I first heard of the term, the “Equator Principle” at a very interesting interview I had in late year 2006, when an interviewer, had asked me if I knew what the Equator Principle meant.
Innocently I replied in the negative, because at that time, I knew from basic science/ geography what the Equator was, but had no idea of any principle or principles, associated with the Equator. Shortly after that interview, I did a bit of research on what the principle meant and got some enlightenment.
Fast forward; half a decade later, working on an energy project I had to look at and advise clients on issues they need to take into consideration when involved in certain kinds of transactions and immediately, the Equator Principle was something I thought was important for anyone involved in energy transactions should be aware of, particularly for acquisition type transactions. This is particularly, where such an acquirer intends to obtain Project finance, subsequent to such transaction.
The Equator Principles
The Equator Principles represent a credit risk management framework for determining, assessing and managing environmental and social risk for transactions requiring Project Finance. Project finance on the other hand, is a means of funding in which the lender or financier looks primarily to the revenues generated a project, as opposed to the balance sheet, both as the source of repayment and as security for the exposure. Project Finance, plays an important role in financing energy projects and infrastructural development throughout the world. This financing method, is usually for large, complex and expensive installations, infrastructure and structures and would include, for example, power plants, chemical processing plants, mines, transportation infrastructure such as trains and telecommunications infrastructure.
The Equator Principles are adopted voluntarily by financial institutions and are applied where total project capital costs exceed Ten Million United States Dollars (US$10, 000, 000). The Equator Principles are primarily intended to provide a bare minimum standard for due diligence to support responsible risk decision-making. Although, the Equator Principles were created and are managed and governed by the adopting institutions. However a close and constructive relationship with the International Finance Corporation is maintained.
The Equator Principles have become the industry standard for environmental and social risk management and financial institutions, clients/project sponsors, other financial institutions, and even some industry bodies, refer to the EPs as good practice. At the moment, over seventy financial institutions in almost thirty countries, including Nigeria have officially adopted the Equator Principles, covering over 70 percent of international Project Finance debt in emerging markets, in particular.
The Equator Principles have substantially increased attention and focus on social/community standards and responsibility, including robust standards for indigenous peoples, labour standards, and consultation with locally affected communities within the Project Finance market. Increasingly, Multilateral Development Agencies (“MDAs”), including the European Bank for Reconstruction & Development (EBRD), and export credit agencies through the OECD Common Approaches are increasingly adopting the same standards as the Equator Principles.
Further, these Principles have served as catalysts for the development of other responsible environmental and social management practices in the financial sector and have provided a platform for engagement with a broad range of interested stakeholders.
Non-Compliance with the Equator Principles and Financing
Though, many business persons are not aware, the Equator Principles Financial Institutions (EPFIs), which include some of Nigeria’s leading financial institutions, commit to the non-provision of financing to projects where the prospective borrower will not or is unable to comply with its respective social and environmental policies and procedures that implement the Equator Principles.
The effect of this is that even where almost everything is done properly, non-compliance with the Equator Principles may render a company ineligible to access funds for acquisition, expansion and such other laudable activities.
It is therefore, important to consider as a priority issue on any checklist, term sheet or heads of agreement etc., compliance with the Equator Principles, in order not to experience unnecessary difficulty in obtaining financing for otherwise laudable and worthwhile projects.
Ayodele Oni (
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), a solicitor, specializes in international energy (oil, gas & electric power) investment law.
