By Michael Torrance
On May 22, 2017, an open letter was sent from 10 global banks requesting the Equator Principles Secretariat to reconsider how financial due diligence should be done in developed countries like Canada, the United States and Australia.
The Equator Principles (EP) is an agreement between 90 of the world’s largest financial institutions to conduct environmental and social due diligence before lending to projects anywhere in the world EP financial institutions have in place internal teams of environmental and social risk experts and also hire independent review advisors to assist them in conducting this diligence.
The reviews consider a variety of aspects of a project, such as resource efficiency, greenhouse gas emissions, biodiversity, health and safety, labour standards, resettlement issues, Indigenous peoples and human rights. In less developed countries, projects are assessed against both local legal requirements of the project and the World Bank’s IFC Performance Standards on Environmental and Social Sustainability (IFC Performance Standards).
The approach in more developed countries has been to only evaluate the project against local legal requirements. Financings can be conditioned (through contractual covenants) on compliance with these standards or on corrective actions being taken to bring the project into compliance. There can be events of default whereby disinvestment could occur if the project falls out of compliance with accepted standards. Ongoing monitoring and review of the project will also be conditions of financing.
The EP are viewed by member banks as a risk management strategy. The long repayment horizon of debt financing for projects means that banks are exposed to project risk for a long time. The EP conditions financing on the application of best practices for environmental and social risk management. The goal is to protect the lender’s reputation and also manage the financial and legal risks associated with a project.