Allens

International Business Obligations

Focus: IFC updates its social and environmental standards

8 September 2011

In brief: The World Bank's International Finance Corporation has released its updated social and environmental standards that take effect from the beginning of 2012. Partner Annette Hughes , Senior Associate Rachel Nicolson and Lawyer Swee Leng Harris report on the changes.

How does it affect you?

  • The IFC Performance Standards have been broadly adopted, including by many in the resources and infrastructure sectors, as the key guidance on sustainability performance. The IFC Standards also underpin the Equator Principles, the leading industry standard on sustainability in project finance.
  • The revised standards:
    • have broader application to business's relationships with stakeholders;
    • require a greater degree of engagement with stakeholders and affected communities, including requiring free prior and informed consent to business activity, rather than the previously lower requirement of consultation;
    • increase business obligations to monitor the behavior of third parties and supply chains; and
    • place a greater emphasis on the issue of climate change.
  • Businesses that must, or have chosen to, comply with the IFC Performance Standards should promptly assess and, if required, update their policies and programs in line with the revised version.

Background

The IFC has released its updated Sustainability Framework, which takes effect from 1 January 2012. The Framework includes the IFC's Environmental and Social Sustainability Policy, Access to Information Policy and Performance Standards.

The Performance Standards provide guidance on improving environmental and social performance, with a view to achieving best practice in corporate social responsibility.

Compliance with the Performance Standards is a requirement for investment by the IFC. Additionally, these standards are adopted by numerous companies in the resources and infrastructure sector, as best practice in sustainability.

The key updates to the IFC Standards are summarised below by reference to each standard in turn.

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Changes to the standards

Standard 1 – Assessment and Management of Environmental and Social Risks and Impacts

Has been updated to:

  • note the obligation of business to respect human rights;
  • require the establishment of a policy on environmental and social objectives and principles as part of the Environmental and Social Management System (ESMS);
  • shift from 'community engagement' to the broader idea of stakeholder engagement as a requirement for clients' ESMSs;
  • provide for participatory monitoring of an ESMS by representatives from affected communities where appropriate; and
  • require the establishment of procedures to monitor and measure the effectiveness of the management program under the ESMS.
Standard 2 – Labour and Working Conditions

Now provides for:

  • migrant workers, now requiring that they be engaged on substantially equivalent terms and conditions to non-migrant workers;
  • accommodation services, for which policies as to the quality and management of the services must be implemented;
  • regular monitoring of health, working conditions and hours of workers under the age of 18;
  • mandatory policies to be established to manage and monitor third-party employers' compliance with Standard 2; and
  • monitoring of health and safety risks for supply chain workers, and mandatory monitoring of supply chain.
Standard 3 – Resource Efficiency and Pollution Prevention

Has been updated to:

  • provide for efficiency in the consumption of energy, water and other resources;
  • increase the application of provisions for greenhouse gas emission monitoring to projects producing more than 25,000 tons of carbon dioxide equivalent annually (previously the provisions applied to projects producing more than 100,000 tons); and
  • require the ascertainment of the standard to which hazardous waste disposal sites are being operated, and reduce waste or consider using cleaner alternatives where the standard of operation is unacceptable.
Standard 4 – Community Health, Safety, and Security

This standard has been updated to now include a requirement to identify where climate change may exacerbate risks and potential impacts on 'ecosystem services' as part of the consideration of effects on ecosystems as they relate to the health and safety of affected communities.

Standard 5 – Land Acquisition and Involuntary Resettlement

Has been updated to:

  • extend the application of this standard to include certain situations where there are involuntary restrictions on land use and access, or evictions of people without formal, traditional or recognised usage rights. Previously, the standard only applied to transactions where land rights or land use rights were acquired through expropriation or other compulsory procedures or through negotiated settlements where failure to reach settlement would have resulted in expropriation or other compulsory procedures;
  • shift from community consultation to the standard of community engagement described in Standard 1; and
  • provide for a completion audit of implementation of a resettlement action plan or livelihood restoration plan, where a client determines such an audit is necessary.
Standard 6 – Biodiversity Conservation and Sustainable Management of Living Natural Resources

Has introduced:

  • biodiversity offsets, to be considered once avoidance, minimisation and restoration measures have been applied;
  • specific requirements for business engaged in primary production of 'living natural resources', which include natural and plantation forestry, agriculture, animal husbandry, aquaculture and fisheries, to comply with globally, regionally or nationally recognised standards for sustainable resource management; and
  • requirements to evaluate primary suppliers as part of the client's ESMS where there is a known regional risk of significant conversion of natural or critical habitats.
Standard 7 – Indigenous Peoples

This standard has:

  • shifted from a standard of information disclosure, consultation and informed participation to the standard of free prior and informed consent established by (among other international laws) the 2007 UN Declaration on the Rights of Indigenous Peoples; and
  • established a due diligence requirement for the acquisition or leasing of land subject to traditional ownership or customary use.
Standard 8 – Cultural Heritage

This standard now requires that clients allow affected communities continued access to cultural sites in circumstances where a project affects access.

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Conclusion

The changes to the performance standards indicate a shift in the best practice standards for corporate conduct to further align them with international law standards, particularly in respect of companies having greater responsibility for their supply chain and a wider set of stakeholders. Entities that must, or have chosen to, comply with the IFC Performance Standards should promptly assess and, if required, update their policies and programs in line with the revised version. In addition, companies should consider these standards when drafting policies and procedures for projects to which the performance standards apply, or for which they may provide guidance.

For further information, please contact:

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