Equator Principles EP4: what changes concretely for the developer

A developer who closed financing five years ago believes they know the Equator Principles. They prepare their impact assessment, have it categorised, produce a management plan, and think they have covered the essentials. Then the bank asks for a climate risk assessment aligned with TCFD, a documented human rights due diligence, and a commitment to public reporting of their greenhouse gas emissions. These requirements are not the whims of a credit officer: they are in the text of version EP4, in force since 2020. This article details what this version changes concretely for the borrower, framework by framework, and provides a compliance check-list for the developer.

What changed with EP4

The Equator Principles are a voluntary framework adopted by financial institutions, the EPFIs, to assess and manage the environmental and social risks of the projects they finance. They rely largely on the IFC Performance Standards for substance, and add their own mechanism: A, B or C categorisation, independent review, action plan, contractual commitment.

The fourth version, EP4, came into force for all member institutions on 1 October 2020. It does not rewrite the overall logic. It tightens it on specific points. Three developments directly concern the developer: an expanded scope, an explicit human rights requirement, and a new climate component that combines risk assessment and emissions transparency.

For those discovering the framework, the entry point remains categorisation. The A, B, C logic, the role of the independent consultant and the scope of each category are detailed in our article onthe categorisation of projects under the Equator Principles. This article assumes this foundation is understood and focuses on what EP4 adds.

An expanded scope

The first development is discreet but structural: EP4 covers more transactions than previous versions.

The framework now applies to four families of financial products. Project finance advisory services. Project finance proper. Project-Related Corporate Loans. And a family that includes bridge loans, refinancings and acquisition finance related to a project. Concretely, a refinancing or the acquisition of an existing asset can bring an operation into the EP4 scope, where the borrower thought they would escape the E&S review because construction was completed.

EP4 has also tightened a historical flexibility. Previous versions allowed, for projects located in so-called designated countries, with reputedly robust regulatory review, a relaxation of certain requirements. EP4 reduces this margin and expects a more complete demonstration, even in these countries. The message for the developer is simple: the project location no longer exempts one from producing the expected assessments.

Human rights: from implicit to explicit

The Performance Standards already addressed, in practice, many human rights issues: working conditions, resettlement, indigenous peoples, community security. But the term itself remained implicit. EP4 names it and anchors it in a specific framework.

Version EP4 explicitly links the responsibility of institutions to the United Nations Guiding Principles on Business and Human Rights, the UNGPs. The text commits institutions to "meet their responsibility to respect human rights in accordance with the United Nations Guiding Principles" by conducting due diligence on the matter (Equator Principles EP4, Preamble, 2020).

For the borrower, this development has a direct documentation consequence. The expected assessment must integrate an analysis of potential negative impacts on human rights, and no longer treat them solely through the standard headings of the impact study. The UNGP approach follows a recognisable logic: identify impacts, assess their severity, prevent and mitigate, and account. This framework goes beyond the project site perimeter. It also questions the supply chain and security providers.

In practice, this translates into increased attention to subjects that lenders' social due diligence now examines closely: labour in the sub-contracting chain, employment conditions of the workforce, use of security forces, effectiveness of the grievance mechanism. These points largely overlap with what we describe in the article onwhat lenders examine in social due diligence. EP4 does not create these issues. It requires that they be dealt with in a traceable manner, with a thread running from risk identification to mitigation measure.

Climate: two risks and a reporting threshold

This is the newest and most concrete component for the developer. EP4 introduces a climate risk assessment and a transparency requirement on emissions.

First block: the Climate Change Risk Assessment. It is required for all category A projects and, where relevant, for category B projects. It must examine two types of risks, according to the TCFD framework. Physical risks, first: the project's exposure to climate hazards, heatwaves, droughts, floods, over its entire lifespan. Transition risks, second: the project's exposure to the evolution of policies, markets and technologies in a world that is decarbonising. A heavily emitting asset or one dependent on a climate-sensitive resource carries a transition risk that the lender wants to see assessed. The logic of this dual reading is developed in our article onthe TCFD climate reporting framework.

Second block: an emissions threshold triggers reinforced obligations. For any project whose combined scope 1 and scope 2 emissions exceed 100,000 tonnes of CO2 equivalent per year, EP4 expects two things. An alternatives analysis, which compares the project to less carbon-intensive options, technically and financially viable. And a commitment to annual public reporting of emission levels. This threshold of 100,000 tonnes is explicit in the EP4 text (Equator Principles EP4, 2020).

These emissions are calculated according to the GHG Protocol scopes. A developer who does not know how to position their project relative to the threshold must first build a credible inventory. The calculation method by scopes, and frequent errors, are addressed in our article on calculating a project's carbon footprint. The point to remember: the threshold is judged on scopes 1 and 2, direct combustion and purchased electricity, not on indirect emissions from the value chain.

What this changes in the borrower's file

These developments do not only modify the spirit of financing. They add deliverables to the file, and therefore time and budget if they are discovered late.

The winning reflex is to integrate these requirements from the scoping of the impact study, instead of treating them in response to the bank's questions. An impact study designed for EP4 covers the human rights component and the climate component from the outset. A study designed for an older framework will have to be supplemented, often at the worst moment, between the term sheet and closing. Well conducted, these assessments actually become an argument in negotiation, a point we develop in the article on how toleverage your E&S performance with a DFI.

Before submitting a file to an institution adhering to the Equator Principles, the borrower should verify point by point the coverage of EP4 requirements.

EP4 does not overturn the logic of the Equator Principles. It raises the level of requirement on three points that the developer must now anticipate. Verify early that the operation falls within the scope, including for a refinancing or acquisition. Treat human rights as an analysis in its own right, aligned with the UNGPs, and not as a by-product of the social study. Build the climate component in two stages: the assessment of physical and transition risks according to TCFD, then positioning relative to the 100,000-tonne threshold that triggers the alternatives analysis and public reporting.

The right question is not "how to answer the bank's questions when they arrive", but "how to scope my impact study so that it covers EP4 from the start". A file designed for EP4 upstream transforms a compliance constraint into a negotiation advantage. A file that discovers these requirements at closing suffers them, in time and money.