Chapter 4B PROJECT FINANCE: THE EQUATOR PRINCIPLES (VER. 4) - I HAVE MY PERMITS, WHERE'S MY FUNDING!

• Jurisdiction: United States

Mining Law
Chapter 4B

[Page 4B-1]

PROJECT FINANCE: THE EQUATOR PRINCIPLES (VER. 4) - I HAVE MY PERMITS, WHERE'S MY FUNDING!
Robert D. Comer ¹Norton Rose Fulbright, LLC Denver, CO

BOB COMER is the Co-Head of Mining at Norton Rose Fulbright US LLP in Denver. He has a diverse legal and scientific background in the mining, oil, gas, energy and natural resource industries focused on achieving business solutions to regulatory, compliance, permitting, operating, transactional and sensitive resource challenges. Bob has held senior leadership positions with industry and the federal government and is well known for his ability to design and implement effective legal and practical solutions. Bob is a leading authority in natural resource permitting and compliance, has testified before the U.S. Congress on mining law issues, and has advanced numerous resource projects. He has counseled industry and government executives on a wide array of sensitive resource issues involving the Equator Principles, energy transmission, public land access, rights of way, NEPA permitting, endangered species, water quality and rights, wetlands, mineral estate title and security, royalties, superfund, toxics, environmental and land use compliance, enforcement, and litigation. Bob also has led negotiations involving commercial and mineral transactions, mineral leasing and mining law claims, and has participated in mergers, acquisitions and due diligence.

The Equator Principles (EP) are perhaps the most widely applied private, international financing protocols seeking to influence environmental and social sustainability in big Project² finance and development. Recent revisions to the EP risk management framework are probing and import their environmental and social sustainability mission to more projects in more places than ever before. The Equator Principles Association (EP Association) released an updated fourth version of the Equator Principles (EP4) on November 18, 2019. The new version, dated July 1, 2020 represents a significant advancement for global conformity among financial institutions in furthering the sustainable development agendas of non-governmental and quasi-governmental organizations.³ As modestly described by Amit Puri, then Chair of the EP Association, EP4 is "moving global best practice for managing environmental and social risks in Projects a step forward."

This paper summarizes certain EP4 processes required to obtain big Project funding, discusses issues associated with achieving Free, Prior and Informed Consent, and considers the potential for conflicts with host country rule of law in Designated OECD countries.

[Page 4B-2]

I. Introduction

The original Equator Principles emerged in 2003 as a global risk management framework providing financial institutions a common baseline to identify and evaluate environmental and social risk in Project finance.⁴ Equator Principles Association member Financial Institutions (EPFIs) bear responsibility for implementation of the EPs in their lending decisions.⁵ EPFIs periodically report certain information to fellow EPFI lenders in a peer review-type process.

The EPs are a "minimum standard" for due diligence, monitoring, and reporting to support risk-based decision-making by project lenders. They are rooted in international law⁶ with approximately 110 Equator Principles Financial Institutions (EPFIs) in 38 countries.⁷ EP4 is the most recent update to the Equator Principles and became effective on October 1, 2020.⁸

When it comes to the financing and implementation of Projects, compliance with domestic law always has been an EP component; however, a clear distinction that had existed between Designated and Non-Designated OECD Countries under prior versions of the Equator Principles has been eliminated.⁹ Prior to EP4, as a general proposition, compliance with Designated Host Country law was deemed to be a surrogate for compliance with the Equator Principles. Designated Countries are mostly high-income, Organization for Economic Co-operation and Development (OECD) identified countries that are considered to have a robust legal regime for managing environmental and social issues.¹⁰ Now Projects in all countries, not just Non-Designated OECD Countries, must meet the explicit EP4 standards.¹¹

Many aspects of the Equator Principles rely on Performance Standards established by the

International Finance Corporation (IFC), a World Bank Group entity. The Performance Standards are a non-governmental framework seeking to ensure sustainable development as a component of

[Page 4B-3]

World Bank lending practices.¹² The Equator Principles have long been aligned with the IFC Performance Standards.

As compared to EP3, the previous iteration of the framework, EP4 has expanded requirements for stakeholder engagement with affected communities, lowered the financial threshold to $50 million, broadened the financial products to which EP4 applies, and expanded the due diligence required to address Free, Prior and Informed Consent and project risk in Designated Countries.¹³ EP4 expands EPFI obligations in addressing environmental and social impacts of Projects¹⁴ with additional processes, challenges, and concerns that financers and stakeholders must address in the 35 OECD designated countries and globally.

One notable social goal of EP4 is the recognition of Free, Prior, and Informed Consent (FPIC) including for Projects on the "ancestral lands, territories and natural resources" of Indigenous Peoples,¹⁵ regardless of present ownership - essentially, involving any land or resources that may be "of interest" to an Indigenous community. FPIC was first designated as a specific participatory "right" of Indigenous Peoples by the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) based on principles of inherent sovereignty.¹⁶ However, the lack of clear definition and specific parameters for FPIC make it an open standard with requirements that are subject to morphing, can be manipulated by Project opponents and could actually impede achieving the goals of the U.N. Declaration. In fact, rather than reduce financial and social risk, in its present form, FPIC may substantially increase risk to Project proponents, and by extension, to the EPFIs. Risk and definitional issues associated with FPIC, including the potential for conflict with host country rule of law, raise challenges to Project implementation.

[Page 4B-4]

II. Equator Principles Ver. 4 Funding Thresholds¹⁷

EP4 is applied by EPFIs through various types of financial products to new Projects, Project-related acquisition finance, Project-related refinance, and expansions and upgrades to existing projects. The Project capital cost threshold remains the same at $10 million and applies to both Project finance as well as Project finance advisory services.

One major EP4 change was to lower the threshold for Project-related corporate loans from $100 million in aggregate Project financing to $50 million on an individual lender basis where the individual lender's commitment is also at least $50 million. It comes into play for Project-related corporate loans with a tenor of at least two years where the borrower has direct or indirect control over the Project.

Other examples of EP4 influence include changes related to bridge loan financing which now reflect the thresholds for the Project-related corporate loans and to Project-related refinancing and acquisition financing where the underlying Project was financed under the Equator Principles framework and there is no material change in scale or scope prior to Project completion.

III. Environmental and Social Considerations in EP4¹⁸

A key tool in achieving EP objectives is the Environmental and Social Impact Assessment (ESIA) process. Projects are assigned one of three categories (Categories A, B or C) based upon the anticipated level of environmental and/or social impact and risk, such as human rights, climate change and biodiversity" pursuant to the largely IFC-defined process.

Projects in category A have potentially significant, adverse environmental and social risk and/or consequences that may be diverse, irreversible or unprecedented. Projects in category B have limited potential adverse environmental and social risks that are few in number, generally site-specific, largely reversible and readily addressed through mitigation. Category C projects have minimal or no adverse environmental and social risk. EP4 allows for certain higher risk category B projects to be treated similarly to category A projects in the ESIA process and likewise, certain lower risk category B projects "could be treated in a lighter regime." A more focused assessment

[Page 4B-5]

not rising to the level of an ESIA may be prepared for category C and lower potential risk category B Projects. This spectrum suggests the potential for some negotiation between borrowers and EPFI lenders on the scope of the ESIA. Any specialized studies must be prepared to the satisfaction of the EPFI lender.

Project finance and Project-related corporate loans for category A and some category B Projects require that an independent consultant review the ESIA or other assessment.¹⁹ This includes vetting environmental and social management systems, environmental and social management plans and stakeholder engagement documentation to assist the lender with its due...