Key ESG aspects: Mitigation hierarchy | Labour conditions | Health, safety & security | Resource efficiency & pollution prevention | Land access, use & acquisition | Biodiversity conservation & ecosystem services | Supply chains | Business integrity
This Guide is designed to help fund managers quickly familiarise themselves with the most frequent and important environmental, social and governance (ESG) aspects of the Project design and construction phase of the investment process. It aims to be a starting point for thinking about ESG risks and opportunities, and not a detailed technical guidance document.
Using this Sector Profile
This Guide draws on internationally recognised good practice standards and guidance, particularly the International Finance Corporation’s (IFC’s) 2012 Environmental and Social Performance Standards and the World Bank Group’s Environmental, Health and Safety (EHS) Guidelines. The Guide identifies key standards that are generally applicable to each sector (refer to the ‘Standards, guidelines and other resources’ section below). It is not a substitute for such standards, which should take precedence as authoritative sources and basic technical references. Applicable laws and regulations must be taken into account and compliance with them should be regarded as the minimum acceptable performance standard.
Most new Projects will usually have required the completion of a detailed Environmental and Social Impact Assessment (ESIA) prior to the start of construction. Based on the risks and impacts identified in the ESIA, a Project’s design may need to be adjusted, or alternative siting or routing options may be required. Those responsible for ensuring the ESIA’s recommendations are implemented should do so following a mitigation hierarchy (i.e. to first anticipate and avoid any risks or impacts, and if avoidance is not possible seek to minimise them, and if residual impacts remain then compensate or offset the risks and impacts).
See the CDC Environmental and Social Checklist and CDC Governance and Business Integrity Checklist for questions that fund managers should consider when evaluating investments from an ESG perspective.
Scope of this Sector Profile
Note - While this Guide refers to ‘ Projects’, this term includes any significant construction or expansion activities associated with a company’s operations.
This Project design and construction guide covers:
Business activities that fall within the scope of this Guide include:
For ESG risks and impacts associated with the extraction of construction materials, additional information may be found in the CDC Sector Profile: Mining. For additional consideration of risks and impacts associated with operation and maintenance of infrastructure and power assets, refer to the CDC Sector Profile: Infrastructure and CDC Sector Profile: Power Generation, Transmission and Distribution.
Mining, agriculture and aquaculture and forestry activities related to exploration, land clearing/preparation and/or planting are covered in CDC Sector Profile: Mining, CDC Sector Profile: Agriculture and Aquaculture and CDC Sector Profile: Forestry and Plantations.
This section outlines some of the specific risks and impacts that emerge from poor ESG practices. Weak management of these aspects may lead to reputational damage, have an impact on a company’s capacity to raise funding (debt and equity) and, more broadly, negatively impact a company’s financial performance. Conversely, sound ESG practices are likely to improve a company’s reputation, access to investors and overall performance.
Management commitment, capacity and track record (CCTR)
Companies need management commitment and sufficient capacity to ensure that the necessary resources are available for sound environmental (E&S) management. Refer to CDC Guidance: Assessing Companies' Commitment, Capacity and Track Record.
Contractors are critical in construction activities. Therefore the sponsoring company (or ‘ Project sponsor’) should consider potential contractors’ ESG management of CCTR prior to their appointment. Companies must ensure contractors understand the applicable ESG requirements and discuss how appropriate ESG management plans will be implemented.
Environmental and social management system (ESMS)
Companies should develop and implement an ESMS commensurate with the level of risks and impacts associated with its activities. For further advice, refer to CDC E&S Briefing Note: Company-level Environmental and Social Management Systems.
Contractors are critical in construction activities. Therefore the Project sponsor should discuss the implementation of any ESMS prior to appointment to ensure that appropriate standards are met.
Relevance of the mitigation hierarchy in Project design and construction phases
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Identification of risks and impacts: Project sponsors should ensure all possible E&S risks and impacts arising from the construction and operation of the planned facility are identified through an impact assessment during the Project feasibility and design phase. Risks and impacts should be considered with regard to labour and working conditions, pollution prevention and resource efficiency, community safety and livelihoods, biodiversity conservation, protection of Indigenous People and cultural heritage. Where possible, any E&S impacts should be avoided bycareful consideration of design elements. If avoidance is not possible, then the design should aim to minimise negative impacts, or at least compensate or offset E&S risks and impacts. Typically, more significant operating impacts (e.g. pollution) will require additional permits and more expensive management measures and therefore avoiding or minimisingE&S impacts at the design phase can reduce operating costs and inefficiencies.
