Ask a sponsor what delays financial close and the answers usually involve contracts, tariffs and government approvals. Ask a lender, and environmental and social issues come up far sooner than many sponsors expect. A resettlement plan that has not been agreed, a biodiversity assessment that missed a season, or a grievance process that exists only on paper can hold up a transaction for months — and, if they surface after close, can put the loan into breach.
The common language
Most international lenders to African infrastructure assess environmental and social risk against the same benchmark: the International Finance Corporation’s Performance Standards. The eight standards cover how a project assesses and manages its risks, labour and working conditions, resource efficiency and pollution, community health and safety, land acquisition and involuntary resettlement, biodiversity, indigenous peoples, and cultural heritage. Development finance institutions apply them as a condition of lending.
A project prepared to meet the Performance Standards is prepared for most of the capital it will approach.
Commercial banks that have adopted the Equator Principles apply the same framework to project finance. The current version, EP4, took effect in October 2020 and, among other changes, strengthened expectations on climate risk and human rights. Because both development and commercial lenders work from the same standards, a project prepared to meet them is prepared for most of the capital it will approach.
Where projects get caught
The most common difficulty is timing. A national environmental permit may be granted on the basis of an assessment that does not meet international standards, and sponsors discover the gap only when a lender’s adviser reviews it. Closing that gap can mean new baseline studies, some of which must be carried out across a full year of seasons, and further consultation with affected communities. Starting the assessment to the international standard, even when the national process requires less, avoids repeating the work.
Land is the other recurring issue. Where a project displaces people physically or economically, the Performance Standards require that they are compensated and their livelihoods restored, and that the process is documented and monitored. This is demanding work, and it is also the work that most directly protects a project’s social licence to operate — the local support without which construction and operation become difficult regardless of what the contracts say.
From obligation to advantage
Sponsors who build environmental and social management into the project from the beginning find that it pays back in ways beyond compliance. Lenders see a sponsor that understands their requirements and adjust their view of execution risk accordingly. Communities that have been engaged honestly are less likely to oppose the project when it matters. And a growing pool of investors with sustainability mandates can only participate in projects that can demonstrate their impact credibly.
When we look at a project, the quality of its environmental and social work is one of the clearest signals of how it has been prepared overall. A sponsor who has taken it seriously has usually taken everything else seriously too.
