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Global | Publication | May 2020
Originally published by Petroleum Economist – Energy Transition Newsletter
“It is not acceptable for any business to ignore their impacts on people’s land rights, security or livelihoods—the renewable energy sector is no different,” says Mary Robinson, president Mary Robinson Foundation — Climate Justice and chair of the International Advisory Network of Business and Human Rights Resource Centre.
In 2016, the international Business and Human Rights Resource Centre interviewed 50 companies involved in renewable energy projects about their approach to due diligence in respect of first nations or land-connected communities, often referred to as indigenous people, impacted by renewable projects.
The results of the study showed that while some renewable energy companies were starting to recognise the importance of a rights-based approach, many still lagged behind. Among laggards, the common issue was a failure to implement adequate due diligence practices including processes to identify how projects may impact communities, or to obtain consent prior to the start of a project.
The key focus of stakeholder engagement should be on the communities actually impacted.
The United Nations and most state actors have proclaimed climate change to be the defining issue of our time. So, it is not surprising that there has been a surge in renewable energy projects as part of the energy transition. This is playing out on a global scale by the shift from the use of fossil fuels in energy production and consumption to renewable energy sources such as solar, wind, hydropower and hydrogen.
Indeed, much can be said about the positive impact of the energy transition. However, as summarised by the leading quote, the management of renewable projects’ social impacts, especially on indigenous people, is critical to the overall success of a project.
Investment in proper stakeholder engagement processes, both in the planning of a project and the construction and the operation of a project, is crucial for all sectors. The often-used phrase ‘social licence to operate’, or simply, social licence, can actually now be quantified by project developers and financiers through a due diligence analysis of the legitimacy, credibility and trust held by a project on its community of impact.
This article compares examples of renewables projects that have not obtained social licence with those that have, considers the learnings that can be taken from traditional or conventional resources projects, and shows that successful projects will usually be able to demonstrate three key criteria:
There are examples in almost every jurisdiction of renewable energy projects that have been impacted by delays, legal action, civil unrest and/or damage to corporate reputation because of a failure to adequately consider and manage social impact issues.
|FIG 1: Examples of failures to manage social impact
||Summary of complaint regarding social licence|
|Cesme Wind Energy Project, Turkey
||There were lengthy delays and numerous ongoing lawsuits filed by the impacted community against a project relating to land acquisition, the project’s energy licence, planning approval, environmental impact assessment and a flawed human rights due diligence process.
|Agua Zarca Dam, Honduras
||A tragic result when two human rights activists and leaders of the Lenca community who opposed the proposed hydroelectric dam, Berta Caceres and Tomas Garcia, were assassinated. The community alleged that the dam would significantly impact livelihoods and there had not been adequate consultation to meet the international standard of free, prior and informed consent. An outcry from the international community resulted in foreign investors withdrawing from financing activity pending further investigations into these tragic results.
The common theme among these examples is the significant risk to a project if there is a lack of substantial upfront investment in, and ongoing maintenance of, good stakeholder relations. The key focus of stakeholder engagement should be on the communities actually impacted. If an impacted community are also indigenous peoples, community expectations and the effort required by a project proponent to ensure that the project is sustainable, concurrently increase.
Renewable energy projects can be a source of positive impact for indigenous peoples, particularly those in very remote regions. Often these remote communities are reliant on extremely old and inefficient forms of energy sources such as diesel generators, firewood and kerosene. Many successful renewable energy projects involve indigenous ownership or partnership with project proponents.
|FIG 2: Examples of success in managing social impact
||Summary of positive social licence story|
|Asian Renewable Energy Hub, Australia
The Asian Renewable Energy Hub, being developed by CWP Energy Asia, InterContinental Energy, Macquarie Capital and Vestas, is a 15GW mass scale wind and solar farm which enable large scale production of green hydrogen products for domestic and export markets.
The Nyangumarta People who hold exclusive native title over a large tract of north west Western Australia in the Pilbara are proactively engaging with the project proponent in relation to project approvals and consents required from the Aboriginal group.
Additionally, CWP reports that the project will generate cheap clean energy for the Pilbara region, and opportunities for the Nyangumarta People, to develop new skills, jobs and revenue, which will provide comprehensive and enduring community benefits during the 10-year construction period and the 50+ year operations and maintenance period.
Across Canada, indigenous peoples own approximately 25pc of clean energy projects recorded in 2017 and genrated an estimated $2.5bn in profit for indigenous peoples over 15 years.
Successful case studies include Ontario Power Generation (OPG)’s 438MW Lower Mattagami Project, involving the construction of a hydroelectric power station on the Lower Mattagami River.
OPG attributes much of the success of the project to its “unique” partnership with the Moose Cree First Nation, and reports that benefits provided for the Moose Cree First Nations under the agreement included employment, training and business opportunities during construction.
Further, Moose Cree First Nation received 25pc equity stake in the project, thereby securing a revenue for the expected duration of the project of about 90 years.
The common thread among these successful projects is that the project proponents have recognised the importance of a rights-based approach that incorporates the best practice in due diligence standards.
The phrase ‘social licence’ is no longer a glib phrase to highlight a potential gap between local laws and community expectations. It is now a tangible consideration for financiers and proponents of major renewables projects. In some cases, the concept of social licence has been codified in local laws and international standards in a way that can be embraced by project developers.
There is a myriad of guidance for renewable project developers that want to ensure they implement best practice procedures for stakeholder engagement. Doing so has benefits for the projects, shareholders, financiers, and reputations of the corporations involved. The IFC Performance Standards and the Equator Principles are examples of methods for project proponents to manage social impacts.
