Pursuing Responsible Investment Practices Beyond ESG: The Equator Principles Help Guide International Investment and Funding Projects

Recently, we discussed the restart of the Prosper Africa Initiative by the Biden administration, which aims to increase trade between American companies and African countries and encourage investment across the African continent. We have also identified several factors such as infrastructure and financing risk for US companies interested in opportunities in Africa to consider. Given the worldwide emphasis on sustainable project development, which encompasses environmental, social and governance (ESG) criteria, US companies considering investing in Africa should also familiarize themselves with the Principles of Ecuador (PE), an environmental and social risk assessment and management tool. in projects.[1]

Across the world, more than 100 financial institutions and export credit agencies in 37 countries have voluntarily adopted the MOUs. These institutions, including JPMorgan Chase & Co, Standard Chartered PLC, UK Export Finance, TD Bank Financial Group, Wells Fargo Bank, NA and the Ex-Im Bank of the United States,[2] apply the MOUs to facilitate the consideration of environmental and social risks and the impacts of the project, and the pursuit of sustainable environmental and social performance in order to obtain better financial, environmental and social results, in particular involving infrastructure projects and industrial. Access to finance often depends on compliance with EPs[3]. Like the ESG movement, which was largely initiated by the United Nations through its support for the Principles for Responsible Investment, MEPs are also aligned with United Nations goals, such as its Sustainable Development Goals. .[4]

EPs apply globally and to all industry sectors, including financial products such as project finance advisory services and project finance that meet certain thresholds. For project finance advisory services and project finance, MOUs apply when the total capital cost of the project is $ 10,000,000 or more. EPs have 10 guiding principles of which this article focuses on the following four: Principle 1: Review and categorization; Principle 2: Environmental and social assessment; Principle 3: Applicable environmental and social standards; and Principle 8: Alliances.[5] Based on principle 1, review and categorization, the project should be placed in a category – designated as A, B or C. Category A refers to projects presenting “significant negative environmental and social risks and / or impacts that are diverse, irreversible or unprecedented; Category B refers to projects with “limited potential negative environmental and social risks and / or impacts that are few in number, generally site specific, largely reversible and easily addressed by mitigation measures”; and Category C refers to projects with “minimal or no negative environmental and social risks and / or impacts”.[6]

Principle 3, Applicable Environmental and Social Standards, addresses the importance of identifying and engaging with relevant host country laws, regulations and permits that relate to environmental and social issues.[7] Principle 3 has two components for projects: those located in designated countries and those located in non-designated countries. Projects located in designated countries apply the relevant laws, regulations and permits of the host country to the project. In non-designated countries, environmental and social assessment (Principle 2) assesses a project’s compliance with the International Finance Corporation (“IFC”) performance standards for environmental and social sustainability,[8] and the World Bank Group Environmental, Health and Safety (EHS) Guidelines.[9] The EHS guidelines serve as a technical reference for IFC’s performance standards, containing examples of international good industrial practice (GIIP), which provide levels of performance and measures normally considered acceptable for projects in non-designated countries. The list of 34 designated countries[10] includes a number of countries in Europe[11] in addition to Australia, Canada, Chile, Israel, Japan, New Zealand, the Republic of Korea and the United States. Countries are classified as designated if they are deemed to have “strong environmental and social governance, legislative systems and institutional capacity designed to protect their people and the environment”. Additionally, while projects in non-designated countries must adhere to IFC and World Bank guidelines, Principle 8 of the MOUs (Covenants) further states that the client “shall undertake … to comply with all relevant host country laws, regulations, environmental and social regulations. and permitted in all material respects. Finally, whether the project is located in a designated or non-designated country, the standards identified and referenced in the PE represent the minimum standards adopted and do not exclude any additional standards that may be imposed by other stakeholders in the project.

As a hypothetical example, the following provides an overview of what a business seeking MOU compliance can expect to encounter. Suppose a company, EnergyCo, wants to use a technology that extracts minerals from mining waste in an African country. In order to implement the technology, a number of costly elements must be considered financially, such as engineering, procurement and construction (EPC) costs and obtaining permits. EnergyCo may use technology for this process, but may not have the financial resources or investors to provide capital for all phases of the project. Thus, credit guarantees and / or financing from an export credit agency may be the available route to continue the project. If the financial institution has adopted the EPs, the EPs would apply if the project meets the different thresholds. If the MOUs apply, this project would likely be classified as a Category A or Category B project as it involves the processing and transport of hazardous substances, which may result in greater emission of air pollutants and the release of wastewater effluents. In addition, the nature of the project raises a host of other environmental and social issues. If the project were classified in Category A or Category B, the MOUs would require the completion of an environmental and social assessment (principle 2) to better identify the potential risks and impacts of the project.

In addition, as mentioned above, under Principle 3, additional considerations may be imposed depending on whether the project is located in a designated or non-designated country. Because no African country is on the list of designated countries[12], the International Finance Corporation (“IFC”) performance standards on environmental and social sustainability and the World Bank Group guidelines on environment, health and safety would be consulted – in this case, the guidelines EHS for mining.[13] Potential environmental issues associated with mining activities that EnergyCo may encounter include water use and quality, waste containment, handling of hazardous materials and impacts on land use, biodiversity, quality air, noise and vibrations, landscapes and energy consumption. EnergyCo may also consider implementing guidelines for occupational health and safety in the workplace as well as community health and safety, such as safe transportation routes and protocols requiring proper handling of materials. waste.

In addition to IFC and World Bank guidance, in accordance with Principle 8 of the MOUs, EnergyCo must commit to comply with all relevant host country environmental and social laws, regulations and permits “in all material respects”. This commitment would include obtaining all necessary permits for mining (processing, recovery, recycling, storage, etc.), as well as compliance with applicable air quality emissions and any discharge limitations. aqueous effluents.

While meeting the multiple requirements presented in EPs may seem daunting to companies looking to seize opportunities in other parts of the world, the reality is that EPs are only one aspect of a growing sustainability movement that obliges companies to engage in infrastructure projects to behave as responsible stewards of the environment, to positively address the social impacts of their activities and to meet the expectations presented in new models of corporate governance. Companies that develop the tools to meet ESG standards, along with the experience and knowledge required to navigate PEs will improve their ability to successfully participate in programs such as Prosper Africa.