Updated Equator Principles: What You Should Know About Version 4

Updated Equator Principles with stronger standards and a broader scope came into effect in October 2020. Human rights, climate change, biodiversity and indigenous peoples are among the topics addressed in this new iteration. It also covers a wider range of financial products. Adhering financial institutions should be taking a number of steps to implement the new Equator Principles.


Following an extensive consultation process, the Equator Principles Association (EP Association) adopted a fourth iteration of the Equator Principles (EP4) on 18 November 2019. Originally, EP4 was due to come into effect on 1 July 2020; the transition period was extended to 1 October 2020 and applies to transactions financed by adhering financial institutions (EPFIs). To date, over 100 EPFIs in at least 38 countries globally have adopted the Equator Principles. Additional implementation guidance was published in June 2020 in order to assist EPFIs and Borrowers with managing Covid-19 risks related to Equator Principles compliance.

Based on the International Finance Corporation (IFC) Performance Standards and World Bank Environmental Health and Safety Guidelines, the Equator Principles have been widely used since their inception in 2003 by financial institutions for the assessment and management of the impact of large-scale development projects on the environment and society. In the Preamble to EP4, the EPFIs “acknowledge that the application of the Equator Principles can contribute to delivering on the objectives and outcomes of the United Nations Sustainable Development Goals (SDGs).” The EPFIs state that they will not finance projects that do not comply with the relevant Equator Principle Requirements1.

The Equator Principles were last amended in April 2013 (EP3). The revisions included in EP4 will:

  • broaden the scope of covered financial products, such that EP4 will apply to refinancing and acquisition finance, as well as a wider range of project-related corporate loans;
  • set project development standards even for high-income OECD countries, which are referred to as Designated Countries;
  • increase commitments regarding human rights, social impact, stakeholder consultation and free, prior and informed consent for affected Indigenous Peoples; and
  • expand requirements for reporting on climate change risk assessments and biodiversity.

While the finalized EP4 generally reflects the contents of the draft released in June 2019, the finalized EP4 contains several significant additions not included in the draft, including: (i) enhanced community engagement standards to protect affected Indigenous Peoples through the process of seeking free, prior and informed consent; (ii) greater emphasis on recommendations from the Task Force on Climate-related Financial Disclosure (TCFD); and (iii) clarifications elucidating the types of corporate financial support now covered subsequent to the inclusion of project-related corporate loans in the EP4 draft.

Though determined to be outside the targeted remit of EP4 and so not addressed in the final publication, the EP Association will consider the following key issues raised by stakeholders during the consultative process as future priority areas:

  • enhanced accountability of EP Association members;
  • strengthened transparency and reporting;
  • deliberation on feasibility of expanding scope to cover non-project financial products; and
  • consideration of updates to Governance Rules to address grievance handling and provide access to remedies.

A summary of the key changes included in EP4 follows below.

Scope of financial products covered 

EP4 modifies the scope of the Equator Principles in three ways:

(1) Project-Related Refinancing and Project-Related Acquisition Financing will now be covered if:

            (a) the underlying project was financed in accordance with the Equator Principles framework;

            (b) there has been no material change in the scale or scope of the project; and

            (c) Project Completion has not yet occurred at the time of the signing of the facility or loan agreement.

As a result, the Equator Principles’ environmental and human rights standards will apply to project expansions and upgrades financed by EPFIs.

(2) EP4 will apply to Project-Related Corporate Loans of USD50 million or more (whereas EP3 applies to loans of USD100 million or more) and which are of two years or more in duration.

(3) Non-contiguous developments over one or more geographic areas, including expansions and upgrades to existing developments, will now be included in the definition of “Project”.

New standards for projects in OECD countries

The Equator Principles distinguish between projects in Designated and Non-Designated Countries, where Designated Countries are high-income OECD countries with “robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the environment,” and Non-Designated Countries are typically lower-income countries that lack comparatively strong institutions and systems. EP3 set standards for project development in Non-Designated Countries, including compliance with IFC Performance Standards, but did not do so for Designated Countries, where domestic laws and regulations to protect the environment and society were assumed to be adequate.

