review; (8) covenants; (9) Independent monitoring and reporting; and (10) reporting and transparency. This article focuses on principles (1), (2), (3) and (8) as these principles outline preliminary deliberations and objectives of the DP, while the other principles come into play at more advanced stages of a project.

[6] The DPs are designed to provide a minimum standard of due diligence and surveillance to support responsible risk decision making. Based on the categorization of the project and other details about the project, additional evaluation and due diligence processes are identified as further evaluation steps.

[7] https://equator-principles.com/wp-content/uploads/2020/05/The-Equator-Principles-July-2020-v2.pdf

[8] https://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Sustainability-At-IFC/Policies-Standards/Performance-Standards

[9] https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/policies-standards/ehs-guidelines

[10] https://equator-principles.com/designated-countries/

[11] Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and Great Britain.

[12] https://equator-principles.com/designated-countries/

[13] https://www.ifc.org/wps/wcm/connect/1f4dc28048855af4879cd76a6515bb18/Final%2B-%2BMining.pdf?MOD=AJPERES&id=1323153264157