Management of risks and impacts: Once the Project design has addressed all possible E&S risks and impacts, the construction and operation phase will require careful E&S management plans to mitigate those factors. Mitigation measures should be monitored during the construction phase and strengthened where necessary. The Project sponsor should ensure that all contractors operate in accordance with both local regulations and Good International Industry Practice (GIIP) with regard to labour and working conditions, occupational health and safety,resource sourcing and use,and pollution prevention. Contractors should use the outcomes of the ESIA to develop and implement a construction environmental and social management plan (ESMP) which also aligns with the mitigation hierarchy mentioned above. Construction companies should always ask to review outcomes and recommendations of the ESIA in order to develop an appropriate site specific ESMP. Project sponsors should engage construction companies, prior to contracting, about their approach to planning for an ESMP.
Guidance on good practice relating to assessing and managing E&S risks and impacts at design and construction are provided by IFC Performance Standard 1 and the World Bank Group General EHS Guidelines and sector specific EHS Guidelines.
Labour and working conditions
Note - Occupational health and safety is covered separately below.
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Contractors: The construction sector is reliant on contractors. Project construction typically involves engaging a principal contractor along with several subcontractors. This may include large-scale international contracting companies (with locally engaged labour) as well as small-scale local specialist subcontractors. The Project sponsor should ensure that all contractors operate in accordance with local regulations and GIIP. All contractors should implement an ESMP for each Project which should reflect the outcomes and recommendations of the ESIA. Project sponsors should engage construction companies at the tender stage (prior to contracting) about their approach to planning for site management planning and how to minimise E&S risks and impacts. In addition, a contractor’s CCTR with regardto E&S performance should be assessed.
Wages and working hours: Construction activities are a major employer of low-paid and often unskilled labour, including temporary or seasonal labour and migrant workers. Furthermore, working hours are typically long. Workers should be paid at least the minimum statutory wage for the sector and working hours should be in accordance with applicable laws and sector regulations/agreements. Companies should not use third party contractors as a means of exceeding working hour regulations or avoiding minimum wage payments.
Freedom of association and collective bargaining: Relations with unions and the rights of workers to enter free and voluntary collective bargaining arrangements with management (and the rights to form unions and to strike) can be an issue in construction Projects. There are many instances where the principles of Freedom of Association have not been respected during Project construction. State involvement and restrictive legislation also dominates the construction sector particularly in emerging markets or where public private partnerships or tendering processes aim to encourage the participation of local companies. The company should require allcontractors to adopt GIIP as this can help to manage costs relating to recruitment, training and talent retention and maintain or enhance efficiency and service quality.
Child labour and bonded/forced labour: Forced/bonded or child labour is not acceptable under international standards but remains evident in the construction sector. Forced and/or bonded labour is sometimes sourced for construction of Projects in some emerging market countries where public private partnerships or regime policies may dictate certain employment practices or where cost overruns can result in pressures to cut employment costs.Non-compliance with ILO Core Labour Conventions on Child Labour/Minimum Age and Forced Labour is not acceptable under international standards. Measures to eradicate these forms of labour should be implemented as a matter of priority.
Equal opportunities and non-discrimination: Discrimination over wages or terms and conditions can be prevalent in the construction sector, particularly towards migrant labour and vulnerable local communities, when it comes to wages or terms and conditions. Companies should address discrimination by identifying key issues (through consultation with affected workers) and putting in place policies that deter discrimination. Such steps can help to manage recruitment and training costs, improve worker retention, and maintain or enhance productivity.
Accommodation: Where the Project sponsor and/or the main contractor undertakes to provide (either directly or through subcontractors) workers’ accommodation, it should include basic services and take into account the principles of non-discrimination and equal opportunity. The Project sponsor and/or main contractor should develop and implement policies on the quality and management of the accommodation in accordance with the principles included in IFC Performance Standard 2.
All contractors should be encouraged to develop and apply family-friendly employment policies. Good practice in this area can help to manage costs relating to recruitment, training and talent retention and maintain or enhance productivity.
For further general guidance on Good International Industry Practice (GIIP) relating to labour standards and working conditions in line with the International Labour Organization’s (ILO’s) Core Conventions, refer to CDC E&S Briefing Note: Labour Standards, IFC Performance Standard 2: Labor and Working Conditions, IFC/EBRD Guidance Note Workers’ Accommodation: Processes and Standards and IFC Good Practice Note: Non-Discrimination and Equal Opportunity.
Occupational, Health and Safety (OHS)
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OHS is an important consideration for any business, regardless of sector. All companies must have in place appropriate OHS and emergency preparedness and response management systems, commensurate with the level of risks.
