Project finance comes increasingly with more pressure on borrowers to manage environmental and social risk – but the focus of this risk is also constantly shifting.
According to Sharon Jones, partner and principal environmental consultant at SRK Consulting, until fairly recently investors and lending institutions tended to scrutinise land acquisition and involuntary resettlement aspects, but there is now elevated interest in working conditions, resource efficiency and pollution prevention (to manage climate change). Indeed, certain types of projects – such as those requiring diesel power – were finding it more difficult to find any funding at all.
Jones highlighted that the reputational risk to investors and lenders remains a critical informant in financial decision making, putting project owners under growing pressure to recognise environmental and social risks. This burden is becoming more pronounced as shareholder activists and civil society groups highlight investment decisions they perceive to be controversial.
“A leading guideline in this field has been the International Finance Corporation (IFC) Performance Standards,” she said. “But other standards and conventions, such as International Labour Organisation (ILO) conventions, are important too, and increasingly SRK is required to consider areas such as human rights, gender equality, carbon neutrality, circular economy, waste valorisation and climate change when assessing project risks.” –
This means that lenders and their Environmental, Social and Governance (ESG) consultants need to assess risk in issues as diverse as worker accommodation, gender-based violence, grievance mechanisms and the use of security forces for protection. There is a continued focus on climate change and climate resilience of projects.
“Other important areas of concern include community health, safety and security, as well as Indigenous Peoples’ rights and cultural heritage,” she noted. “The Equator Principles, also driven by financial institutions, have been updated to focus more intensely on aspects like climate change.”
This has confirmed the value of Environmental and Social Due Diligence (ESDD) as a tool to assess projects’ environmental and social compliance with good international industry practice (GIIP). SRK partner and principal consultant Christopher Dalgliesh highlighted that ESDD’s often identify gaps and recommend measures to bring projects into compliance, providing assurance to funders. Gaps are typically documented in an Environmental and Social Action Plan (ESAP) against which lenders usually require ongoing compliance reviews or audits through construction and into project operations.
“By reviewing project performance, we can identify a range of risks – highlighting those that are material to financing,” said Dalgliesh. “By giving lenders insight into certain key risk areas, they are in a better position to make their lending decisions.”
This makes the exercise different to a normal environmental and social impact assessment, where mitigation measures are recommended which can solve specific problems.
ESDD work usually begins with expert scrutiny of key project documents. This highlights the main areas of potential concern, which can be further explored during a site visit.
“With an experienced practitioner or team conducting the ESDD, a great deal of valuable insight can be gathered in discussions with the project team, project owners and Health, Safety and Environment managers – but also with a range of project stakeholders,” said Jones.
She noted that ESG consultants need to be constantly upgrading their skill sets to keep abreast of evolving or shifting risks and standards. As a leader in ESG compliance, SRK has conducted ESDD across many sectors, ranging from hydropower projects in Angola and fertiliser projects in Bangladesh, to a mine upgrade near Saldanha Bay and a hydro-electric scheme in Ethiopia.