The past decade has seen a significant rise in the prominence of environmental and social issues relating to project development. Investors, governments, lenders and communities are increasingly focused on promoting sustainable development, mitigating climate change, and preventing human rights abuses. In addition to the moral imperative of these goals, investors are growing more aware of the benefits to their bottom line – projects with strong environmental and social bona fides have been demonstrated to outperform those of competitors with weaker policies in the medium to long term.
Recognizing the imperative for – and the benefit of – more responsible, sustainable global development, mining companies and international institutions have been taking the initiative to set up their own risk management frameworks to promote enhanced environmental and social standards.
The Equator Principles are one such global risk management framework. Initially published in 2003, the Equator Principles have since been adopted by 105 major banks and financial institutions around the world, including many Canadian banks.
The principles are used by signatories, or Equator Principle Financial Institutions (EPFIs), as a common baseline in identifying, assessing and managing the environmental and social risks in mining and other projects they finance. They provide a minimum standard for due diligence and monitoring to support responsible risk decision-making. EPFIs that have adopted the principles commit to implementing them in their internal environmental and social standards for financing projects and to not provide funding for projects where the client cannot or will not comply.
The Equator Principles Association has released a fourth version of the Equator Principles, known as “EP4”, that will come into effect on Oct. 1.
EP4 — What’s new?
EP4 both expands the application and strengthens the content of the Equator Principles. The changes include lowering the threshold for in-scope projects to US$50 million, incorporating the United Nations Guiding Principles on Business and Human Rights, and adding in reporting requirements for project sponsors related to biodiversity and greenhouse gas emissions that are similar to the standards set out in the Recommendations from the Task Force on Climate-related Financial Disclosures.
Perhaps the most significant change in the Canadian context is the fact that EP4 will now apply to domestic projects. The Equator Principles distinguish between “designated countries,” whose domestic environmental and social laws and regulations are considered sufficiently robust, and “non-designated countries” with less developed rules, where the Equator Principles would apply. Canada is a designated country, and as a result mining projects in Canada were previously subject only to domestic environmental rules and regulations. With EP4, while domestic Canadian mining projects may now also be required to comply with certain IFC Performance Standards.
Mining companies in Canada should familiarize themselves with the revised EP4 standards. They are not intended to apply retroactively, but they may require additional diligence, reporting and other obligations for mining companies and financial institutions on future projects. There are a number of steps project sponsors and lenders can take to smooth the transition:
Start the conversation early – doing so gives everyone an opportunity to understand expectations. Project sponsors should understand how lenders plan to categorize their project’s risk level, and what that means for additional stakeholder engagement and reporting obligations over the life of the project. Will EPFIs be requesting the support of an independent environmental and social consultant? Will IFC Performance Standards apply? If so, which ones and why? Answering these and other questions early allows parties to create a road map for the project before time and energy is spent on unnecessary or inadequate procedures.
Review corporate environmental and social regimes – this is an opportunity for project sponsors to review their corporate strategy and analyze if and how environmental and social principles have already been integrated into their policies and procedures, and make any necessary changes. Consider training needs too, with the goal of developing internal talent capable of understanding and implementing the standards required under EP4.
Seek external guidance – mining companies that do not possess internal expertise in these matters should consider whether to acquire or to engage professional expertise.
These steps will allow project sponsors and lenders alike to recognize and mitigate environmental and social risks, while minimizing their reputational exposure.
Alison Babbitt is an English and Ontario-qualified project finance partner whose practice focuses on mining, renewables and clean technology. Michael Cockburn is a corporate and commercial lawyer who works in project financing, M&A and public private partnerships. They are both based in the Ottawa office of Norton Rose Fulbright Canada.