Entrepreneur, are you familiar with the term "The Equator Principles”? For those planning a big investment in the mining industry, it is good to familiarize themselves with this concept now.
The Equator Principles (EP) are the rules adopted by financial institutions to identify, manage and assess the risks connected with the implementation of a given project and its effects on the natural environment and on the society. These rules are supposed to ensure minimum standards for due diligence analyses of projects which are going to be conducted by banks financing the projects.
If a given bank applies the EP procedures, the funds will be awarded only to the projects which meet the 10 basic requirements.
At first, the bank applying EP will classify an investment as belonging to Category A (significant negative impact on natural environment and society), Category B (potential limited negative impact on natural environment and society) or Category C (minimum impact or no impact).
For projects in category A and B it is necessary to conduct an Impact Assessment which will identify significant environmental and social risks. The Impact Assessment should also indicate the methods of restricting the negative impact of the project or the means by which it can be avoided.
If an investment is implemented in the so-called Dedicated Countries, whose regulations provide proper protection for the natural environment and for the society (Poland belongs to this group), the process of Impact Assessment should confirm the compliance of a given project with the laws of a given country, in particular it should indicate relevant permits, decisions, concessions and regulations concerning the protection of natural environment and social issues.
In the case of the so-called Non-dedicated Countries, the Impact Assessment should concern compliance with the Performance Standards on Environmental and Social Sustainability applied by international financial institutions.
For projects in the categories A and B, financial institutions will require the adoption of a Risk Management System and Plan, which will take into account all problematic issues identified in the Impact Assessment, as well as the documentation of involvement and participation of social stakeholders, among others through holding ongoing consultations.
The projects should be audited by an independent entity, whereas the investor should commit to observe the project’s compliance with EP, domestic law regulations and to provide interim reports on the progress in project implementation, including after the financing of the project is completed.
It is worth pointing out that at present EP is already applied by around 80 financial institutions in 35 countries, which includes approx. 70% financing for projects on emerging markets. For instance, in the years 2006-2012 the Bank of Tokyo-Mitsubishi conducted the assessment of conformity with EP for 225 projects, of which 60% concerned the mining and energy sectors.
It can be stated that the existing EP requirements were equal, as a rule, to the requirements of natural environment protection and the assessment of risk applied by entrepreneurs, among others, for insurance purposes. Then why might such rules pose an additional burden for financing projects in the mining sector?
The third EP version of 2013 extended the scope of requirements imposed on entrepreneurs who seek to receive financing. First of all, it should be noted that EP is applied not only to new investments, but also to projects which already exist in the case of any change (modernization, extension), which may affect the natural environment or the society.
Secondly, the scope of EP covers, apart from the currently existing support forms (project finance type of financing or consulting services for project finance delivered for projects, in which capital costs amount to 10 million USD or more), also loans granted for the implementation of investment (project-related corporate loans, where the total amount of loan is at least 100 million USD) as well as bridging loans. In addition, as the practice has shown, banks often apply EP also regarding other forms of financing, such as the issue of bonds or IPO.
Thirdly, in the new version of EP greater attention has been given to the protection of human rights. In the case of initiatives for which the protection of human rights may pose a significant element, EP recommends to apply due diligence of the project in accordance with UN guidelines. This rule seems not to apply to projects implemented in Poland, however, it is worth pointing out that banks have the freedom of applying EP in this respect.
The last but not least change concerns the obligation to present alternative solutions in the case of investments in which the expected CO2 emission will exceed 10 000 tons per year. Such analyses will also be published by entrepreneurs and financial institutions.
All the above amendments may result in a situation when more and more projects in the mining sector will be subject to assessment in accordance with the EP rules. In consequence, every project will bear additional burden connected with preparing relevant documentation. Unless all the requirements are met, it will be difficult to obtain financing for new investments.