The construction and further development of infrastructure is of crucial importance for society and a healthy economy. But protecting the environment and human rights has also come to the forefront of the global agenda. At times these two goals have been cast as mutually exclusive, but the financing community has recognized the imperative to harmonize developing modern infrastructure with preserving our natural habitat and upholding social standards.
The majority of financing banks have for some time attempted to ensure the sustainability of infrastructure projects by following the Equator Principles (EPs), which establish certain environmental and social standards.
In order to extend the scope of the EPs, set higher environmental and social standards and to align the EPs with other international guiding principles such as the United Nations Guiding Principles on Business and Human Rights (UNGPs), the EPs are continuously evolving. Since the release of the fourth version of the EPs (EP IV) is approaching, this article will not only present the current status, but also give a preview of expected developments in light of criticism levied at the current version of the EPs.
The Equator Principles are an international risk management framework used by Equator Principles Financial Institutions (EPFIs) on a voluntary basis. The EPs currently consist of ten principles that require considering environmental and social standards, engaging with stakeholders, developing environmental and social action plans and management systems, and ensuring independent project monitoring and reporting. The standards are based on Environmental, Health and Safety Guidelines (EHS Guidelines) and Performance Standards of the World Bank subsidiary, International Finance Corporation (IFC).
The EPs apply worldwide to all industry sectors and to projects involving the following financial products: project finance and advisory services with total project capital costs of US$10 million or more; project-related corporate loans with a total aggregate loan amount of at least US$100 million; and certain associated bridge loans. Although the EPs do not confer any rights or even liability, non-compliance may result in EPFIs completely refusing financing or banks prescribing remedial measures when financing has already begun. On the other hand, it is worth noting that, as with all voluntarily imposed standards, compliance under the EPs does not afford lenders or project developers blanket protection from litigation for social or environmental harm caused by the financed projects.
Since the EPs were signed by ten international banks in June 2003, many more banks have followed suit. More than 90 financial institutions in 37 countries now make use of these principles and have committed themselves to financing projects only if borrowers comply with the EPs. Satisfying the applicable environmental and social standards set out in Principle 3 of the EPs has therefore become established practice, particularly in the financing of major international projects in developing and emerging countries. In 2018, more than 80 percent of project finance transactions in emerging markets were already financed by EPFIs.
Despite their success, the EPs are by no means perfect.
Alignment with UNGPs
A report commissioned by the Equator Principles Association (EPA) concluded that robust implementation of the EPs can address a number of human rights risks. However, expectations in the EPs fall short of expectations of human rights due diligence (HRDD) under the UNGPs.
The report made ten recommendations to improve the EPs’ alignment with the UNGPs, including: (1) eliminating existing financial thresholds for the EPs to apply to project finance-related transactions; (2) reflecting an expectation that EPFIs should consider all human rights risks connected to the aspects of a client’s operations being financed, including those arising from business relationships with third parties throughout the value chain for a project, as opposed to just human rights risks arising from EPFIs’ own activities under the current EPs, and (3) ensuring coverage of the full scope of “affected stakeholders” as are covered by the UNGPs.
The EPA is still in the process of considering these findings and recommendations as part of developing EP IV. Assuming some or all of the recommendations are incorporated, EP IV is likely to see a widening of the scope of HRDD expectations under the EPs.
Designated and Non-Designated Countries
A recurring point of criticism is that the distinction between Designated and Non-Designated Countries leads to the EPs being applied differently in different countries.
This distinction is based on the assumption that national laws in Designated Countries already offer such a high standard of human rights and environmental protection that assessing compliance with the standards laid down in the EPs is not necessary.
The construction of the USA’s Dakota Access Pipeline, for example, showed that this assumption is not always justified. Since the pipeline runs through an area in which indigenous communities live, applying the EPs’ standards would have required that the free, prior and informed consent (FPIC) of the indigenous people be obtained in accordance with Principle 5. However, since this requirement does not apply to the USA as a Designated Country (provided relevant local law is complied with), FPIC was not sought and disputes arose with the indigenous communities, leading to criticism of both the banks involved in financing the project and the EPs themselves.
In light of this critique, EP IV is expected to bring changes to the definition of Designated Countries.
Preview of EP IV
A draft EP IV text is expected to be approved for public release by EPA members in May, following which there will be an external stakeholder consultation – the EPA has indicated that an online form will be made available on its website to those wishing to provide feedback.
It is worth noting that, for the first time, the revision of the EPs will not take place in parallel with a revision of the IFC Performance Standards, which highlights the growing importance of corporate responsibility for human rights and the environment.
Environmental and social impacts of infrastructure projects are not only gaining in importance in the general public’s awareness, but are also reflected in financing requirements. It is therefore important for sponsors of such projects to consider the EPs at an early stage of project development and to involve banks and their legal and technical advisors.
Engaging with experts early in the due diligence process to review a particular investment’s compliance with the EPs is key, particularly with EP IV likely to increase HRDD expectations and apply standards more rigorously in Designated Countries such as the UK and the USA. Ultimately, to avoid a compliance headache, implementation of the UNGPs will ensure that a business is well placed to meet any standard of HRDD now and in the future.
 In addition, an EPFI’s individual commitment to a project-related corporate loan must be at least US$50 million and the loan tenor must be at least two years.
 Bridge loans with a tenor of less than two years that are intended to be refinanced by project finance or a project-related corporate loan.
 Notably, the U.S. Supreme Court ruled in Budha Ismail Jam, et al. v. International Finance Corporation, 139 S.Ct. 759 (2019) that international organizations are not immune to suit in the U.S. for certain alleged damages that financed projects cause to local stakeholders. The Jam suit will be permitted to go forward, notwithstanding internal due diligence IFC performed to prevent the alleged harm. See our full analysis of the Jam case here and stay tuned to our Blog for updates as the case makes its way through the U.S. federal courts.
 Principle 3, The Equator Principles, June 2013: for projects in Non-Designated Countries, the applicable IFC Performance Standards and EHS Guidelines; for Designated Countries, the relevant host country laws, regulations and permits that pertain to environmental and social issues.
 Enhancing the Alignment of the Equator Principles with the UN Guiding Principles on Business and Human Rights: A Public Summary of Shift’s Advice to the Equator Principles Association, Shift, November 2018
 Designated Countries are those deemed to have robust environmental and social governance, legislative systems and institutions designed to protect their population and the natural environment, including the UK and the USA. A full list can be found here: https://equator-principles.com/designated-countries/
 Cf. Principle 3