By James Barrett, Paul Davies and Michael Green

The Equator Principle Association has committed to revise the Equator Principles (EPs) for the first time since 2013.

The EPs provide a voluntary risk management framework for determining, assessing, and managing environmental and social risk for certain project finance transactions. More than 90 financial institutions in 37 countries have already adopted the EPs, which formally launched in 2004. These institutions — which are known as Equator Principle Financial Institutions (EPFIs) — have committed to withholding loans from projects if the borrower fails to comply with the EPFI’s social and environmental policies and procedures.

However, regulators, financial institutions, and other stakeholders have significantly changed how they engage with environmental and social concerns since the last 2013 iteration of the EPs. For example, companies increasingly face pressure to consider environmental, social, and governance (ESG) issues proactively, rather than focusing resources on addressing immediate environmental compliance issues.

The Equator Principle Association recognized such developments at its annual 2017 meeting. More than 130 individuals representing 60 EPFIs attended the meeting — during which they discussed key issues related to sustainable finance. In particular, attendees reflected on the far-ranging implications of the Paris Agreement and the recently released Financial Stability Board’s (FSB’s) Task Force on Climate-Related Financial Disclosures (TFCD) recommendations. In adhering to the TFCD, for example, companies may be addressing concerns of investors by being more transparent in relation to their governance structures, climate change strategies, and risk management practices. However, Non-Governmental Organisations are increasingly adept at identifying any gaps between the obligations a company formally commits to and what they actually do in practice. This potential delta may result in an increased risk of litigation. New challenges associated with the management of environmental and social risk necessitate a review of the EPs.

Meeting participants decided to update the EPs with a focus on enhancing the framework’s primary function: to provide a structure for financial institutions to handle environmental and social risks that arise in transactions. The review process — which will include related external stakeholder consultations — is likely to take up to 18 months. Notably, NGO’s have called for the new EPs to be “sufficiently ambitious” in light of escalating risks posed by climate change. The amendments could potentially include a mechanism to resolve environmental and social issues resulting from a potential breach of the framework’s standards.

In order for the EPs to continue to prove useful to companies, a review is required in light of other major global environmental developments impacting companies’ consideration of environmental and social issues. The new EPs will likely provide more onerous requirements than previous iterations. Borrowers, as well as both current and prospective EPFIs, should pay close attention to any more taxing obligations, depending on the outcome of the review process.

This post was prepared with the assistance of Tegan Creedy in the London office of Latham & Watkins.