A Dependable Social Risk Framework? These international standards have you covered
When considering social best practices, we often look to in-country regulations to understand what is required with respect to Indigenous recognition and engagement, human rights, livelihood assessment, cultural heritage, among others. That is still a critical step in the process but there is often a gap between socially focused regulatory requirements and standard business practice – and in some jurisdictions the regulatory requirements are too ‘light touch’ to give investors and multinationals the confidence that pertinent risks are considered and managed. Without guidance and direction, it can be challenging to know what variables to consider ensuring all angles are covered.
Financial risk management tools such as the Equator Principles (EPs), International Finance Corporation Performance Standards (IFC PS), World Bank Group EHS Guidelines (EHS), and World Bank Environmental and Social Standards (ESS) are strong frameworks to assess and manage social and environmental project risk – especially if you’re looking for a roadmap. The standards have a purpose: to give financial institutions confidence that projects in which they are investing are being conscious of social and environmental risks throughout project life. These standards examine both the lender’s and borrower’s responsibilities. Absent of a financial requirement, the documents still provide strong guidance for proponents if they are wondering “where do I start and what social (and environmental) risks should I consider?”
These standards have slight similarities and differences:
Categorization and risk management: The IFC PS and ESS similarly categorize risks using a mitigation hierarchy. They both identify and evaluate social risks as “beneficial” and “adverse”, and adopt a mitigation hierarchy to avoid, minimize, compensate or offset for the project-developed risk to people and environments. The EP's identify projects as Category A, B, and C based on the magnitude of impact. Category A projects are those that create irreversible impacts, Category B have limited impact and are reversible, and Category C has no adverse impacts. Under the EP's, projects located in industrialized countries (Designated Countries) require compliance with host country regulatory requirements as these are assumed to be more stringent, whereas projects located in non-industrialized countries (Non-Designated Countries) require compliance with IFC PS and EHS guidelines in addition to host country regulatory requirements.
The variables assessed are similar: The standards examine similar social (and environmental) variables. Particular to the social variables, these include labour and working conditions; community health, safety, and security; land acquisition and involuntary resettlement; stakeholder engagement; Indigenous Peoples; cultural heritage; and reporting and monitoring for stakeholder engagement and disclosure. The current EP (EP4) requires demonstration of Free, Prior and Informed Consent with Indigenous Peoples, as well as assessment of human rights impacts and climate change risks. Of the three standards, the IFC and ESS standards have the most robust evaluation methodology – especially when developed with a sound Environmental and Social Management System.
Check for updates and guidance notes: The standards evolve with risk management expectations from financiers and investors and updates to the standards do occur. In addition, guidance notes are often prepared to support the practitioner’s evaluation of social risks throughout the steps of the required process – these explain the requirements in greater detail. The EP's have been updated more frequently in the past two decades with EP4 released in 2020; the IFC PS are still those published in 2012 but the next iteration of IFC PS are understood to be under development.
For practitioners looking to manage their social risks effectively, these frameworks and guidance documents provide a well-established roadmap that is globally used and built on project fundamentals. This is guidance that you can use with confidence.