Editor's note: This is the second blog in a series on the Equator Principles III. Read part one, on the implications for financial services companies, here.
Since the inception of the Equator Principles in 2003, the energy and extractives industry has been a major focus of the environmental and social risk reviews conducted by nearly 80 member banks. For example, Bank of Tokyo-Mitsubishi, a leader in project finance, put 225 projects through its Equator Principles review process between 2006 and 2012. Of these, 60 percent were in the mining, oil, gas and energy sectors.
Focus on the energy and extractives industry by Equator Principles Financial Institutions (EPFIs) should come as no surprise. These types of projects often take place in emerging economies, where the Equator Principles are most applicable, and require major investment and external financing. Comprehensive identification, planning and management of environmental and social impacts are also essential to responsible natural resource development.
With the recent launch of the third version of the Equator Principles, or EP III, some requirements have been expanded. BSR has identified five major changes for energy and extractives companies receiving funding from EPFIs:
1. More types of financing will include environmental and social risk analyses. While early versions of the Equator Principles focused only on project finance, EP III formally has expanded its scope to include project-related corporate loans and bridge loans. Many EPFIs, however, are applying the same environmental and social risk analysis to other forms of financing as well, such as IPOs and bond issuance. This means that considerably more energy and extractives projects will be subjected to EP III.
2. EPFI clients are now required to publicly disclose environmental and social impact analyses. Under EP III, clients must publish summaries of environmental and social impact assessments online and disclose greenhouse gas emission levels for projects emitting more than 100,000 metric tons of carbon dioxide annually (during the operational phase). The EPFIs also will disclose more information publicly, including project details, internal management of the Equator Principles and project names for project finance deals, subject to client consent. This greater transparency will increase pressure on energy and extractives companies to demonstrate project-level environmental and social performance to stakeholders.
3. Project-level human rights impact assessments will be expected. While in the past, project-level human rights impact assessments were considered best practice, now they specifically will be requested by EPFIs in many cases. Following the Guiding Principles on Business and Human Rights, EP III emphasizes energy and extractives companies’ responsibility to move beyond human rights policies toward on-the-ground oversight of human rights impacts.
4. Companies must provide analysis on alternative options for high-emitting projects. While EP III does not mandate that companies only develop low-emitting projects, it does require that during the feasibility phase, companies analyze the technical and financial implications of shifting to a lower-emitting alternative.
5. More projects will have to meet stakeholder engagement requirements. Previously, only the most impactful projects, labeled Category A, had to meet the Equator Principles’ stakeholder engagement requirements. The vast majority of EP III projects are Category B, however, including some energy and extractives projects. EP III now requires both Category A and B projects meet these requirements. With this expanded application, EPFIs will expect more energy and extractives clients to address stakeholder concerns up front which, in turn, should reduce the risks of project delays and unsupportive communities.
With these added requirements comes added complexity. For many years, BSR has been assisting mining, oil and gas companies at the project level with issues relevant to EP III, including stakeholder engagement, human rights impact assessments and, increasingly, the development of integrated environmental and social management plans, which are core to comprehensive sustainability performance.
There are no shortcuts in responsible impact management. In our experience, companies and projects that invest in robust environmental and social plans, systems and qualified people, and then execute projects diligently, are best positioned not only to exceed international standards, including EP III, but also to secure a social license to operate. These projects are more likely to be commercially successful as well, and they will provide better outcomes for countries and communities.
This article originally appeared on the Business for Social Responsibility blog and is reprinted with permission.
Nuclear power plant image by Thomas Anderson via Flickr