Changes in the air for project finance risk management
The past month has seen a flurry of activity in relation to risk management requirements applicable to social and environmental project risks in emerging markets. Over seventy financial institutions across the world have adopted the “Equator Principles” (EP) as a risk management tool to screen and manage their exposure to these risks in project finance. The EP require banks to screen projects located in countries that are not categorised as high income by the OECD to satisfy themselves that the projects will meet IFC/World Bank standards.
The EP association has just announced the results of a strategic review. This indicates a willingness to provide more transparency on how lenders apply EP to projects, and envisages wider application of the EP to other forms of lending provided these are focused on a single asset. There are also recommendations to test the local law requirements of high income OECD countries against IFC standards to assess whether there is a need for broader application of those standards, and to beef up the secretariat that runs EP for its members. Coincidentally, the IFC substantially revised its standards and sustainability policy last month. The EP association is expected to adopt the revised standards in lieu of the current 2006 edition from next year. The new standards introduce the requirement for free, prior and informed consent where indigenous peoples are materially affected by a project, impose more onerous requirements in respect of project supply chains, and introduce new obligations in relation to the assessment and mitigation of impacts on biodiversity and ecosystem services (natural resources such as water, forest products etc.), including biodiversity offsetting. EP institutions will need to consider their response to the EP strategic review and will also want to prepare for the move to new IFC standards. Those banks who apply IFC standards through their own public or private sustainability guidelines will also want to review the wording and scope of these given the changes now announced.