The Government has just given a fairly clear mandate for new nuclear power stations. However, potential funders should consider the extent to which they can back new projects while complying with their environmental and corporate social responsibility policies. A popular basis for these policies, particularly in the financial sector, is the Equator Principles.

Organisations involved in project finance lending can commit to these 10 tenets as a means of managing the social and environmental risks of projects they finance. The principles apply to a wide range of project investments, with the intention that those organisations that sign up – known as Equator Principles Financial Institutions (EPFIs) – will ensure they are consistent with the principles.

Banks that are not EPFIs cannot necessarily ignore the principles. Where a syndicated loan arrangement is to be entered into, as will often be the case with a large capital project, even if the lead arranger is not an EPFI, it will need to ensure compliance with the principles to secure the participation of EPFIs in the syndication.

The principles apply to project finance transactions worldwide, with total project capital costs of more than $10m (£4.87m). The intention is that the principles should apply not only to new projects, but also to project financing of the expansion or upgrade of an existing facility.

Principle one: review and categorisation

Before lending, EPFIs must categorise each project based on 'potential impacts and risks' in accordance with IFC criteria. Broadly, the categories are:

- projects with potential for significant social or environmental impact;

- projects with potential for limited social or environmental impact; and

- projects with minimal or no social or environmental impacts.

Clearly, this is open to interpretation. The industry could argue that a new nuclear power station, if properly designed, managed and regulated throughout its lifespan, would have minimal or no impact. However, opponents of nuclear power would argue that site contamination, waste generation and radiation emitted in an accident would make the project fall into category A. Given that the categorisation process is dealing with potential impacts rather than actual impacts, though, it seems reasonable to assume that a well-designed, regulated and managed project would fall within category B.

Principle two: social and environmental assessment

For all category A and B projects, the EPFIs commit to ensuring that the borrower has assessed the risks before agreeing to lend. The assessment, which should include proposed mitigation and management measures, may be prepared by the borrower or externally, and the extent of the assessment will depend on the project.

An illustrative list of issues that should be considered is in Exhibit II to the principles, some of which will be of more relevance to nuclear projects than others. It is important to note, however, that just because a number of these issues will arise does not necessarily mean that the project should not be funded. Rather, the purpose of the list is to ensure that risk is thoroughly considered and assessed.

It is clear that such assessments could involve a wholesale review of options for power generation other than nuclear. Similarly, pollution prevention and waste minimisation needs serious consideration. Therefore, the economic and social assessment for a new nuclear power station will require substantial work. Before lending, an EPFI would wish to be satisfied that these issues had been adequately addressed.

Principle three: social and environmental standards

This principle mainly applies to projects to be located in non-Organisation for Economic Cooperation and Development (OECD) countries and those in OECD countries which are not designated as 'high-income' by the World Bank. For projects inside the high-income countries, the Equator Principles presume local and national laws and regulations will be sufficiently rigorous that there is no need to specifically demonstrate compliance.

Principle four: action plan and management system

For category A and B projects located outside high-income OECD countries, the borrower must prepare an action plan that takes into account the social and environmental assessment and describes how to mitigate and monitor the risks.

For projects within the high-income OECD countries, no formal action plan is necessary. However, in the UK the borrower would be required to implement a detailed management system to deal with any risks identified as part of the planning and licensing processes.

Principle five: consultation and disclosure

Principle five applies only to category A and B projects located outside the high-income countries. It requires the borrower to hold a public consultation with local people, and to document the process and results of the consultation.

Principle six: grievance mechanism

This applies as in principle five. It requires the borrower to establish a grievance mechanism to be followed throughout the construction and operation of the project, in order to allow the affected communities to raise concerns and address these appropriately.

Principle seven: independent review

This principle applies to all category A and, as appropriate, to category B projects, including those in high-income OECD countries. It requires that an independent social or environmental expert reviews the social and environmental assessment, as well as the action plan and consultation process document where appropriate.

It is not entirely clear whether there must be a further review in circumstances where the borrower's initial assessment has been carried out by a third party. Either way, a lender would probably appoint its own adviser to review the borrower's assessment before agreeing to fund the project.

Principle eight: covenants

This is perhaps the most crucial principle for the UK. For all category A and B projects, including those in high-income OECD countries, the borrower is required to:

- comply with all relevant host country social and environmental laws, regulations and permits;

- comply with the action plan (where applicable) during the construction and operation of the project;

- provide periodic compliance reports in a format agreed with the EPFIs, prepared by in-house staff or third-party experts; and

- decommission the facilities, where applicable and appropriate, in accordance with an agreed plan.

However, these covenants are no more onerous than typical project finance documentation, and it is likely that most lenders' conditions would be stricter.

Moreover, the Government's May 2007 consultation document makes it clear that "any private sector developers of new nuclear power stations would be required to meet their full decommissioning and full share of waste management costs".

Principle nine: independent monitoring and reporting

Principle nine applies to all category A and, as appropriate, to category B projects, and requires independent monitoring and reporting over the life of the loan. Alternatively, the borrower may retain external experts to verify its own monitoring information, which will then be shared with the EPFI.

Such monitoring is clearly something that will need to be factored into the costs of constructing a new nuclear power station. Again, however, it is unlikely this requirement would surpass the monitoring system of any project finance lender.

Principle 10: EPFI reporting

The final principle requires each EPFI to produce a public report, at least annually, covering its implementation of the principles. This must include the number of transactions that each EPFI has screened and the category into which each was allocated.

Overall, the principles are unlikely to prevent or materially discourage an EPFI from investing in new nuclear power in the UK. There is little in the principles that goes beyond the scope of the social and environmental risk assessment and risk management process that would normally be carried out as part of any large-scale project financing.

Indeed, it is likely that many of the environmental and social assessment processes and ongoing monitoring measures that are required by the principles would have to be undertaken in any event as part of the regulatory and licensing regime which will apply to any new nuclear power station in the UK – whether the lender is an EPFI or not.

Hamish Lal is a partner in the projects team and Mark Brumwell a partner and head of the environmental team at Dundas & Wilson.