EP III: an open pit for finance? The impact of the Equator Principles on the industry’s environmental and social performance

The Equator Principles (EP) is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk. EP applies globally to all industry sectors and covers project finance and various forms of lending. Currently, 79 financial institutions in 35 countries have adopted EP, covering more than 70% of international project finance debt in emerging markets. Financial institutions that follow EPs will not provide project finance or project-related loans where the client will not, or is unable to, comply with EP. The lenders’ mantra was: “We will not provide loans to projects where the borrower will not or is unable to comply with our respective social and environmental policies and procedures that implement the Equator Principles.” Recognising the unavoidable impact on the environment and communities from extractive industries is both complex and challenging. The latest round of revisions to EP – the third set, hence the abbreviation ‘EP III’ – have attempted to dig deeper into the relationship between financing and lender responsibility for the consequences. On the surface, the EP III appears to impose more onerous requirements on borrowers. Yet, they are designed to reconcile the role of lenders with the global consequences of their lending. But are lenders ready to be charged with the responsibility of being custodians of our global commons when the mechanism of financing mining projects, and the banking industry itself, are being re-invented?

Background -

When EPs were first developed in 2003, the founding Equator Principles Financial Institutions (EPFI) aimed to create a voluntary framework for determining, assessing and managing the environmental and social (E&S) risks of major projects they were asked to finance. However, given the general lack of enforcement and the fact that their application is limited to project finance transactions, the effectiveness of EP has been called into question. The EPFI are seen as carving their environmental and social footprints onto landscapes around the world with little or no accountability. Lenders to mining projects have faced criticism that, blinded by returns, they have found ways of financing that have effectively circumvented the EP discipline of international best practices, such as the International Finance Corporation Performance Standards. Even when the EPs have been applied to mining project finance, they have not provided an effective enforcement tool for lenders...

Originally published in Mining Journal, 9 August 2013.

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