The International Finance Corporation Environmental & Social Performance Standards (“IFC Standards”) has become the global benchmark for corporate social responsibility (“CSR”) in project financing. While the IFC Standards originated in relation to projects financed by the World Bank, they are now used by all financial institutions around the globe that have signed on to the “Equator Principles”, accounting for over 90% of global project finance. This makes the IFC Standards a “must know” for strategic leadership of multinational corporations interested in maintaining access to capital for their international projects.
WHAT ARE THE IFC STANDARDS?
The IFC Standards establish a private regulatory framework in respect of labour and working conditions; environmental practices; workplace health & safety; community health, safety and security; land acquisition and involuntary resettlement; relations with indigenous communities, and; preservation of cultural heritage. In addition to the express guidelines of the IFC Standards themselves, adherents must meet the requirements of local and international laws in these areas, regardless of whether such laws are regularly or consistently enforced by local governmental institutions. In this way, the IFC Standards require a corporation to go beyond minimum compliance with laws and regulations in the conduct of their operations, where such laws and regulations fall below the IFC Standards.
Adherents to the IFC Standards must establish a Social & Environmental Assessment and Management System. This requires companies and/or financial institutions to undertake assessments of the social & environmental impacts, risks and opportunities of projects; engage with local communities, disclose necessary information, create grievance resolution mechanisms, and manage the social & environmental risks throughout the life of the project.
An Action Plan for the project must be established based on consultation with stakeholders, describing how risks will be re-mediated and the IFC Standards implemented. Implementation of the IFC Standards typically necessitates their integration into corporate policies, practices and procedures; the development of organizational capacity through training of personnel; and the delegation of effective authority throughout the organization to ensure compliance and enforcement.
Community and stakeholder engagement, disclosure and consultation are requested by the IFC Standards and necessitate communication and dialogue between those undertaking the project and the members of the community affected by it. Engagement efforts should be oriented towards dialogue regarding the risks of the project and the needs and concerns of the local community.
Disclosure regarding project risks and public reporting on the implementation of the Action Plan is also required in the implementation of the IFC Standards. Monitoring of the project and ongoing risk assessments must also be done through the life of the project to ensure compliance with the IFC Standards at each phase.
HOW ARE THE IFC STANDARDS ENFORCED?
The IFC Standards are designed to operate through the Social & Environmental Management System (“SEMS”) established for each project as a system of self-regulation. It is typically left up to corporations themselves to implement the IFC Standards and monitor risks for each project.
Equator Principle Financial Institutions commit to applying the IFC Standards in all financed projects, and thus bear the burden of ensuring adherence. That being the case, it is quite common for lenders to require the borrowers to make covenants in relation to the implantation of the IFC Standards in respect of a project, thereby placing obligations on the borrower through contractual terms. Such terms could be enforced through the courts in the same way as any contractual provision. Violation of such covenants may be considered an event of default leading to acceleration of the loan, or equity disinvestment by the financing institution.
An SEMS, whether implemented by the lender or the borrower, requires the establishment of grievance mechanisms which act as a dispute resolution mechanism for the project vis-à-vis affected communities. The World Bank has established such a mechanism called the “Compliance Advisor Ombudsman”, which (as the name implies) is an Ombudsman office that takes complaints from interested parties and attempts to resolve disputes by reference to the IFC Standards. Grievance mechanisms within multinational corporations operate in a similar manner, and allow the company to identify and address concerns of affected stakeholders.
In an interesting development, the IFC Standards have become the endorsed performance standard used by the Government of Canada’s CSR Counsellor for the Extractive Sector (the “CSR Counsellor”), which has been established as a type of grievance mechanism applicable to the international operations of Canadian mining and oil & gas companies. The CSR Counsellor represents one of the first forays by a State government to monitor the implementation of the IFC Standards across a certain industry. This approach may be a vanguard for similar mechanisms elsewhere, affecting not just the financial sector but also mining and oil & gas operations or other industries. Such developments suggest that the importance of the IFC Standards as a benchmark for CSR is growing in importance.
ARE THE IFC STANDARDS MANDATORY?
The IFC Standards are binding to the multinational corporations that have chosen to adhere to them in carrying out their transnational operations. While the decision to adhere to the IFC Standards may be “voluntary” in the sense that it is not compelled by government in most circumstances, it may be required for business reasons including to ensure market competitiveness or access to capital, or to fulfill contractual obligations. The IFC Standards constitute a system of transnational rules created by private actors in response to the demands of the marketplace and administered through self-regulation.
Whatever the reason for adoption, once multinational corporations have agreed to implement the IFC Standards and have made public commitments to do so and incorporated the IFC Standards into contractual agreements, it is reasonable to conclude that IFC Standards create obligations of a legal nature for multinational corporations.
In light of this, it is essential that project financing involving the IFC Standards be the subject of due diligence and planning involving legal counsel. Covenants requiring adherence to the IFC Standards can have serious implications for both borrowers and lenders, and as such necessitate consideration with legal counsel during the diligence phase of project finance and throughout the life of the project.
IFC STANDARDS AND LEGAL RISK MANAGEMENT
It is clear that the adoption of the IFC Standards requires a corporation to go beyond minimum legal compliance and towards best practices in their transnational operations. As such, it is essential that legal counsel understand that the corporate objective that drives CSR practices transcends minimal legal compliance.
Despite the transnational and private nature of the IFC Standards, in-house counsel and strategic management should not conclude that their implementation in relation to financed projects is purely voluntary or non-legal. On the contrary, the IFC Standards are derived from the requirements of State based and international laws in the areas of environment, labour & employment, health & safety, indigenous relations, and human rights, and therefore require understanding of such legal standards in their implementation. As well, the disclosure, public consultation and engagement requirements of the IFC Standards give rise to both political and legal risks for the corporation that must be addressed with sound legal management.
The key for the strategic leadership is to balance the implementation of CSR best practices with a cogent strategy for legal risk management and compliance practices. Doing so effectively will ensure both access to capital, preservation of corporate reputation and the minimization of legal and other social risks arising from global projects of the multinational company.