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in the Equator Principles

The Equator Principles (PE) are a set of standards adopted by some financial institutions to identify, evaluate and manage social and environmental risks derived from large projects in the financing phase .  

The Equator Principles are applied in all countries and economic sectors. However, these are limited to four specific types of financial products:

(i) financial advice for projects;

(ii) project financing - in both cases, when the project's total capital costs are US $ 10 million or more;

(iii) corporate loans linked to projects of US $ 100 million; and

(iv) bridge loans.

Which are?

The EPs are ten: (i) review and categorization; (ii) environmental and social evaluation; (iii) environmental and social standards; (iv) environmental and social management systems and action plan; (v) participation of interest groups -including ethnic communities-; (vi) complaints mechanism; (vii) independent review; (viii) contractual commitments; (ix) independent monitoring and reporting; and (x) reporting and transparency.

Essentially, the EPs oblige financial entities to categorize the projects that they propose to finance based on the magnitude of their environmental and social risks and impacts, following the standard developed by the International Finance Corporation (IFC).

For those projects that qualify with certain risk levels, financial institutions must impose on their clients the performance of evaluation processes -in some cases, with the intervention of independent experts- to address environmental and social risks and impacts, as well as to propose mitigation and compensation measures.

One of the most relevant points of this evaluation is the analysis of compliance with the laws, regulations and permits of the host country. When it does not have strong environmental and social governance, compliance with IFC's environmental and social sustainability performance standards and World Bank guidelines on environment, safety and health are analyzed.

Another of the fundamental obligations is the effective participation of the affected interest groups. This includes carrying out a process of consultation and informed participation that must observe, in addition to local regulations, the standards established in international legislation.

What are the legal effects of its breach?

Although the EPs are voluntary, currently there are 101 financial institutions that have adopted them. These entities belong to 38 different countries, and their activity covers most of the debt related to international project financing, in developed countries and emerging markets.

When contracting with any of these entities, failure to comply with the PE may mean that it is impossible to access the credit required to finance the project. Likewise, if the credit has already been granted, said breach could become a contractual breach; and, therefore, activate the anticipated enforceability of the same.

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