EP4 amends the Equator Principles to address concerns that domestic laws and regulations in Designated Countries may not meet international standards. While EP4 provides that projects in Designated Countries will still be evaluated for compliance with domestic environmental and social laws, regulations and permits, it also will now require such projects to also be evaluated against the IFC Performance Standards where the “specific risks of the Project” merit heightened scrutiny. Therefore, under EP4, compliance assessments taking into account only the domestic regulatory landscape may no longer be sufficient for EPFIs financing projects in Designated Countries.

Human rights

In the Preamble of EP4, EPFIs commit to respect human rights in accordance with the UN Guiding Principles on Business and Human Rights (UNGPs) by carrying out human rights due diligence on covered Projects. While EP3 only required human rights due diligence alongside Environmental and Social Impact Assessments (ESIAs) “in limited high risk circumstances,” EP4 requires an assessment of potential adverse human rights impacts for every project regardless of whether the risk merits a full ESIA (Principle 2). EPFI borrowers should refer to the UNGPs when assessing human rights risks and impacts.

Assessment Documentation must now propose measures to minimize, mitigate and, where residual impacts remain, remediate risks and impacts to workers (defined to include those engaged directly or indirectly on a Project, including contractors and sub-contractors) and affected communities (Principle 2). Online summaries of ESIAs should now also include a summary of any relevant human rights risks and impacts (Principle 10).

In another significant development, EPFI borrowers for all Category A and appropriate Category B Projects must establish an effective grievance mechanism for affected communities and workers consistent with the effectiveness criteria set out in the UNGPs (Principle 6). Affected communities and workers should be informed about the grievance mechanism during the Stakeholder Engagement process.

Free, prior and informed consent for indigenous peoples

Under EP3 and EP4, all Projects affecting Indigenous Peoples must undertake a process of “Informed Consultation and Participation,” and must comply with relevant national law, including those laws implementing host country obligations under international law. Principle 5 on Stakeholder Engagement has been revised in EP4 to also address the “special circumstances” that require the “free, prior and informed consent” (FPIC) of affected Indigenous Peoples. These special circumstances, which are adopted from paragraphs 13 - 17 of IFC Performance Standard 7 (IFC PS7), include any of the following:

  • projects with impacts on lands and natural resources subject to traditional ownership or under the customary use of Indigenous Peoples;
  • projects requiring the relocation of Indigenous Peoples from lands and natural resources subject to traditional ownership or under customary use;
  • projects with significant impacts on critical cultural heritage essential to the identity of Indigenous Peoples; or
  • projects using their cultural heritage for commercial purposes.

If any of these circumstances arise, an independent consultant must evaluate the consultation process with Indigenous Peoples, and the outcomes of that process, against the requirements of host country laws and IFC PS7. If a consultation process has been followed, but it is not clear if FPIC has been achieved, the EPFI must determine, together with the consultant, whether or not there is a justified deviation from the requirements of IFC PS7, and whether any additional corrective actions should be pursued in order to comply with IFC PS7.

There was considerable debate during the drafting of EP4 over whether such a deviation would be permitted and also over the definition of FPIC. A footnote in the final draft provides the following definition: “FPIC builds on and expands the process of Informed Consultation and Participation, ensures the meaningful participation of Indigenous Peoples in decision-making, and focuses on achieving agreement.” It also suggests that “FPIC does not require unanimity, does not confer veto rights to individuals or sub-groups, and does not require the client to agree to aspects not under their control.”

The inclusion of an independent consultant in the stakeholder engagement process represents a new and substantial development. The independent consultant may be either the Independent Environmental and Social Consultant who conducts the Independent Review mandated under EP4 (Principle 7) or another qualified independent consultant, such as a lawyer. The requirement for an evaluation by an independent consultant applies to projects in both Designated and Non-Designated Countries.

Climate change

EP4 acknowledges the risks posed by climate change within project financing and increases reporting requirements through the following four measures:

(1) The Preamble now recognizes the role of EPFIs in achieving the goals of the 2015 Paris Agreement. This emphasis may be relevant for host countries striving to ensure that project development complies with Nationally Determined Contributions (NDCs) under the Paris Agreement.

