The challenge: Financing a major LNG project under the Equator Principles
A U.S. infrastructure developer entering the liquefied natural gas (LNG) market sought financing for its flagship LNG project in Texas, which would be one of the largest greenfield LNG liquefaction and export projects in U.S. history.
As a new entrant to the LNG liquefaction and export market, the developer had no prior track record in project finance or experience working under the Equator Principles, a globally adopted risk management framework used by member financial institutions to identify, assess, and manage environmental and social risks in project finance. The company faced the complex task of securing a major loan from a consortium of Equator Principles financial institutions, whose requirements often exceed domestic U.S. regulatory requirements in specific areas.
Several participating banks were highly sensitive to perceived risks within the U.S. regulatory system following the intense criticism that surrounded the Dakota Access Pipeline and the extended protests in support of the Standing Rock Sioux opposition to the project. In the aftermath of these protests, international lenders raised concerns about perceived gaps between U.S. regulatory processes and international good practice under the Equator Principles, particularly around stakeholder engagement, Indigenous community consultation, and biodiversity risk management. Similar concerns arose among prospective lenders this LNG project when a self-identified Indigenous group opposed the project.
ERM was engaged to serve as the Independent Environmental and Social Consultant (IESC) to conduct a comprehensive and independent review of the project’s environmental and social assessment and associated management systems in the context of Equator Principles 2020 (EP4) and relevant International Finance Corporation (IFC) Performance Standards.
What ERM did: Expert guidance on Equator Principles alignment and relevant IFC Performance Standards
The project’s lenders appointed ERM as the Independent Environmental and Social Consultant (IESC) under EP4. ERM completed two Environmental and Social Due Diligence (ESDD) reports: an initial ESDD and a revised ESDD following several years of additional project planning and re-design.
Although the project was subject to U.S. environmental permitting, principally though the Federal Energy Regulation Commission (FERC), which manages environmental review under the National Environmental Policy Act (NEPA), compliance with domestic regulatory requirements alone may have not been sufficient to meet EP4 expectations, depending on perceived project risks and impacts. ERM’s role was therefore assessing how the outcomes of these U.S. regulatory processes aligned with EP4 and relevant IFC Performance Standards, and to identify gaps requiring additional measures to meet international lender requirements.
Assessing alignment with applicable environmental and social standards
Under EP4, lenders require assurance that projects identify, assess, and manage environmental and social risks in line with the Equator Principles and relevant IFC Performance Standards. ERM reviewed the project’s environmental and social documentation, management systems, and permitting record, using the outputs of the FERC‑led NEPA process as one key input to the EP4 assessment.
ERM also considered the applicability of IFC Performance Standard 7 (Indigenous Peoples), which seeks to minimize negative impacts and foster respect for human rights, dignity, and culture of indigenous populations. During the FERC/NEPA process, the project issued formal notifications to federally and state‑recognized Native American tribes with potential interests in the project area; however, none were located proximate to the project area, and no face-to-face consultations occurred.
The closest state recognized tribe to the project responded by mail and confirmed that it did not know of any sacred sites in the project area, requesting notification only if construction uncovered human remains.
Later in the process, a self-identified Indigenous NGO asserted that sacred sites or remains existed on the site. ERM reviewed this position alongside the outcomes of the NEPA process, and the results of extensive state required archaeological surveys conducted in the area, which had not identified such sites. ERM thus concluded that IFC Performance Standard 7 was not applicable to the project.
However, given the sensitivity of Indigenous Peoples issues under EP4 and heightened lender scrutiny in this area, ERM placed particular emphasis during the second ESDD on evaluating the robustness of the project’s stakeholder engagement program, communications transparency, and effectiveness of grievance mechanisms.
ERM worked closely with the developer’s senior leadership and the project’s local community relations team to review and assess these systems against EP4 expectations and international good practice.
Evaluating stakeholder engagement in practice
ERM timed a diligence site visit to coincide with a quarterly meeting of the project’s local Community Advisory Board. The developer established this voluntary board several years earlier to serve as a public forum for the project. The board includes a broad cross section of public and private sector representatives from several municipalities across the project area, including members of local government staff, representatives from a regional development council community elected officials, and other concerned citizens. Following the site visit, the chief of the closest state recognized tribe agreed to become a member of the Community Advisory Board.
During the forum, ERM explained its role as IESC and engaged members through questions and discussions. Several participants described how the project’s consistent outreach, responsiveness, and follow-through on commitments and actions shifted their views from initial opposition to support.
Reviewing biodiversity mitigation
Given the ecological importance of the area as a key habitat for resident and numerous migratory bird species, ERM applied the guidance of IFC Performance Standard 6, Biodiversity Conservation and Sustainable Management of Living Natural Resources, to manage potential biodiversity risks.
By the second ESDD, the developer had completed its wetland and biodiversity mitigation program by permanently protecting over 4,000 acres (160 hectares) of land through conservation easements or gifts to a nearby federal national wildlife refuge, achieving an offset ratio of approximately 15:1 relative to the project’s direct habitat impacts.
ERM concluded that the mitigation program delivered a net gain in habitat for the Ocelot (Leopardus pardalis), a federally listed endangered species in the U.S. Although the species holds a “Least Concern” classification globally by the International Union for Conservation of Nature, populations in Texas occur at the edge of the species’ range and continue to decline, making this habitat gain especially important.
Engaging with lenders
Following the second ESDD, ERM supported six months of lender reviews, while individual banks submitted clarification requests on certain topics covered in the ESDD.
ERM provided comprehensive written responses to individual questions and participated in multiple calls with the environmental and social risk teams of several European Equator Principles banks.
This collaboration enabled ERM to address lender concerns directly, clarify risk management measures, and demonstrate the project’s alignment with EP4 requirements, ultimately helping the project achieve financing.
The impact: Lender confidence and successful project financing
ERM’s independent assessment and ongoing lender engagement provided clear evidence of the project’s alignment with the Equator Principles and the relevant IFC Performance Standards. The process showcased the project’s ability to identify, manage, and monitor environmental and social risks, giving lenders confidence in the project’s EP4 alignment and enabling one of the largest LNG liquefaction and export developments in the U.S. to move forward with confidence.
