International Project Financing: Environmental Social Governance (ESG) How do the Revised Equator Principles (EP4) Apply? LR Consultants Dubai UAE March 2021

1. International
Project
Financing:
Environmental &
Social Governance
How do the Revised
Equator Principles
Apply?

2. HOW WERE
PROJECTS
FINANCED IN
THE PAST?

3. There is now a 100%
certainty of increased
due diligence
requirements.
Compliance is no longer
a request.
• A common source of funding for large-
scale projects involving multiple parties,
particularly government entities
• Access debt at costs and in amounts that
are attractive
• Risk allocation/mitigation
• Traditional capital structure for
infrastructure projects
• Certainty of funding for projects with
different sponsors
• Investor discipline and transparency
• “Gold Standard” for Environmental and
Social (E&S) compliance
Project Finance

4. Today’s Project
Financing &
Compliance
• Lawyers
• Financial advisors
• Insurance advisors
• Technical advisors
• Market advisors
• ESG advisors

5. If you owe the bank $100,
that's your problem. If you owe
the bank $100 million, that's
the bank's problem.

6. New Refinery project owned by 2 National oil companies in Kuwait & Oman.
• Loan Amount: Between USD 4.5 & 5.5 B
• ECA Involved: Reduced from 7 to 3
• Banks Involved: From 76 to 27
• Lenders Advisors: 6
• Client Advsiors: 5
Case Study

7. Making Project
Financeable
Lenders review execution strategies to assess
the certainty of venture’s revenues
Expert opinions required during lender’s due
diligence process (paid by borrower)

8. Integrity &
Background
Checks
Sponsors
& Owners
Company
Management
Historical
Performance
Business
Strategy
Market
Position
Financial
Performance
Market
Environment
Operating
Efficiencies &
Inefficiencies
Environmental
Risks
Governance
Structure
Overall Impact
Strategy
Legal Due
Diligence
Growth
Opportunities

9. A new era for
compliance
&

10. 3
4
2
1
What are the
Equator Principles?
The Equator Principles (EPs) are a framework for assessing and managing
environmental and social risks associated with project financing.
Formally launched in June 2003, the Equator Principles were created based
on the environmental and social policy frameworks established by the
International Finance Corporation.
Equator Principles Financial Institutions (EPFIs) apply EPs to new projects
(globally and across all industry sectors) financed by five financial products:
• Project Finance Advisory Services
• Project Finance
• Project-Related Corporate Loans
• Bridge Loans
• Project-Related Refinance, and Project-
Related Acquisition Finance
Provides a minimum standard for due diligence and monitoring to support
responsible risk decision-making.

11. ESG
RISK
ESG DUE
DILIGENCE
ESG PERFORMANCE
MONITORING
INVESTEE OPERATIONS TRANSACTION
SCREENING
IS ESG RISK
ACCEPTABLE?
FINANCIAL
INSTITUTION

12. Why is it
Important?
• Most Lenders apply the Equator Principles
• Project financing by ANY fractional co-venturer can
result in Lender imposed requirements across the
entire venture
• Lender imposed requirements last for duration of loan,
can subsequently impact future development phases
• Access to finance depends on ever more encompassing
(and stringent) environmental, social and governance
expectations.
• The EPs may have significant implications for projects
both in the developing and developed world
"one day all projects globally will be
financed sustainably under this (EP) framework".
INCREASED
CREDIBILITY &
GAIN IN
REPUTATION
INVESTOR
DEMAND
LOWER
RISK
BETTER
RETURNS
CONSIDERING ESG ISSUES

13. • Climate change – towards Net zero
• Scarcity of resources
• Biodiversity / Critical Habitat – net positive impact
• Human rights
• Secure and maintain access to land
• Resettlement process/Compensation
• Landowner issues
• National content
• Community investment
• Maintain / Enhance ‘license to operate’ with community
• Managing stakeholder expectations and grievance process
Typical ESG
Issues

14. For the engineers working in the
industry for many years, “social” went
from something that got organized
every Saturday night at the
construction camp, to a determinant of
project success or failure…
Research now shows that social issues
are a leading cause of value destruction
for projects during development.