(2) ESIAs are now mandated to include Climate Change Risk Assessments for:

(a) all Category A projects, and, as appropriate, Category B projects; and

(b) all projects where combined scope 1 and scope 2 greenhouse gas emissions are likely to exceed 100,000 metric tons of CO2 equivalent. (Principle 2)

The Climate Change Risk Assessment undertaken for Category A and Category B projects must analyze climate “physical” risks, including those arising from changes in acute or long-term climate patterns. For projects expected to exceed the cap on greenhouse gas emissions, the Climate Change Risk Assessment must review climate “transition” risks, such as those arising from a move to a low carbon economy, and evaluate potential alternatives to the project that are less greenhouse gas-intensive. EP4 also indicates that ESIAs must consider project compatibility with the relevant climate and energy policies of the host country, including its NDCs.

(3) TCFD recommendations are now explicitly recognized in the Preamble as well as in reference to reporting metrics. Though not directly requiring Climate Change Risk Assessments to be carried out in accordance with TCFD recommendations, EP4 mandates the assessment of “physical” and “transition” climate risks as defined by the TCFD.

(4) EP4 indicates that EPFIs must require borrowers to report annually on greenhouse gas emission levels and provide a greenhouse gas efficiency ratio where appropriate (Principle 10).


EPFI borrowers are now prompted to share commercially non-sensitive Project-specific biodiversity data with the Global Biodiversity Information Facility (GBIF)—an international research network for biodiversity data endorsed by the OECD—and other relevant national and global data repositories (Principle 10). These changes will primarily apply to biodiversity survey data gathered during ESIAs or data collected after infrastructure construction to monitor the project’s impact on biodiversity and the effectiveness of mitigation measures. Disclosures to the GBIF by private stakeholders should enhance the evidence base for research and decisions relating to biodiversity, and reduce duplication of effort. The GBIF provides open, public access to their data, and is reportedly working with the Equator Principles Biodiversity Working Group to produce simple guidance for EPFIs and their borrowers on sharing biodiversity data.

New and updated guidance notes

In order to assist interested parties in understanding and implementing EP4, the EP Association published a number of reference notes and guidance documents on topics such as human rights assessments, Climate Change Risk Assessments, biodiversity data sharing and projects affecting Indigenous Peoples. A multi-jurisdictional team of A&O lawyers advised the EP Association on its latest Guidance Note for EPFIs on Incorporating Environmental and Social Considerations into Loan Documentation, which includes template contractual provisions for EPFIs to refer to in connection with, and adapt for use in, financing agreements. A&O worked closely with the EP Association and, including its Secretariat and Steering Committee, composed of member banks and export credit agencies, in producing the updated Guidance Note. The Guidance Note also provides an overview of the Equator Principles and their applicability to certain financial transactions and services.  

Next steps

EPFIs and other financial institutions that seek to adhere to EP4 should now be taking a number of practical steps, including:

  • considering the impact of the EP4 changes on their current Equator Principles compliance procedures and, in particular, human rights due diligence and climate change risk assessments;
  • assessing any material divergences between host country laws and IFC Performance Standards, including with respect to human rights and climate change;
  • identifying independent environmental and social consultants or lawyers able to assess compliance with host country laws and the IFC Performance Standards, including with respect to stakeholder engagement and FPIC processes with Indigenous Peoples;
  • devising due diligence policies and guidelines or metrics to assess whether borrowers are establishing grievance mechanisms that meet the effectiveness criteria set out in the UNGPs;
  • revising standard project documentation in line with the EPFI commitment to undertake human rights due diligence, and require borrowers to do the same with respect to all projects and to establish grievance mechanisms where required;
  • revising standard project documentation in line with the EPFI commitment to improving the availability of climate-related information, and requiring borrowers to undertake climate change risk assessments for certain projects; and
  • preparing for more expansive reporting, including with respect to human rights and climate change, and considering how to address the related litigation risks.

Allen & Overy’s International Environmental and Regulatory Law Group has deep experience advising on EP compliance. Please reach out to any member of the Group or your usual contact at A&O if you would like any further information or have an issue that you would like to discuss.

1 Capitalized terms not defined in this document are defined in EP4.

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