Equator Principles Association releases guidance note | Latham & Watkins LLP

The Guidance Note aims to help financial institutions applying the Equator Principles navigate the environmental and social due diligence process.

In July 2022, the Equator Principles Association published a The guidance note on how to apply the latest iteration of the Equator Principles (EP), EP4, during the environmental and social due diligence (ESDD) process. In particular, the guidance note addresses the scope of work and terms of reference for Independent Environmental and Social Consultants (IESCs) who undertake HESD on behalf of Equator Principles Financial Institutions (EPFIs) in the framework of the EP4, including the appropriate scope for the development of an EP4-compliant Environmental and Social Impact Assessment (ESIA).

The guidance note is important as it addresses the changes to the pre-financial close ESDD that must be undertaken by CIES as part of PE4, including with respect to projects located in designated countries that are not no longer “deemed to comply” with the Equator Principles only by virtue of host country law. For more information on the transition to EP4 and our analysis of its implications for projects in designated countries, see this December 2019 blog postJune 2020 Customer alertand December 2020 Customer alert.

This blog post summarizes key elements of the guidance note for lenders and project sponsors to consider.

Pre-closing IESC and ESDD

The overall objective of the IESC scope of work is to assess a project’s environmental and social (E&S) compliance and capability. In particular, the IESC should undertake an assessment of the project’s compliance with applicable standards (as that term is used in the guidance note) and its E&S management capacity, among others. The applicable standards against which a project is assessed depends, in part, on whether the project must be located in a Designated Country (countries deemed to have strong environmental and social governance, legislative systems and institutional capacity, such as the United States) or a non-designated country – although the distinction between the level of ESDD pre-financial closure that must be undertaken for projects in designated and non-designated countries is less pronounced under EP4 than it was the case under the previous version of the EPs.

Generally, applicable standards include all relevant local and national laws and regulations, international laws and conventions, the International Finance Corporation (IFC PS) environmental and social performance standards, and environmental, health and safety guidelines (directives EHS) of the World Bank Group. as well as applicable industry guidelines and the UN Guiding Principles on Business and Human Rights. Other sources of Good International Industry Practices (GIIP) may also be relevant.

The guidance note clarifies the following with respect to the scope of work/ESDD required of the IESC under PE4:

  • E&S standards applied by Export Credit Agencies (ECAs) and Development Finance Institutions (DFIs) generally do not distinguish between designated and non-designated countries. Thus, if ECAs or DFIs are involved in the financing of a project, the scope of the ESDD of the IESC should be the same whether the project is located in a designated country or in a non-designated country (this is i.e. the IESC needs to assess compliance against IFC performance standards and relevant EHS guidelines).
  • If only commercial banks are involved, the scope of the ESDD of the IESC for a project in a designated country will broadly follow the scope of the ESDD required for a project in a non-designated country, with one notable exception. The IESC review will focus more on assessing compliance with host country standards and will include a review of compliance with national laws and regulations; however, the IESC will also need to determine, based on the project, to what extent aspects of the IFC PS (and other relevant GIIPs) should be used as guidance to address specific project-related risks in the project. ESDD. The guidance note recommends that EPFIs either identify these risks themselves or include in the IESC’s scope of work a requirement that this analysis be undertaken by the IESC.

The guidance note explains that parties should identify these gaps by performing a high-level comparison of the scope of local/national legal requirements against IFC PS and EP4 and a review of regulatory submissions to determine whether significant elements of the IFC PS standard have not been addressed. The guidance note further provides the following list of elements where consideration of IFC’s PS may be relevant to address potentially material risks: (1) definition of the area of ​​influence of the project, which is defined as the total area likely to be affected by both the on-site and off-site impacts of project-related activities (in particular consideration of associated facilities, supply chain and treatment of impacts cumulative); (2) biodiversity; (3) aspects of resettlement (eg, treatment of informal landowners); and (4) assessment of specific social impacts.

The guidance note provides that the scope of HESD in the designated countries should also cover the review of climate change risk assessments (if applicable), human rights assessments (if applicable) , ESIAs, environmental and social management plans/environmental and social management systems, and stakeholder engagement plans (including free, prior and informed consent for indigenous peoples, where applicable), internal and external grievance mechanisms and biodiversity data sharing.

The guidance note recommends that the IESC’s scope of work define appropriate and realistic timeframes for the completion of ESDD. The guidance note indicates that ESDD pre-financial close for more complex projects typically takes between six and 12 months, or longer when significant and time-consuming compliance gaps are identified against applicable standards. To ensure the success of a project, the parties must engage the IESC early enough in the process, and with sufficient scope, to enable the IESC to conduct its ESDD in a manner and in a timely manner that reduces risk. ESDD considerations become triggers for financial close.

Scope of ESIA work

ESIAs and similar E&S assessments are at the heart of the HESD required under PE4. As the guidance note explains, an ESIA that comprehensively addresses all of a project’s E&S risks and meets applicable standards enables an efficient and timely ESSD process. On the other hand, fixing the shortcomings of an ESIA often requires specialists and can lead to prolonged delays in the project. With this in mind, the guidance note outlines the steps needed to properly scoping and obtain a full ESIA early in project planning to avoid significant delays in project funding. These steps include: (1) selection of E&S requirements; (2) the scoping studies required for the identification of impacts; (3) conducting an impact evaluation; and (4) developing mitigation plans.

  • The screening identifies the extent and complexity of the impacts on the project’s area of ​​influence. The guidance note states that the screening should be done at a time when the project is sufficiently defined, the preferred location is known, and the design concepts and resource/infrastructure requirements are understood. An effective selection will take into account a number of issues, including the extent to which the applicable standards may apply to projects in the designated countries.
  • Scoping is an important part of early identification of potential E&S issues and helps determine whether the project is considered high or medium/low risk. It is important to note that the results of the scoping process may allow the borrower/sponsor, with advice from the EPFI, to determine whether a full ESIA is required (for high risk projects) or whether an E&S assessment targeted and limited would suffice (for medium or high risk projects). low-risk projects) – a determination that has a direct bearing on the time required to complete the required ESDD.
  • Impact evaluations. Depending on the existence of significant negative impacts and risks for the project (as determined during the selection and scoping phases), carrying out an impact assessment may require the assistance of external experts to all or part of the assessment. The use of these external experts is required under the IFC PS and EP4 for matters involving biodiversity, indigenous peoples and cultural heritage issues. Additionally, site-specific primary data is often required if a project is likely to have specific E&S impacts, particularly those involving (1) the identification and characterization of potential biodiversity receptors; (2) identify and verify social livelihoods and land use; (3) characterization of receiving environments for direct and indirect emissions/releases to air, water and soil; and (4) identify natural resource use for ecosystem assessments. This baseline data collection exercise is often the determining factor in the time required to complete the assessment.
  • Impact mitigation. Once potential impacts have been identified, additional mitigation measures should be developed to satisfy EP4. The ESIA will document mitigation measures either through a description of design controls or as part of a management program or plan implemented through the Environmental and Social Management System of the project.

Conclusion

As the guidance note points out, lenders and project sponsors should prioritize HESD from the start of the funding process to avoid potential and unnecessary delays related to meeting stricter due diligence requirements. introduced by EP4. In particular, lenders and sponsors are encouraged to engage an IESC early in the financing process. Through the effective use of IESCs, appropriate scoping of ESIA, and consistent coordination between participating parties, EPFIs and their clients should be well placed to meet the ESDD requirements of EP4 in accordance with the desired project funding deadlines.

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