15. Principles
1 Principle 1:
Review & categorization of project
2 Principle 2:
Environmental & social impact assessment
3 Principle 3:
Applicable environmental & social standards
4 Principle 4:
Environmental & social management systems and
equator principles action plan
6 Principle 6:
Grievance mechanism
7 Principle 7:
Independent review
8 Principle 8:
Covenants
9 Principle 9:
Independent monitoring & reporting
5 Principle 5:
Stakeholder engagement 10 Principle 10:
Reporting & transparency

16. • Borrowers from EP sources must conduct a Social and
Environmental Assessment of a proposed project.
• EPFI’s use common terminology to categorize (based
on the International Finance Corporation's
categorization process) projects into high, medium and
low in terms of environmental and social risk:
• Category A (high risk) – Projects with potential
significant adverse social or environmental
impacts which are diverse, irreversible or
unprecedented;
• Category B (medium risk) – Projects with
potential limited adverse social or
environmental impacts that are few in number,
generally site-specific, largely reversible and
readily addressed through mitigation measures;
and
• Category C (low risk) – Projects with minimal or
no social or environmental impacts.
• For all projects designated as either Category “A” or
“B” in non-OECD countries or non-high-income
countries, borrowers must establish a Social and
Environmental Management System.
Applicability of EPs

17. EP4 applies to a broader range of
financial products, reduces
inconsistencies between
“developed” and “developing”
countries and includes substantive
new requirements on climate
change, human rights, and
Indigenous Peoples.
Designated v. Non-Designated Countries
• Historically, the EPs addressed projects differently
depending on location. A designated country is a
member of the OECD i.e., US, Japan, and most
European Union countries.
• Non-designated countries are all others generally
considered to be “developing” nations. This means
projects in designated countries subject to the EPs
may be required to satisfy of the EPs standards, even
where those standards may exceed requirements of
local law.
• EPFIs must evaluate the specific risks of a project in a
designated country and decide whether one or more
of the IFC Performance Standards should be assessed
when reviewing the project, in addition to host
country law.
The 4th & latest
iteration of the EPs

18. Environmental and Social Review and Due Diligence
• The EPs mandate that financial institutions require
borrowers conduct an appropriate environmental and
social risk assessment, achieved by an Environmental
and Social Impact Assessment (ESIA). It now makes
more explicit the issues that should be included in
such an assessment, including human rights, climate
change, and biodiversity.
Human Rights & Social Risk
• EP4 strengthens human rights assessment criteria,
requiring an assessment of adverse human rights
impacts in line with the UN Guiding Principles on
Business and Human Rights (UNGPs).
Climate Change
• Under EP4, ESIAs must include a climate change risk
assessment identifying physical and transition risks,
consistent with recommendations of the 2017 Task
Force on Climate-related Financial Disclosures. And
evaluate alternative lower-emitting options.
The 4th & latest
iteration of the EPs

19. Indigenous Peoples
▪ EP4 requires consultation with Indigenous Peoples
against the requirements of host country laws and the
IFC Performance Standards, including whether Free,
Prior and Informed Consent (FPIC) has been obtained.
This consultation process must be evaluated by an
independent consultant on behalf of the financial
institution, including those located in designated
countries such as the USA.
Biodiversity
▪ For certain high-risk projects, EP4 encourages the
sharing of biodiversity data with the Global
Biodiversity Information Facility and relevant national
and global data repositories.
The 4th & latest
iteration of the EPs

20. Funding Implications &
Public Disclosure
• Notification requirements for significant
incidents and MOCs
• Results of quarterly visits by an external
Independent Environmental and
Socioeconomic Consultant (IESC)
• Project quarterly reports
• Continued funding contingent on
material compliance with lender
requirements
Negotiation and
reviews with Lenders and
IESC will be significant
time component; up
to 4 assessments per
year during construction
and annually for life of
loan during operations

21. Available Guidance
Guidance material as provided by the EPA, containing information to support the implementation of the
requirements contained in the Equator Principles on scope, applicable standards and reporting and auditing.

22. Budget Required for a
Cat A Project

23. EP4
• includes significant changes from earlier
iterations
• minimizes reputational risk with focus on
ESG
• investors expect high sustainability
standards
• guidance is not law but there is an
expectation that it will be followed
Project sponsors looking to finance a project,
should seek outside counsel to evaluate the
implications of the new EP4 standards on the
project.
Main
Takeaways

24. +971 43758050 (Office)
andrew.jamieson@lr-consultants.com
lr-consultants.com

25. Additional Information

26. • The climate crisis is the existential challenge of our time — soaring
temperatures, extreme weather events, rising sea levels.
• 2021 Texas grid freezes
• 2020 wildfires in Australia and the Western United States are the
worst in history.
• Meteorologists tracking hurricanes across the Eastern United States
ran out of names last season.
• How we deal with climate change will define our future.
• The Paris Agreement calls for a concerted effort to limit global
temperature rise by reducing emissions of greenhouse gases.
• This call to action for a sustainable future has only grown stronger
with the COVID-19 pandemic.
• COVID-19 has sensitized the world to how vulnerable we all are to
the forces of nature.
• The pandemic has underscored the importance of taking timely and
collective actions to mitigate global challenges
Setting the
scene, fiction
or reality

