In May 2009, the Government of Canada established the Office of the Extractive Sector Corporate Social Responsibility Counsellor (“CSR Counsellor”) and explicitly endorsed the International Finance Corporation (IFC) Performance Standards on Environmental & Social Sustainability (IFC Performance Standards) as a primary part of the Corporate Social Responsibility (CSR) expectations for the Canadian mining and oil & gas industries. This endorsement was but the latest development to highlight the increasingly important role the IFC Performance Standards play in setting the standard for CSR and sustainable development in foreign direct investment. In considering the concept of CSR from a legal perspective, it gives rise to questions about the legal implications of the use of this environmental and social risk management standard in international trade, particularly as it may come to be used in investment disputes and to impose liability on lenders and borrowers.
IFC Performance Standards – What are they?
There are eight IFC Performance Standards that together form part of the IFC Sustainability Framework and which are applied to financings of the IFC or Equator Principles banks:
1. Assessment and Management of Environmental and Social Risks and Impacts: requiring impact assessments, stakeholder engagement and the development of action plans and an Environmental & Social Management System (ESMS);
2. Labour and Working Conditions: setting standards for the management of human resources, including workers’ organizations, occupational health and safety, child and forced labour practices and the establishment of grievance mechanisms;
3. Resource Efficiency and Pollution Prevention: including the management of emissions, including greenhouse gases, pollution of land, air or water;
4. Community Health, Safety and Security: requiring design, hazardous materials management and emergency preparedness, as well as risk management on the use of security services;
5. Land Acquisition and Involuntary Resettlement: establishing standards to be applied where there is expropriation of land and/or resettlement of communities affected by a project;
6. Biodiversity Conservation and Sustainable Management of Living Natural Resources: establishing requirements to manage and mitigate impacts on habitats and ecosystems;
7. Indigenous Peoples: requiring consultation with affected indigenous communities, including in some circumstances to the point of Free Prior and Informed Consent (FPIC) of indigenous peoples as part of the stakeholder engagement process – a new and controversial requirement of the 2012 IFC Performance Standards;
8. Cultural Heritage: establishing requirements for the identification, management and protection of cultural heritage that may be affected by project activities.
In addition, the 2012 IFC Performance Standards address issues such as stakeholder engagement as well as human rights due diligence in light of the Protect, Respect and Remedy Framework adopted by the United Nations Human Rights Commission in 2011.
In applying the IFC Performance Standards, a risk categorization process is required to determine the anticipated levels of risk of a particular project, which in turn determines the extent of environmental and social risk management that will be necessary. Category A projects involve the most significant risks, Category B projects have more limited risks and Category C projects have minimal effects. All risks must be managed applying a mitigation hierarchy of avoidance, minimization or offset/compensation, with ongoing monitoring and review to ensure action plans are being implemented.
The IFC Performance Standards typically create obligations for borrowers, which are overseen and monitored by the lending institution. The IFC Performance Standards are highly detailed and comprised of hundreds of pages worth of principles, guidance notes, secondary reference material and interpretation notes. Diligence in relation to these standards includes reviews of local and international laws and highly detailed risk assessments examining each of eight topic areas. The process is, indeed, as complicated and involved as any diligence process in relation to a domestic legal or regulatory regime.
IFC Performance Standards as Private International Regulation
The IFC Performance Standards can be characterized as a private regulatory system to manage the environmental and social risks of international commercial activity.
Under international trade law multinational corporations may acquire significant rights through bilateral investment treaties and host government agreements. Few mechanisms have been developed other than through domestic State law to enforce obligations regarding environmental and social issues, creating what has been referred to as a “governance gap” in relation to environmental and social risks of commercial activity.
The World Bank and its investment arm the IFC are international actors subject to international legal expectations. For such institutions, doing business with private actors creates a dilemma of how best to promote sustainable development, a concept which is now recognized as a legitimate objective of international trade law. The international legal obligations that may apply to the World Bank or IFC do not automatically become obligations of their private sector business partners, who do not carry the same legal personality in international law. As the World Bank Compliance Advisor Ombudsman has concluded, when it comes to private lending, international agreements, norms and standards may give “helpful context and reference points”, but any such reference is “intended to acknowledge the international consensus and support on these instruments,” rather than to create private “obligations to comply with these agreements, as the obligations under these agreements rest with signatory states and not with businesses.”
This lack of binding obligation on private sector business partners of the World Bank and IFC has created the impetus for these institutions to develop ways to promote the adoption of sustainable development practices amongst its business partners. The IFC Performance Standards emerged for this purpose as a form of private regulation to fill the governance gap.
In their application, the IFC Performance Standards require a corporation to go beyond minimum compliance with the local laws of emerging jurisdictions to address the IFC’s own objectives of sustainable development. By incorporating sustainable development expectations into the financing agreements between the World Bank and its private sector partners, the concept of sustainable development applicable to the World Bank and IFC can be transposed onto private actors, enforceable as contractual conditions for financing.
