Impending Updates to the Equator Principles Include Significant Changes for Projects in High-Income Countries

July 23, 2020

Revisions to the Equator Principles (“EPs”) that go into effect October 1, 2020, include significant changes affecting projects in the United States and other specified “high-income” countries (“Designated Countries”).  The EPs, which have been adopted by 105 of the world’s largest financial institutions in 38 countries (the Equator Principles Financial Institutions or “EPFIs”), are a risk management framework for assessing and managing environmental and social risk on finance for projects of US$10 million or more.  The EPs are intended to provide a minimum standard for due diligence and monitoring to support responsible decision-making.  The EPFIs commit to implementing the EPs as part of their internal environmental and social lending policies and procedures, including an obligation to decline financings for projects that do not, or are unable to, comply with the EPs.

The Equator Principles Association (“EP Association”) released the first version of the EPs in 2003 and adopted the current version (“EP3”) in June 2013.  On November 18, 2019, the EP Association approved the fourth version of the EPs (“EP4”).  EP4 was due to come into effect July 1, 2020, but due to the COVID-19 pandemic, the EP Association has delayed the effective date until October 1, 2020.  

EP4 includes several significant changes affecting projects in the Designated Countries, including, most significantly, elimination of a prior provision that deemed conformance to the environmental and social laws of the Designated Countries as compliance with the most burdensome requirements of the EPs (including the requirement for pre-construction environmental and social impact analysis).  Hence, after October 2020, a borrower may be obligated to conduct pre-construction assessment work that is not required under local law and perhaps even face risks that a project does not receive financing based on a negative assessment or other non-compliance with the requirements of the revised EPs .

Other changes in EP4 that are likely to impact projects in Designated Countries are (i) a requirement that EPFIs determine, based on an evaluation of project-specific risk, whether one or more International Finance Corporation Performance Standards on Environmental and Social Sustainability (“IFC PSs”) could be used in addition to host country laws to address the same, and (ii) a requirement that project sponsors obtain the “Free, Prior and Informed Consent” of affected Indigenous Peoples in accordance with IFC PS 7.  The IFC PSs provide guidance on how to identify, avoid, mitigate, and manage environmental and social risks and impacts, and may require commitments that go beyond compliance with host country law, such as compliance with good international industry practices established by the World Bank Group Environmental, Health and Safety Guidelines (the “EHS Guidelines”).



The EPs apply to the following financial products when supporting a new project.

  • Project Finance with total project capital costs of US$10 million or more; and Project-Related Corporate Loans where (i) the majority of the loan is related to a project over which the borrower has direct or indirect control, (ii) the total aggregate loan amount is at least US$100 million (reduced to US$50 million by EP4), (iii) the EPFI’s individual commitment is at least US$50 million, and (iv) the loan tenor is at least two years.
  • Project Finance Advisory Services where the total project capital costs are US$10 million or more; and Bridge Loans with a tenor of less than two years that are intended to be refinanced by subject Project Finance or Project-Related Corporate Loan.
  • Project-Related Refinance and Project-Related Acquisition Finance where (i) the underlying project was financed in accordance with the EPs, (ii) there has been no material change in the scale or scope of the project, and (iii) project completion has not occurred at the time of signing the facility or loan agreement.


The EPs include ten principles, with Principles 1-3 establishing the basic requirements.

  • Principle 1:  Review and Categorization.  Projects are categorized based on their potential environmental and social risks and impacts as Category A (significant), Category B (limited), or Category C (minimal/none).
  • Principle 2:  Environmental and Social Assessments.  For all Category A and B projects, the EPFI will require an assessment (the “Assessment”) evaluating and, to the extent relevant and appropriate, proposing measures to minimize, mitigate and offset, adverse environmental and social impacts.
  • Principle 3:  Applicable Environmental and Social Standards.  The Assessment should address compliance with relevant host country laws, regulations, and permits that pertain to environmental and social issues, and, for projects in Non-Designated Countries, compliance with applicable IFC PSs and World Bank Group Environmental, Health, and Safety Guidelines.

The other principles build on the structure set by the first three, and are:  Principle 4:  Environmental and Social Management System and Equator Principles Action Plan; Principle 5:  Stakeholder Engagement; Principle 6:  Grievance Mechanism; Principle 7:  Independent Review; Principle 8:  Covenants (in financial documents); Principle 9:  Independent Monitoring and Reporting; and Principle 10:  Reporting and Transparency.

Significant Changes Affecting Projects in Designated Countries

EP4 eliminates the long-standing exemption for projects in Designated Countries from most requirements of the EPs.  Principle 3 of EP3 provides that: “Host country laws [in Designated Countries] meet the requirements of environmental and/or social assessments (Principle 2), management systems and plans (Principle 4), Stakeholder Engagement (Principle 5) and, grievance mechanisms (Principle 6).”  This provision is deleted in its entirety in EP4, so that EPFIs and other lenders using the EPs will require an Assessment for Category A and B projects in Designated Countries.  In the United States, in particular, under EP4, the need for an Assessment must be evaluated separately from whether a similar review is required under the National Environmental Policy Act (“NEPA”) or state analog.  As a result, there will be projects without a federal nexus triggering NEPA (and not subject to a similar state requirement) for which an Assessment is required.  Furthermore, since the types of environmental and social review required by the laws of the United States (and other Designated Countries) do not always align with the EPs, project sponsors may need to go beyond compliance with law to satisfy the requirements of EP4.

Two other changes in EP4 also have the potential to significantly increase the requirements for projects in Designated Countries.  First, under Principle 3, the EPFI will evaluate the specific risks of the project to determine whether one or more of the IFC PSs could be used as guidance to address those risks, in addition to the host-country laws.  Second, Principle 5, which will be applicable to projects in Designated Countries under the revised Principle 3, requires that that project sponsors obtain the “Free, Prior and Informed Consent” of affected Indigenous Peoples in accordance with IFC PS 7.

The IFC PSs, which provide guidance on how to identify, avoid, mitigate, and manage environmental and social risks and impacts, may require commitments that go beyond compliance with host country law.  The IFC PSs require the evaluation of good international industry practices established by the EHS Guidelines, and, typically, compliance with the more stringent of host laws and the EHS Guidelines.  The EHS Guidelines provide practices of general applicability relating to the environment, including air and water quality, waste management, noise, occupational health and safety, community health and safety, and construction and decommissioning.  The EHS Guidelines also provide industry-specific practices for various industries in the following sectors:  agribusiness, chemicals (including petroleum refining), forestry, general manufacturing, infrastructure, mining, oil and gas, and power generation and distribution.


EP4 introduces potentially significant new obligations for sponsors seeking funding for projects in the United States and other high-income countries.  Sponsors will need to consider the requirements of the EPs in addition to applicable laws and regulations, and, in particular, the EPs’ obligations for environmental and social review.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric B. Rothenberg, an O’Melveny partner licensed to practice law in Missouri and New York, and John D. Renneisen, an O’Melveny senior counsel licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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