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Voluntary commitment for a better world

Published: 29.10.2020 The fourth iteration of the Equator Principles has been applied since 1 October 2020. The “Equator Principle Financial Institutions” (EPFIs), i.e. the banks that have signed up to the Equator Principles, undertake not to finance any projects that do not meet the current EP4 requirements. But what exactly does that mean?

What are the Equator Principles?

Sabine Lehmann: The Equator Principles are a voluntary framework of rules adopted by banks to ensure compliance with environmental and social standards when financing investment projects that are linked to a particular area. The participating institutions undertake to only finance projects where the borrowers meet the environmental and social criteria laid out in these principles. KfW IPEX-Bank signed up to the Equator Principles on 1 March 2008 and uses them as a framework to underpin its Sustainability Policy.

Why have they been updated?

Sabine Lehmann: Since they were created in 2003, the world has clearly changed – as is repeatedly shown by extreme weather events, or the overuse of resources and pollution of global ecosystems. In order to remain relevant in this dynamic context, it was necessary to move the Equator Principles forward and develop them. They have been revised three times since their creation and since October 1, 2020 the fourth version has been applied.

In which specific areas have they been updated?

Sabine Lehmann: In the latest version, not only has the area of application for finance products been expanded, the subject matter has also been laid out more clearly. In practice, this means that adherence to local regulations regarding compliance with human rights and the rights of indigenous peoples is no longer sufficient. It is more important to apply EP4, the updated Equator Principles. This includes the requirement to obtain “free, prior and informed consent” (FPIC) from indigenous people, including in countries like the USA or Australia, who are affected by the proposed projects. Furthermore, the due diligence obligations with regard to climate change have been strengthened considerably: the impact of climate change on the projects and the impact of the financed project on climate change must be taken into account.

The preamble to the latest version sets out that the EPFIs should support the Paris Agreement of 2015 and ensure that reporting conforms with its recommendations. According to the revised EP Principle 2, all projects will be expected to have a climate risk assessment. This means that assessments are no longer limited to projects with negative ecological and social risks (category A or B), but should also be carried out for projects where combined emissions are expected to exceed 100,000 tonnes of CO2 per year (even if the project is not expected to carry any other environmental risks).

According to EP Principle 10 (Reporting and Transparency), since 2015 project companies/sponsors have been required to report on the level of greenhouse gas emissions in category A and category B projects.

Sabine Lehman is sustainability manager at KfW IPEX-Bank.

More information on KfW IPEX-Bank’s environmental and social impact assessment