Resource extraction projects are fundamental to maintaining growth and development around the globe.
Everyone uses or benefits daily from raw materials that are derived from mining extraction – from the gold used in moblie phones and computers to cobalt, which is an essential material used in batteries for hybrid electric vehicles.
At the same time, mining extraction may create a significant impact on local communities and ecosystems. In recognising this, the mining industry has embarked on important sustainability and ethical initiatives over the past decade, which have underscored the importance of environmental and social sustainability in the development of mining projects.
From ICMM to EITI, industry-led initiatives have put ‘sustainability’ at the top of the mining industry’s agenda in order for it to expand and survive.
The financing of a green-field mining project is no small feat, and involves identifying and managing a number of different risks related to reserves, market fluctuations, credit, political and regulatory risks, and, not least of all, environmental and social risks.
The sheer scale of many mining projects dictates that multiple lenders (both commercial banks and official agencies such as export credit agencies) are involved in the financing, and understanding the requirements of lenders can be critical to ensuring access to capital and preventing project delays.
The financial sector has, itself, faced its own share of challenges during the past decade.
One of the bright spots has been the rise of the Equator Principles (EPs); a voluntary standard to help project-finance banks assess and manage the environmental and social impact of large infrastructure projects, including greenfield mining developments and expansion schemes.
In just under eight years, the EPs have become an important benchmark for both banks and project sponsors.
The EPs are based on the policies and guidelines of the World Bank Group’s International Finance Corp (IFC), and are applied globally across all industry sectors.
The EPs are a set of process steps that a financing institution and the project sponsor must take to ensure compliance. They therefore create a unique partnership between banks and clients to improve, and drive, environmental and social sustainability.
New Standards
The IFC Performance Standards came into effect in 2006, and are currently under review and revision by the corporation. As this issue goes to press, the IFC has just concluded its last consultation phase, with the final revised Performance Standards set to be presented to the IFC Board in May 2011.
If approved, the EPs will require a separate revision and updating process to consider and adopt these new Performance Standards as the underlying baseline standard.
Since their inception in 2003, the EPs have grown significantly from the original ten adopting institutions to 70 financial institutions around the world, making them leading and respected voluntary standards for environmental and social due diligence.
As part of their internal environmental and due diligence review process, EP adopters categorise projects based on the magnitude of potential impact and risk, in accordance with the environmental and social screening criteria of the IFC. If a project is located in a high-income OECD country, as defined by the World Bank Development Indicators Database, EP adopters assess the project using local and national law (rather than IFC standards), and ensure that the project sponsors have fulfilled all regulatory, permitting and public comment processes, as required by law.
Depending on the magnitude of a project’s environmental and social impact and risks, lenders and project sponsors may jointly appoint an independent environmental consultant to review the Environmental and Social Impact Assessment (ESIA) action/management plans, and confirm compliance with the IFC Performance Standards, EHS Guidelines and EPs.
Over the past seven years of implementation, some approaches for streamlining the EP process have emerged.
The following sections highlight the environmental and social processes to help speed up the EP review and diligence processes, and discuss ways in which those companies interested in pursuing project financing can maximise their EHS management and performance in order to meet the EP process requirements and Performance Standard objectives.
Early communication
One of the most common challenges associated with financing mining projects is the completion of various environmental and social requirements prior to financial close.
Perhaps the most critical step in the EP process is the preparation of an ESIA.
Early development of ‘terms of reference’ for the ESIA, which addresses all aspects of EP compliance, can save time and money during the project cycle.
Many financial advisory mandates now include identifying qualified consultants, drafting terms of reference for the ESIA, and managing a competitive process in the hiring of qualified consultants.
Once the ESIA has been prepared, a second consultant may be required by the lender to conduct an independent review of the project in accordance with the EPs.
Project sponsors should communicate at an early stage with lenders to confirm whether an independent review is required, and, if so, the completion time expected.
Many environmental and social issues require long lead times to adequately address concerns to the satisfaction of lenders.
Social considerations
Social considerations have become a greater focus of EP adopters, particularly as they relate to new requirements of the revised IFC Performance Standards.
The EP update in 2006 explicitly incorporated a number of new requirements, including community engagement standards, grievance mechanisms requirements and labour standards consistent with the IFC.
