Financial institutions are increasingly aligning their investment priorities with sustainability principles. However, simply stating that you intend to comply with environmentally and socially responsible investing takes more than just a statement of intent. It requires concrete steps that demonstrate how those good intentions are backed by actions.
This is one of the primary reasons that many institutions seek guidance and advice from independent environmental and social consultants. This is particularly so when the institution is a signatory of the Equator Principles, or when other defined environmental and social standards are required.
The Equator Principles are voluntary framework used by financial institutions to assess and manage the environmental and social risks associated with project finance. The Equator Principles are based on 10 principles that financial institutions must follow when assessing and managing environmental and social risks. The Equator Principles are widely used in project finance, particularly in the infrastructure, mining and energy sectors. Over 100 financial institutions from around the world have adopted the Equator Principles, including many of the world's largest banks and financial institutions.
The Equator Principles have become an industry standard for assessing environmental and social risks in project finance and their use is often required by investors and other stakeholders as a condition of financing. In turn, the Equator Principles incorporate the International Finance Corporation (IFC) Performance Standards into their framework and financial institutions that adopt the Equator Principles are required to comply with IFC Performance Standards, which cover a range of environmental and social issues, including labour and working conditions, community health and safety, biodiversity conservation and cultural heritage.
Going Beyond the Basics
As the world continues to deal with mounting environmental and social challenges, many organisations are recognizing the need and benefitting from the experience that a third party can provide in assessing the environmental and social risks associated with lending activities.
Assessing these risks takes more than just a general understanding of Equator Principles and IFC Performance Standards. To truly be effective in the role, a lenders environmental and social consultant must have a deep understanding of the principles and standards, as well as extensive experience in applying the standards to real-world situations.
Can Your Consultant Perform?
In his 2008 book, Outliers: The Story of Success, Malcolm Gladwell wrote about a concept he called the “10,000-hour rule.” According to Gladwell, this is the amount of time one must spend in deliberate practice in order to become an expert in a particular skill or field.
This rule has been debated and criticised by some who suggest that this is an arbitrary standard and the actual amount of time required to become an expert will almost always vary, depending on the skill or field in question. This counterargument states that many factors — including natural talent and opportunities for learning — will affect the time it takes for any individual to gain true expertise.
Still, the 10,000-hour rule may serve as a useful guideline to bear in mind when choosing a consultant, or as a basic reminder that experience brings expertise.
In selecting a lenders environmental and social consultant, look at how much hands-on experience the team has in environmental and social risk assessment and management, stakeholder engagement and project monitoring and reporting. Can the consultant demonstrate a deep understanding of standards and be able to apply them in a practical and effective manner?
Here are a few steps to take to verify whether the consultant actually can perform:
- Check credentials. Look for their professional qualifications, memberships and accreditations. Relevant professional bodies or organisations should be consulted to confirm their status.
- Look for evidence of their work. Ask for examples of previous work, including case studies or testimonials that demonstrate a track record in environmental consulting.
- Check references. Speak to previous clients or colleagues and ask for their opinion of the consultant's work. This can help to give you a better understanding of their reputation and credibility.
- Review their website and online presence. Check relevant information posted on the website and social media profiles. This will provide clues to their approach to environmental consulting, their values and mission. Look for evidence of their involvement in relevant industry groups or associations.
- Ask specific questions. If you have any doubts, ask for details about experience, methodology and approach to environmental consulting. A reputable consultant should be able to provide clear and precise answers to your questions.
- Check for conflicts of interest. Verify that the consultant is independent and doesn't have any undisclosed current or past engagements that could influence their advice or recommendations.
When speaking with a potential client, these are the routine verification questions we expect to answer at 1898 & Co.
A great relationship with a consultant must be based on trust, and getting off on the right foot requires full and transparent disclosures of capabilities and experience. You deserve nothing less than that, particularly when sensitive and important matters arise in the environmental and social space of a project.
Complexity is the norm for due diligence on nearly every project financing transaction.