The Equator Principles

• Published date: 10 January 2023
• Subject Matter: Finance and Banking, Environment, Government, Public Sector, Financial Services, Project Finance/PPP & PFI, Environmental Law, Climate Change, Indigenous Peoples
• Law Firm: Azmi & Associates
• Author: Ahmad Syahir Yahya and Rohamina Jamil

The Equator Principles (EPs) are risk management framework adopted by financial institutions to identify, assess and manage environmental and social risks in project financing.¹ To address the environmental and social risks, the EPs were developed in 2003 by the International Finance Corporation (IFC), which were intended to serve as an international de facto benchmark for sustainable project financing. Financial institutions are required to adopt the EPs when financing large-scale development or construction projects involving oil and gas development, mining, power plants and dams. The term "Equator" is used since the EPs are to be adopted globally by financial institutions in the northern and southern hemispheres and the equator is equidistant from the two hemispheres. Financial institutions that implement the EPs are known as Equator Principles Financial Institutions (EPFIs).

The EPs are applied to five financial products, namely (i) Project Finance Advisory Services, (ii) Project Finance, (iii) Project-Related Corporate Loans, (iv) Bridge Loans and (v) Project-Related Refinance and Project-Related Acquisition Finance.²

The Principles³

The EPs are periodically updated to meet the current development on climate change, biodiversity, human rights and indigenous people. The EP4 is the latest EPs, which expands the scope of the EPs to Project-Related Refinance and Acquisition Finance and emphasizes on climate change and human rights i.e. indigenous peoples' rights in developed countries. The ten principles of the EP4 are summarized below:

Principle 1: Review and Categorisation - EPFIs have to review and categorise the proposed project into three categories i.e. high risks, addressable risks and no risk.

Principle 2: Environmental and Social Assessment - The borrower has to assess and declare the environmental and social risks of the proposed project.

Principle 3: Applicable Environmental and Social Standards - The borrower has to address the country's laws, regulations and permits in their assessment document.

Principle 4: Environmental and Social Management System and Equator Principles Action Plan - For high risks and addressable risks projects, the borrower has to develop an Environmental and Social Management Plan (ESMP) and an Environmental and Social Management System (ESMS) to evaluate and address the risks.

Principle 5: Stakeholder Engagement - The borrower has to show an ongoing stakeholder engagement process to mitigate the risks.

Principle 6:...