These issues continue to evolve at a rapid pace, and some of the areas to watch include emerging practices in community engagement, emerging standards related to indigenous peoples’ rights, land acquisition and resettlement, and security and human rights.
The current IFC Performance Standards and EPs outline three main components of community engagement: disclosure; consultation; and grievance mechanisms.
Increasingly, ESIAs include a section documenting public consultation and disclosure processes. This is often overlooked, however, and can lead to delays in financing if insufficient detail is provided.
At a minimum, the ESIA should include the stakeholders who have been (or will be) consulted and the number of planned consultations.
Grievance mechanisms – implemented and managed by the project sponsor – are a new requirement of financial institutions. They should be appropriate to the scale and complexity of the project, and range from suggestion boxes in a project office to community liaison staff and periodic community meetings.
Such mechanisms are most often a component of the Environmental and Social Management Plan (ESMP), which outlines the procedure for accepting and responding to complaints. Additionally, development of a Public Consultation and Disclosure Plan (PCDP) or Stakeholder Engagement Plan is generally required prior to financial close.
The concept of free, prior and informed consent (FPIC) by indigenous peoples is an emerging issue that has gained traction with the adoption of the UN Declaration on the Rights of Indigenous Peoples by 17 countries; most recently Australia, Canada, New Zealand and the US.
Although it has yet to be approved, the latest, proposed version of the IFC Performance Standards includes a requirement to obtain FPIC of indigenous peoples under certain circumstances.
Such circumstances include projects that are located on, or make commercial use of, natural resources on land subject to traditional ownership and/or under customary use by indigenous peoples; require relocation of indigenous peoples from traditional or customary lands; or involve commercial use of indigenous peoples’ cultural resources.
It is important to note that such FPIC is not required under every circumstance in which indigenous peoples are located at or near the project site.
A new stakeholder consultation hierarchy is also being proposed by the IFC, and mining companies should watch carefully how these requirements evolve.
Land acquisition and resettlement is an issue that may require long lead times to address before a project can successfully access the project-finance market.
At a minimum, if significant resettlement is required, project sponsors should develop a resettlement action plan, and document the compensation and consultation processes.
A resettlement audit may also be helpful at a later stage in the project cycle to close out the resettlement, and limit the liability and responsibility of the project sponsor over a certain period of time.
EP adopters recognise that resettlement is a complex and challenging undertaking, often involving multiple parties, actors and interested stakeholders.
The IFC Performance Standards include a section on private-sector responsibilities under government-managed resettlement, stating: “Where land acquisition and resettlement are the responsibility of the host government, the client will collaborate with the responsible government agency, to the extent permitted by the agency, to achieve outcomes that are consistent with the objectives of this Performance Standard.”
The Performance Standard for community health, safety and security requires the assessment of community exposure to impact and risk.
As a minimum, the ESIA should include an assessment of infrastructure and equipment safety, the safety of hazardous materials, natural hazards, community exposure to disease (particularly HIV/AIDS), emergency preparedness, and response and security personnel requirements.
Although not explicitly required by the IFC Performance Standards or EPs, project sponsors should consider adopting the Voluntary Principles on Security and Human Rights if the project requires the use of security personnel at or near the project site.
Biodiversity impact
Of all the Performance Standards, the one with the most proposed changes relates to biodiversity conservation and the sustainable management of living natural resources.
Three key concepts are emphasised in the proposed draft:
- The mitigation hierarchy;
- Ecosystem services; and
- Biodiversity offsets.
As with social issues, assessment and planning for adequate mitigation of the impact on biodiversity often require long lead times.
Early on in project planning, a high-level risk scoping and preliminary assessment of the impact on biodiversity should be conducted. If threatened or endangered species are identified, qualified experts should be retained to begin a thorough assessment and develop mitigation strategies as early as possible.
The mitigation hierarchy is a three-step process commonly used by ESIA practitioners.
Impacts are first avoided, and where they cannot be avoided they are minimised. Once these factors have been avoided and minimised as much as possible, residual impacts are then offset as a last resort.
The proposed revision of the Performance Standards require project sponsors to demonstrate in the ESIA that the mitigation hierarchy has been followed, and it outlines the use of ‘set-asides’ as an emerging best practice.