27. • Specific E&S due diligence at the project or asset level focuses
on alignment with international standards:
• OECD Common Approaches - Export Credit Agencies
• IFC Performance Standards on Environmental and Social
Sustainability
• Key topic focus: policies & management systems,
organizational capacity & competency, emergency
preparedness, stakeholder engagement, grievance
mechanism, labor & working conditions, resource
efficiency & pollution prevention, community health,
safety & security, land acquisition & involuntary
resettlement, biodiversity conservation, indigenous
peoples, cultural heritage
• Relevant IFC & World Bank Group Environmental, Health, and
Safety Industry Sector Guidelines
Other E&S
Expectations

28. Principle#2 -
ESIA
• Envigo is a unique digital platform for Environmental and Social
Impact Assessment (ESIA) for true sustainable development
• Aligned with IFC standards, Equator Principles and best practices,
offering built-in expert knowledge (datasets and methods)
• Covers the complete ESIA procedure and can be applied to projects
from any industry sector
• Increases the process efficiency and quality of studies, through
better streamlining and control, support in decision making by
systematic approach, increased transparency and reproducibility
• Used for large-scale projects of the major oil and gas corporation,
assessed by globally recognised consultancy

29. High-level EP strategy
The strategy calls for more robust and consistent application,
training/support and disclosure/accountability for E&S due
diligence in project finance as the EP’s evolve.
"We recognize that the Principles can only be truly effective when
they are consistently and robustly applied. Continuous training
and development are key to maintaining standards and we will
provide tools, materials and support to our members. We will
enhance our reporting and disclosure requirements and
strengthen our governance and accountability processes."
One day all
projects globally
are financed
sustainably under
this (EP)
framework

30. Project Finance and Project-Related Corporate Loans (Over
$50million)
The EPFI will only provide Project Finance and Project-Related Corporate
Loans to Projects that meet the relevant requirements of Principles 1-10.
Project-Related Refinance and Project-Related Acquisition
Finance
The EPFI will continue to apply relevant Equator Principles requirements to
the underlying Project by taking reasonable measures to ensure that all
relevant existing environmental and social obligations continue to be
included in new financing documentation.
Project Finance Advisory Services and Bridge Loans
The EPFI will make the client aware of the content, application and
benefits of applying the Equator Principles to the anticipated Project. The
EPFI will request that the client confirms its intention to adhere to the
requirements of the Equator Principles when subsequently seeking long
term financing.
Approach

31. Loans Breakdown
by Bank

32. EP Focus Area EP3 EP4
Applicability • Project-Related Corporate Loans over $100M
• Project-Related Refinancing and Acquisition Financing not in-scope
• Project Finance Advisory Services, Project Finance and Bridge Loans in-
scope
• Applies to Project-Related Corporate Loans over $50M
• Project-Related Refinancing and Acquisition Financing in-scope
• No changes to Project Finance Advisory Services, Project Finance and Bridge
Loans
Designated Countries • Projects located in countries on the designated countries list are deemed to
satisfy Equator Principles 2, 4, 5, and 6 if they meet host-country laws
• All projects will be reviewed for compliance with the Eps
• Projects located in designated countries will be separately evaluated for
specific project-related risks to determine if IFC Performance Standards
should be applied
Climate Change • Climate change is recognized but specific actions are not considered
• Alternative analyses to be carried out for projects above specified GHG
threshold
• Report GHG emissions for certain projects
• Preamble includes a recognition of financial institutions’ role in achieving
targets under Paris Agreement
• Climate Change Risk Assessments required for certain projects
• Requirements to: (i) consider physical and transition risks; (ii) conduct lower-
GHG alternatives analyses; and (iii) report GHG emissions for certain projects
Human Rights • Preamble acknowledges a responsibility to respect human rights
• Human rights impacts assessment not required
• Preamble states financial institutions will meet UN Guiding Principles on
Business and Human Rights
• ESIA must include human rights impacts assessment
Indigenous Peoples • Projects must obtain FPIC of Indigenous Peoples
• Projects in designated countries must follow host-country laws on Indigenous
Peoples
• For all projects, in all countries, consultation with affected Indigenous Peoples
is required, consistent with host-country laws and IFC Performance Standards,
including obtaining FPIC. The consultation must be assessed by the financial
institution’s independent consultant
Biodiversity • Biodiversity not addressed • Projects encouraged to report on biodiversity

34. We believe in a
sustainable
future
We assure our
clients
worldwide
We support
financiers as well
as borrowers
We take the
stress out of
navigating the
EP4 process
End-to End Support Throughout a Project Life-Cycle