How do Physical and Transitional Risks Impact Financing Parties and Project Owners?
In terms of the financing parties related to these projects or assets, climate change represents both a reputational risk to the lenders, and a risk with regards to the repayment of the loan. Regarding the Project owner, climate change represents a risk to their assets, operations, and future business viability. The absence of a climate change risk assessment as part of an Environmental and Social Impact Assessment (ESIA), also represents a risk to the environmental permitting / approvals and financing process, which ultimately determines whether a new project or development can proceed or not.
What are the Equator Principles (EP4)?
The Equator Principles were created in 2003 to be used as a global risk management framework providing a common baseline and framework for financial institutions to identify, assess and manage environmental and social risks when financing projects. The Equator Principles have, however, expanded and developed over the years with the release of updated versions. The latest update (EP4) was released in November 2019 and came into effect in October 2020.
Key updates to the EP4 includes the requirement for CCRA and reporting obligations aligned with Task Force on Climate-related Financial Disclosures (TCFD).
The CCRA applies to Projects with varying obligations depending on the Project’s anticipated greenhouse gas (GHG) emissions. Projects are categorised as follows:
It is interesting to note that for all projects, when combined Scope 1 and Scope 2 GHG emissions are expected to be more than 100,000 tonnes of CO2 equivalent annually, a CCRA is required. The risk assessment is to include consideration of climate-related ‘Transition Risks’ and must also include a completed alternatives analysis which evaluates lower GHG intensive alternatives.