Set-asides are areas within the project area that are excluded from development and targeted for conservation-enhancement measures. They are often used to demonstrate ‘avoidance’ along the mitigation hierarchy. These areas often include wildlife corridors, riparian buffers or areas of high conservation value.
As the world responds to climate change, the focus on ecosystem services has increased. These are defined as benefits that people obtain from ecosystems, including:
- Provisioning services (food, freshwater, shelter and timber);
- Regulating services (surface water purification, carbon storage and sequestration, climate regulation and protection from natural hazards);and
- Natural cultural services (cultural heritage and sacred sites).
The proposed revision of the Performance Standards requires project sponsors to analyse their dependence and impact on the ecosystem. This should be done as part of the ESIA process.
The requirement to offset residual impacts is perhaps the most challenging of the proposed changes, as few offsets have been successfully demonstrated outside of high-income OECD countries.
At the most basic level, the steps to design an offset include:
- Assessing the impact on biodiversity and assessing the feasibility of offsets within the ESIA process;
- Applying the mitigation hierarchy and quantifying residual impacts (most often in terms of habitat area);
- Identifying potential locations for an offset using appropriate biophysical and socioeconomic criteria; and
- Calculating potential offset gains using the same metrics to quantify residual impacts.
A leading organisation on the practical application of biodiversity offsets is the Business and Biodiversity Offset Program (BBOP), which is a multi-stakeholder initiative that includes companies, conservation NGOs, biodiversity experts, financial institutions and governments.
Several mining companies are members of the programme and have implemented pilot projects, using the BBOP Principles for Offset Design.
Financial advisor role
Many EP adopters are now trying to differentiate themselves as EP Advisors to ensure companies structure their projects so that they can successfully access the EP-covered financial market and syndicate the transaction.
A financial advisor should understand every aspect of the project, with a view to assessing the overall risk profile, including environmental and social issues.
If companies are planning to pursue project financing, they should mandate a financial advisor who is an EP adopter.
Financial advisors who are EP adopters can assist the client with the development of the ESIA terms of reference, and the identification of a third-party environmental and social consultant to review ESIA documentation, if appropriate.
Understanding the environmental and social requirements of financial institutions can ensure access to capital, and speed up the project finance diligence and approval process.
After nearly eight years of implementing the EPs, several practices have emerged that can help to streamline the approval process for financing:
- EP compliance should be viewed as a ‘partnership’ between lenders and the project sponsor;
- Project sponsors and lenders should communicate early on with regard to environmental and social requirements;
- Social considerations should be given particular attention, including public consultation, disclosure and grievance mechanisms, indigenous peoples rights, land acquisition and resettlement, and security and human rights;
- The impact on biodiversity should be identified early on; and
- Project sponsors should choose an EP adopter as a financial advisor to avoid project delays and syndication risks.
So far, 70 financial institutions have adopted the EPs and, as more banks implement the principles and the capacity of project sponsors is developed in response, more streamlined project approvals with comprehensive risk management can be expected. This, in turn, should lead to positive outcomes on the ground.
Case study: Partnering to improve standards
Facing challenging environmental and social issues in an emerging market, a mining company hosted a due diligence tour for banks to visit its operational sites.
Following this site visit, the company worked with banks to develop an action plan that would help it address its challenges, and conform to internationally accepted social and environmental standards, and management practices over time.
This included an assessment of the impact of the company’s operations on indigenous peoples.
Additionally, Citi encouraged the company to make public commitments which included:
- A comprehensive review and update of its environmental health safety and social (EHSS) policies, procedures and practices to conform with IFC Performance Standards;
- Independent, expert advice on EHSS policies and standard operating procedures;
- Appointment of globally recognised EHSS staff and increase in staff capacity to handle these issues at the corporate level;
- Auditing of policy implementation with annual reporting to the board.
| Level of risk | Category | Risk | Example |
| High | A | Projects with potential significant adverse social or environmental impacts that are diverse, irreversible or unprecedented | Development of most new underground or surface mining facilities Development of an aluminum smelter that requires resettlement of people |
| Medium | B | Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures | Construction of water management infrastructure such as treatment ponds, ditches, piping Upgrades to existing facilities |
| Low | C | Projects with minimal or no social or environmental impacts | Construction of water wells for water supply Development of communications systems |
Courtney Lowrance is a director, and Shawn Miller is global head of environmental and social risk management, at Citigroup