OHS risks are particularly relevant in construction activities and robust systems should be implemented. Since contractors would typically be involved in design and construction activities, Project sponsors must have systems to ensure that contractors work in accordance with applicable regulations and GIIP.
Specific OHS risks during Project design and construction include those in connection with:
For further general guidance on GIIP relating to OHS, refer to CDC E&S Briefing Note: Occupational Health and Safety, IFC Performance Standard 2: Labor and Working Conditions, World Bank Group General EHS Guidelines, CDC Good Practice: Preventing Fatalities and Serious Accidents, and IFC/EBRD Guidance Note Workers’ Accommodation: Processes and Standards.
Pollution prevention and resource efficiency
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Energy efficiency and air emissions: Initial Project design should focus on incorporating energy efficiency measures and building resilience to risks from climate change. Sponsor companies should incorporate energy efficiency and pollution prevention into Project design. Careful consideration should be given to power supply and fuel source reliability and resilience and where possible the use of renewable sources should be encouraged. Process design and layout elements should take energy conservation as well as pollution prevention into account (e.g. through insulation, co-generation, loop systems to heat other process stages with by-product heat, process equipment and efficiency in the context of emissions generation). Overall siting and orientation of facilities should also focus on energy conservation (e.g. aspect with relation to sun/latitude; height of the building or facility (e.g. temperature control in a small footprint high rise facility versus a low rise larger footprint); heating/cooling/ventilation aligned with the numbers and aspect of the windows and prevailing winds; and building height relative to actual Project site and existing built or natural environment). Project design should consider building materials to be used in the context of energy efficiency. Certain materials can offer improved or diminished insulation (e.g. smooth surface or glass vs rough surface or concrete/stone). The sourcing of such materials and potential supply chain impacts should also be taken into account.
The main sources of air emissions during construction are dust generation and exhaust gases of heavy mobile and fixed equipment, including temporary power generation sources (generators), and from the burning of waste materials.
Site clearing, including demolition and excavation, as well as onsite storage of construction materials can result in significant quantities of dust. Management of dust is critical during construction to avoid impacts to neighbouring sites and communities. Timing of dust generating activities, and planning of activities and construction to minimise (both spatially and temporally) the exposure of bare soil should be a key part of construction management. Clearing and rapid resurfacing or re-vegetating, enclosure and covering of open areas and storage piles, and dust suppression techniques including damping down should be encouraged.
Sponsor companies should explore business opportunities associated with the adoption of cleaner technology/energy efficiency measures in the use, maintenance and purchase of heavy equipment and the sourcing of raw materials such as cement. Sponsor companies should give due consideration to how the best available techniques (BAT) for management of emissions may be applied, including where site clearing is undertaken by contractors or where heavy equipment is leased.
Water management: Construction activities can use significant quantities of water, e.g. in the mixing of raw materials (particularly cement), dust suppression activities, soil stabilisation and cleaning activities in the actual building as well as in the plant. Sponsor companies should engage with contractors to explore opportunities to reduce water consumption (e.g. use of closed-loop water systems in dust suppression). This is particularly relevant when water consumption is significant and/or water availability is restricted. Water use efficiency measures can have positive effects in terms of reducing the amount of wastewater generated by the site, and therefore any potential wastewater treatment costs and/or discharge fees.
Wastewater flows can have a high solid content due to site surface erosion and dust. Other effluent is generated from sanitary wastewater (from the site office/temporary worker washrooms facilities/accommodation). Adequate temporary sanitation facilities should form part of site management and sanitation should require treatment prior to discharge.
Waste management: Waste management should be considered at the design phase of any Project. The local context of the operation should be taken into account, as some waste disposal or recycling facilities may not be available (e.g. certain hazardous waste facilities) or waste disposal may be difficult in remote locations (e.g. a run of the river hydro Project which typically generates significant spoil). Early planning and consideration of these issues can help identify cost effective disposal options that might even include construction of a dedicated disposal facility. Solid waste streams specific to construction activities include excess fill materials, scrap wood and metals such as steel girders and scaffolding, domestic waste (from site offices, temporary washrooms and accommodation), waste construction material arising from poor handling or storage, as well as material from demolition activities and machinery maintenance. All require specific care in disposal to prevent environmental contamination or community health and safety risks. Where possible re-use or recycling of waste materials should be encouraged and careful site management including waste segregation and collection should avoid the need for double handling of raw materials and resulting waste.
Where any chemical or oil spill or clean-up has occurred, care should be taken in the disposal of clean up materials, which will also be classified as hazardous waste. Where even relatively small volumes of potentially hazardous wastes are generated (e.g. waste containing asbestos, used machinery oils, lubricants, solvents, paints or cleaners) the construction company must ensure that these are stored, handled, transported and disposed of according to good international industry practice, in a manner that prevents environmental contamination or danger to handling workers or communities nearby.