While the IFC Performance Standards were originally developed for use by the IFC and the Multilateral Investment Guarantee Agency (MIGA), two arms of the World Bank Group, the IFC Performance Standards are now regularly incorporated into private investment agreements by banks that have committed to the Equator Principles agreement, which has been signed onto by 77of the world’s leading financial institutions and which requires adherents to apply the IFC Performance Standards to the evaluation of project financings, project related corporate loans, bridge financings or advisory services meeting certain monetary thresholds. Notwithstanding the express limitations on the scope of the Equator Principles agreement, the IFC Performance Standards are increasingly used by financial institutions beyond the project financing context, as a risk management and investment evaluation tool for assessing all types of asset based financing and even equity underwriting.
Wherever the IFC Performance Standards are applied, failure of a company to abide by these requirements can result in suspension or cancellation of a loan, disinvestment, or a decision by a financial institution not to invest at all. In this way, adherence to the IFC Performance Standards often operates as a threshold qualifier for access to capital, particularly in emerging markets where they are most often utilized. In light of this, the IFC Performance Standards have become the de facto benchmark for sustainability in the financial industry – and by consequence are of critical importance to any corporate actor seeking financing for foreign direct investment projects that may give rise to environmental and social risks.
Implications for International Trade Law and Investment Disputes
The international trade law regime overseen by the World Trade Organization (WTO) has been established to eliminate barriers to trade, including Non-Tariff Barriers to Trade. An exception to this prohibition was carved out by the 1994 Technical Barriers to Trade Agreement, which permits and requires member States to base their domestic “technical regulations” (referring to any topical regulation, including such things as safety, environmental regulations etc.) on “existing voluntary standards developed by international standardization bodies”. Regulations deviating from any such standards could be challengeable as illegal trade barriers. However, countries are entitled to implement regulations in these environmental and social areas that conform to accepted international best practice.
Recent bilateral trade treaties of the Canadian government, including for example the Canada-Peru Free Trade Agreement (FTA), have gone even further, explicitly permitting and encouraging the promotion and enforcement of “internationally recognized standards of corporate social responsibility”, as an exception to their economic trade liberalization elements. There are no clear definitions of what constitutes an “internationally recognized standard of CSR” which could be the basis for technical or CSR related regulations. However, given the Government of Canada’s explicit endorsement (and their pervasive use globally) the IFC Performance Standards provide the best evidence of what acceptable standards would look like.
What could this mean from a legal perspective in the context of international trade? There has yet to be trade litigation dealing with this topic head on, but the possibilities are easy to imagine. Consider for example the recent mining licence revocation of Canadian mining company Bear Creek by the Peruvian government, or the recent expropriation of the Malku Khota mine of South American Silver in Bolivia by the Bolivian government. Both government actions were tied to indigenous protests against these mines and the alleged failures of the mining companies to address the concerns of local stakeholders. Should these matters become the subject of international arbitration, it is easy to see how the Indigenous Rights or stakeholder engagement sections of the IFC Performance Standards could be used by the expropriating governments as evidence of the consultation standard these companies ought to have met. Alternatively, these companies could themselves point to compliance with these standards to evidence how they have done all that could be reasonably expected of them in relation to local communities, removing any justification for expropriation that might otherwise exist. In either case, the IFC Performance Standards could play an important normative (or evidentiary) role as persuasive and justifying reasons in relation to future FDI disputes involving environmental or social issues.
Other Legal Implications Regarding Lenders Liability?
Aside from pure international trade law, there is a whole world of potential legal implications that pertain to the adoption of the IFC Performance Standards by lenders for use in investment decision-making.
Reference to the IFC Performance Standards in contractual documentation creates legal obligations for the contracting parties in relation to their implementation. By rooting the implementation of the IFC Performance Standards in commercial contractual relationships which clearly have a binding legal nature, the framework immediately possesses more than simply an “aspirational” or soft law quality.
The Equator Principles agreement expressly state in a disclaimer that “as with all internal policies, these Principles do not create any rights in, or liability to, any person, public or private.” That being the aim, it is not clear that such a disclaimer would be enough to avoid any duty of care that may arise where a lending institutions holds itself out in public as a “regulator” or guarantor of environmental and social risk management for a project it is financing.
Could a lending institution overseeing implementation of the IFC Performance Standards, or the borrower agreeing to meet such expectations, be held to account by third party affected communities where implementation falls short? This is an untested possibility that raises many interesting (and perhaps troubling) questions for lawyers involved in transactions applying the IFC Performance Standards. The mere possibility that hard legal liability could attach to the implementation of the IFC Performance Standards in FDI financings should flag the importance of the framework from a legal perspective.
The IFC Performance Standards are taking on more significance than simply a de facto baseline for sustainability. Indeed, there appears to be a trend towards making the IFC Performance Standards the de jure content of “sustainable development” and CSR expectations in FDI.
It is entirely possible that the IFC Performance Standards framework will be overtaken by other standards. Indeed, they have been criticized for their lack of democratic legitimacy. Nevertheless, at the present time, the IFC Performance Standards offer the best source to understanding what sustainability or CSR really means in FDI and in law.
The risks and opportunities associated with the increasing prevalence of the IFC Performance Standards remains to be seen. More thought must be given to exactly how this framework relates to legal systems and the legal obligations that it creates or substantiates by its use in environmental and social risk management. In the meantime, it is safe to say that the IFC Performance Standards are only growing in importance as a benchmark for CSR and as a legal focal point for understanding the concept of sustainable development.