News

The newest release of the Equator Principles (EP III),  launched on June 4th, 2013, covers more projects and streamlines the process to focus on legal compliance in countries with strong environmental and social protection regulations.

The EP framework is used by member financial institutions for determining, assessing and managing environmental and social risk related to financing development projects of US$10m or more. Over 70 financial institutions worldwide are members including HSBC, Lloyds Banking Group and the Royal Bank of Canada.

Scope of Application

The new EP III clarifies that the principles apply to project funding from financial institutions, but also to corporate loans where 50 per cent or more of the funds are used to finance a single project.  Disguising project funding as a corporate loan had been a way of avoiding the EP framework in the past.

Compliance with Host Country Regulation

The reworded Principle 3, states that: “the Assessment process should, in the first instance, address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues.” This is in an effort to streamline assessments, especially in countries that have robust environmental and social governance, legislation and institutions.  This is done by designating countries on a list, to be published shortly, where host country laws already meet the requirements of environmental and/or social assessments (Principle 2), management systems and plans (Principle 4), stakeholder engagement (Principle 5) and, grievance mechanisms (Principle 6).  In this case, an evaluation of compliance with host country laws is sufficient.  Elsewhere, compliance with the applicable International Financing Corporation (IFC) Performance Standards (updated in January 2012) and the World Bank Group Environmental, Health and Safety Guidelines is required.  The concept of “High-Income OECD” countries present in EP II no longer exists in EP III.

Other changes include:

- public disclosure of the Environmental and Social Impact Assessment for the project, or at a minimum, its summary statement;
- analysis of alternatives to address greenhouse gas reductions;
- in non-designated countries, consideration of the new IFC Performance Standards around labour standards, and occupational health and safety diligence requirements in relation to primary supply chain employees and contracted workers, and possibly human rights due diligence in limited “high risk circumstances”.  The new IFC Performance Standards also require Informed Consultation and Participation of affected peoples, or even, Free Prior and Informed Consent for certain projects.  This latter is stronger than most of the legally required consultation frameworks around the world.

While the EP III takes effect on the 4th June 2013, funding organizations have until the 31st December 2013 to implement the changes to the framework.

The Global Reporting Initiative recently released its new sustainability reporting guidelines, to be known as G4.  It is hoped that reporting will now focus on what is most important to the reporting organization and to its different stakeholders, and reduce the reporting burden for issues not considered material.  Indeed, the word material is at the heart of the G4 guidelines where the scope of what must be reported is ascertained through a materiality assessment.

For those familiar with the G3 and G3.1 guidelines, you will notice that the reporting levels (A, B or C) have gone. Now, to be reporting “in accordance with” the guidelines, you can either produce a core report or a comprehensive report. A core report will include a shortened list of standard disclosures, especially on governance, and a single indicator is sufficient for each aspect deemed material.  A comprehensive report will include all standard disclosures and all indicators for each material aspect.

Note that for industries for which sector supplements have been published, all material aspects in the sector supplement must also be reported on.  GRI is converting the existing sector supplements to work with G4 over the course of the next few months.

In keeping with the “is it material?” mantra, the new guidelines also include new emphasis on supply chain.  First, in the organization’s profile section, a description of the supply chain must be included, then, where supply chain aspects are material, description of supplier screening and actions to mitigate risks, must be included.

Other significant changes are:

- more detailed guidance on what should be reported in the standard disclosures;
- new disclosures on how the board and senior management are involved in the development and oversight of sustainability policies and their training and competency to provide that oversight (not required for a core report);
- new disclosures on renumeration policies of board members and senior executives, – new disclosures on ethics and integrity;
- the third party review, while still recommended, will no longer be noted by GRI as a “+” report.

A surprise for those who had reviewed the G4 Exposure Draft last fall, there is no reference to value-chain mapping. However, to complete a materiality assessment that includes the supply chain, something resembling a value-chain map will be essential.

If your organization needs assistance with its materiality assessment or just to get going on its corporate social responsibility reporting, ÉEM would be pleased to help.

Download the G4 Guidelines here.