Obligations for handling of such materials should extend to all contractors and suppliers. Many emerging market countries have guidelines, organisations or facilities focused on collection and disposal of used oil. They also often have specific licensing requirements for hazardous waste handling by contractors and disposal-permitting requirements at registered landfills. Stringent regulations also apply for trans-boundary movement of hazardous waste.
Land contamination due to historical releases of substances by previous land occupants may be discovered after demolition or during excavation of foundations. Construction companies should ensure a management plan is prepared to identify, delineate, contain and manage the hazardous material, where handling and disposal may require additional permits. Project sponsors should engage with construction companies and developers regarding the likelihood of encountering contaminated land (e.g. investigate land use history and where necessary, undertake pre-development soil sampling) in order to avoid significant delays once construction has commenced.
Resource use: Sourcing building materials from sustainable sources should be considered during the design phase, and encouraged where possible in construction (e.g. sourcing cement from signatories to the Cement Sustainability Initiative). Construction and demolition waste should be reused where possible (e.g. recycling of concrete minimises the cost associated with sourcing new aggregate for construction). Demolition should be preceded by site inventorying and salvage to ensure all benign materials are re-used and recycled, even if only as fill for site levelling. Selection of building materials should be a key component of Project design as mentioned above for enhanced energy efficiency and pollution prevention.
For further general guidance on GIIP relating to resource efficiency and pollution prevention, refer to CDC E&S Briefing Note: Resource Efficiency, CDC E&S Briefing Note: Pollution Prevention, IFC Performance Standard 3: Resource Efficiency and Pollution Prevention and World Bank Group General EHS Guidelines.
Community health, safety and security
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Guarding local communities’ health, safety and security is as important during the initial design and siting of a new Project or facility, as it is during construction and ultimate commissioning of buildings or facilities. Community health and safety risks and impacts associated with design and construction include:
Health: Increased incidence of communicable and vector diseases related to construction or ultimate operation activities (migrant labour and land clearing/stagnant water) can pose health risks to local communities and to the workforce. Excessive dust generation from land clearing and excavation and poorly timed execution of works (i.e. premature clearing of land which is not followed immediately by next stage construction) can impact air quality for surrounding communities. Construction site personnel should undertake dust suppression and containment, and the site should be managed (including layout and works planning) to minimise dust generation where possible. Original design should ensure that any dust or emission generating operational activities take into account prevailing winds and site aspect and are managed to avoid or minimise impacts to communities.
Safety: The first issue to be taken into account is Project siting. Where a Project (or an element of a Project) presents significant risks and/or adverse impacts to local communities, the Project sponsor should consider whether the Project (or some elements of the Project) could be relocated (e.g. large oil tanks could be relocated away from residential areas).
The use of large heavy equipment on site and local roads to deliver materials poses threats of traffic accidents and congestion. Facility layout design and construction planning should take seasonal or daily road use fluctuations into account when planning site access and delivery to minimise impacts on the local community. Activities such as awareness programmes, community engagement and signage can minimise the potential for road accidents. Where significant impacts are anticipated, it may be advisable for the Sponsor company and/or the main contractor(s) to appoint a community liaison officer to manage traffic detour planning and site access timing. Emergency preparedness focused on protecting local communities in case of accidents on or near the site should be a priority during design and construction.
Security: Most construction sites and certain critical national infrastructure (CNI) sites are protected in order to prevent theft of equipment and materials, or access by external parties for safety reasons. Companies should be guided by principles of proportionality, good international practice and applicable law in relation to hiring, rules of conduct, training, equipping, and monitoring of security workers, and by applicable law. Such principles include practices consistent with the United Nation’s (UN) Code of Conduct for Law Enforcement Officials and UN Basic Principles on the Use of Force and Firearms by Law Enforcement Officials. Project design should incorporate security elements to minimise potential negative impacts to local communities.
Noise and vibrations: Construction operations can generate significant noise and vibrations particularly during demolition activities, delivery of materials, use of large scale heavy plants on site, cement mixing, concrete pouring, steel pylon erection, jack hammer compression and tile cutting, all of which can negatively impact neighbouring land users and local communities. The design of new facilities should take operational noise into account in the siting and/or insulation of process equipment. Noise/vibration prevention and control measures should be implemented (e.g. selecting equipment with lower sound power levels and restricting noisy activities to reasonable hours) at the design and construction phase.
