Why You Need To Consider Environmental and Social Factors When Getting Your...

Why You Need To Consider Environmental and Social Factors When Getting Your Project Financed

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Project Financed

Sustainable businesses need to focus on the triple bottom line, comprised of economic, social and environmental factors. Economic factors tend to be top of mind, followed more recently by social factors. Environmental factors often come third, but are as important as their counterparts.

Consider the ramifications of environmental incidents such as oil spills, chemical spills, illegal waste dumping, operating without an environmental permit/licence, and injuries or fatalities due to poor environmental management.

The growing importance of good environmental management

Through the years, multi-national corporations have realised the importance of good environmental management — and the consequences of non-compliance with regulatory requirements.

Understandably, environmental incidents that may result in harm can have significant legal and financial implications that result in major complications, when an entrepreneur and his financiers just want to ‘get on with business’ and be profitable. A certain business owner and his project were delayed for years because a protected species was present on the project site and no regard was ever given to adapt the project design to minimise the impact on this species.

Related: Need Growth Funding? Here’s How To Get It

Social risks to business are often neglected — lack of skills, political unrest and legacy issues that have left populations disgruntled with particular operations — are all critical issues for investors to understand, as these issues would require time and cost to remedy, and in the era of social media they could have a reputational impact and affect the bottom line.

Shifting the context

If you’re a seasoned entrepreneur, you’re familiar with financial due diligence, where the risks of long-term financing of extractive, industrial and infrastructure projects are assessed based upon inherent project risks. These could adversely affect the project financiers’ cash flow, and reputation.

But what happens when a non-banking sector-financier partners with you to fund a project? Numerous international standards and guidelines (that are prerequisite for major capital projects involving the banking sector) might no longer be compulsory. This results in corners being cut — either by design or because the parties involved simply do not know or understand the potential risks.

What are these risks?

Project risks could include a combination of economic, technical, environmental and social, statutory, site history, political risks, and so on. This is of particular relevance in developing countries and emerging markets such as Africa.

If risks are not managed to an acceptable level, financial institutions and project sponsors may lose interest in a project if they conclude that the inherent risks render the project ‘un-financeable’.

Environmental risks can range from sensitive ecological areas being in close proximity of a project, to previously contaminated areas. There are also inherent risks of your type of project to consider, from pollution to social risks (community objections to a project or relocation and pollution impacts on the community). The potential environmental and social ‘show-stoppers’ are numerous.

What you should be doing

The principles of the available international guidelines should be tailored for specific projects. Site assessments may also be undertaken to establish risk of legacy issues from prior users of the site to be developed.

Not all businesses require environmental permits, but they may need other licences and permits for certain aspects of a project. For example, to abstract water, to use non-municipal water, discharge waste water/effluent, cut down trees, dispose of waste, and so on. A review of environmental and social legislation and regulations during due diligence identifies potential illegal activity, or shortcomings.

Find out what environmental permits you need

Consult your local provincial environmental department and environmental consultant to determine which permit you require.

Assessing a site’s history of previous owners or operators can swing purchasing negotiations into the entrepreneur’s favour or assist financiers to decide if a project is ‘unpalatable’. As a start — find out all you can about your site’s history. Who were the previous owners and what was the land used for? Does the site show evidence of contamination?

Related: Funding Your Start-Up

Strategies to determine social and environmental issues

Financiers should determine early in the project if there are any ‘red flag’ environmental and social issues and formulate strategies to address these. Such strategies could include:

  • Biodiversity Management Plans for areas with sensitive ecological features
  • Site remediation and restoration for sites with historical contamination
  • Construction and operational environmental management plans for infrastructure developments, industrial developments and mining operations
  • Implementing Environmental Management Systems (e.g. ISO14001)
  • Community and stakeholder management plans
  • Environmental audits and monitoring programmes to assess and monitor construction and operational activities.

In a nutshell, poor environmental and social management can sink a business. Current and legacy environmental and social issues should be considered early on in the business lifecycle to determine the financial risks in order to determine whether a project is viable from a risk-reward point of view and whether it could be financed by a venture capitalist or lending agency. Involve environmental practitioners during the concept stages of any project.

 

Nelius Scheepers and Marion Thomas
Nelius Scheepers is a director for Montrose Environmental. He has successfully managed environmental assessment projects in Africa, the Middle East and Asia. Marion Thomas is a director for Montrose Environmental She is an expert in environmental and social impact assessments. Visit: www.montroseint.com/environment