The phrase ‘social licence to operate’ is no longer a glib phrase to highlight a potential gap between local laws and community expectations.
IFC Performance Standard 7 requires that developers undertake stakeholder engagement as part of any environmental and social management system. Specifically, developers are to establish and maintain an ongoing relationship with an impacted community based on “informed consultation and participation” with indigenous peoples affected by a project. This must occur throughout the project’s lifecycle. As part of engaging in informed consultation and participation, the developers must seek to obtain the community’s free, prior and informed consent, in certain circumstances.
Standard 7 gives thorough guidance on the appropriate process of community engagement in order to ensure that it is culturally appropriate and commensurate with the risks and potential impacts to the indigenous peoples. Appropriate processes can include:
Standard 7 is supported and entwined in the most recent version of the Equator Principles, which will commence on 1 July 2020 (the fourth version). The Equator Principles are applicable to those financiers that are signatories to the guidelines. It is worth noting that a significant number of banks are signatories to the Equator Principles.
When financiers look to invest in renewables projects, they must ensure that those affecting indigenous peoples provide adequate proof of meaningful engagement in a process of free, prior and informed consent. Alternatively, they must provide evidence that circumstances exist that allow a justifiable deviation from that objective.
These steps are required for projects that:
However, even projects that are not beholden to the Equator Principles can benefit from undertaking a stakeholder consultation process to be assessed against both host country laws and Standard 7. Project proponents and financiers are recommended to embed them in their own due diligence processes in order to demonstrate to the world at large that a project has the support of impacted communities.
Renewable energy projects can take significant learnings from the engagement and agreement-making processes developed by mining and oil and gas companies, over the past approximately 50 years. In that industry there are now accepted principles for conducting negotiations that involve gaining an understanding of:
The common theme arising out of mining projects that have developed best practice stakeholder engagement processes are also reflected in other publications of the IFC such as the IFC Stakeholder Engagement: A good practice handbook for companies doing business in emerging markets. Renewable energy projects can also look to industry associations such as the International Committee for Mines and Minerals and country-based mining industry groups for guidance and tool kits.
In order to develop and implement a best practice stakeholder engagement strategy, it is critical for companies to frequently contemplate the following questions: What do we need to do? What do we want to do? What story do we want to tell? The development of a stakeholder engagement plan requires a fundamental understanding of national and local laws, international standards and a company’s internal policies. A simplistic model could involve five key steps such as:
A project proponent must understand the community landscape in which it will be conducting activities, the identity of indigenous peoples and tribal groups, decision-making processes and interaction with other neighbouring groups. A well thought through and resourced stakeholder consultation process with culturally appropriate teams is essential. Many of the projects that have been subject to protest and litigation have been accused of not providing sufficient and timely information on the impact of the project not only on social issues but also environment, political and indeed ongoing social impact.
The process then following both parties obtaining an understanding of the project and the social and community landscape then evolves into the manner of negotiations and how a community will engage with a project.
This can take many forms, including a purely compensation for consent arrangement through to joint ventures through to partnerships involving critical issues such as intergenerational equity, consideration of gender, diversity and impacts, and a true risk sharing partnership.
It would be very rare for a project to get these matters completely right, so it is very important to ensure that all parties understand that there is an appropriate grievance mechanism in place to deal with any disputes and to be utilised to bring the parties together rather than further apart. The IFC Performance Standards and Equator Principles highlight how critical a project’s grievance mechanism is over the full lifecycle of a project that will have a major impact on an indigenous community.
Involvement of the community as a stakeholder in project monitoring in relation to timeframes, delivery and environmental and social impacts is another critical step in ensuring that the support or consent of the indigenous peoples is maintained and sustained throughout the entire life of the project. Reputational problems have occurred in projects where the project assumed that once community support was obtained in the planning stage there was no longer a need to further engage with the community. This could not be further from the reality of ensuring that a project is sustainable. A project’s developer needs to consider the land connectedness of an Indigenous community and the deep spiritual meaning and connection that many indigenous peoples have with the land that will be impacted by a project.
Renewable energy projects can take significant learnings from the engagement and agreement-making processes developed by mining and oil and gas companies.
This style of stakeholder engagement plan is what is required in order to show the company has undertaken appropriate due diligence in line with international standards and community expectations. More so, stakeholder engagement will be required for any projects that seek finance from an Equator Principles Financial Institution, or another financial institution with similar requirements designed to ensure that a project has a sustainable social licence.
The theme of legitimacy, credibility and trust flows through these requirements. Legitimacy can be shown through community engagement, the provision of information to impacted communities, and the resulting acceptance of the development by the community. Credibility is demonstrated through standing by the commitments made to communities and the establishment of real partnership roles and responsibilities. Trust is shown by the collaboration of the project proponent and the community, in order to foster a mutually beneficial outcome according to principles of intergenerational equity.
No project developer or financier seeks to be the subject of litigation, civil protest or shareholder activism based on claims of a failure to appropriately engage with indigenous peoples and other impacted communities. Appropriate resourcing and the development of strategies limit this risk. For projects that engage in best practice stakeholder management, project financiers can quantify and confidently assess that the project in question.
The image that the renewable industry seeks to show is one of being ‘clean’ and ‘green’. This goes hand-in-hand with being at the forefront of best practice human rights and social impact due diligence. For renewable energy companies that do so, they ensure that the global expectations of the energy transition are met and that direct benefits are delivered to impacted indigenous peoples.
Essential UK Pensions News covers the key pensions developments each month.
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