Indirect impacts: New developments under construction may be located in remote areas and their establishment and operation generally includes the development of some associated infrastructure including access roads, waste disposal sites, water abstraction, and sometimes, workforce accommodation. An influx of Project labour can pose risks to local communities such as exposure to communicable diseases, increased competition for natural resources (e.g. water, firewood, and arable land for workforce food supply). There is potential for conflict between local and migrant labour where there is seen to be a lack of local economic benefit from the new development, or where local labour is marginalised or where migrant labour has been located without family.
Cumulative impacts: During the design and construction phase of a Project, cumulative impacts should be assessed as the Project risks and impacts may be exacerbated by the presence of other Projects or existing assets. Please refer to CDC E&S Briefing Note: Cumulative Impacts.
For further general guidance on GIIP relating to community health, safety and security, refer to CDC E&S Briefing Note: Community Health, Safety and Security and IFC Performance Standard 4: Community Health, Safety and Security,UN Code of Conduct for Law Enforcement Officials, UN Basic Principles on the Use of Force and Firearms by Law Enforcement Officials and the Voluntary Principles on Security and Human Rights. Where Indigenous Peoples will be affected, Free, Prior and Informed Consent (FPIC) should be obtained as described in CDC E&S Briefing Note: Indigenous Peoples and IFC Performance Standard 7: Indigenous Peoples.
Land access, use and acquisition
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Construction activities may require access to and/or acquisition of large plots of land, which may result in temporary or permanent physical and economic displacement of communities. Companies may negotiate with Affected Communities before triggering the expropriation process as this could expedite the land acquisition process and would allow the company to manage the process (if an expropriation process is triggered, host country authorities would manage the process).
Alternatives Analysis: The company should conduct an Alternatives Analysis during planning (as part of feasibility planning and ESIA investigations), in order to try to avoid involuntary resettlement and, if not possible, minimise it.
Land rights: It is imperative to ensure that the company has (or is in a position to negotiate) the legal rights to own, access, and/or use the land. Additionally, it should be noted that land tenure and rights of use in emerging markets can be unclear and complex due to a lack of regulation, existence of customary/traditional land tenure and the presence of communities that occupy and use lands, but without a recognisable legal right or claim. Therefore, companies should conduct a robust assessment to identify affected peoples and design a Compensation Framework accordingly.
Community relations: It is critical for companies to develop and maintain good relations with local communities. Sufficient time and resources should be made available to consult with Affected Communities in a culturally appropriate manner. Efforts should be made to accommodate their needs and reasonable requests; however, it is important to manage the expectations of local communities, as well as take into account precedents that may have been set. It is important to view stakeholder engagement as an ongoing process and mechanisms should be in place or set up to hear grievances and address complaints.
Compensation Framework: Where a company’s activities/ Projects involve economic and/or physical displacement of local communities, it should develop and follow a Compensation Framework. The Compensation Framework should:
Resettlement Action Plan: Where affected people will be physically relocated, companies should implement a Resettlement Action Plan (RAP) designed to mitigate the negative impacts of displacement. The Plan should include the procedures that the company will follow and the actions that it will take to mitigate adverse effects, compensate losses, and provide development benefits to persons and communities affected by the company.
Livelihood Restoration Action Plan: In the case of activities/ Projects involving economic displacement only, companies should develop a Livelihood Restoration Plan to compensate affected persons and/or communities and offer other assistance in accordance with good international practice. The Livelihood Restoration Plan should establish theentitlements of affected persons and/or communities and ensure that these are provided in atransparent, consistent, and equitable manner. The mitigation of economic displacement will be considered complete when affected persons or communities have received compensation and other assistance, and are deemed to have been provided with adequate opportunity to re-establish their livelihoods.
Support for local facilities and infrastructure: In some cases, companies may be asked to support community development or the provision of public services (e.g. construction or running of schools, clinics or other local services). These types of efforts should not be used to trade off impacts that could have been avoided, reduced or mitigated. It is important to follow the mitigation hierarchy (avoid, reduce, mitigate and fully compensate). Ultimately, the goal should be to ensure that community impacts are addressed in the first instance and to deliver additional mutually beneficial support thereafter.
For further general guidance on GIIP relating to land access and acquisition, refer to CDC E&S Briefing Note: Land Acquisition and Involuntary Resettlement and IFC Performance Standard 5: Land Acquisition and Involuntary Resettlement.
Biodiversity and ecosystem services
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As with other E&S risks and impacts, Sponsor companies (and, where relevant, contractors) should always adopt a mitigation hierarchy to anticipate and avoid (or where this is not possible, minimise) impacts. Where residual impacts remain, steps to compensate/offset risks and impacts to the environment should be taken. This hierarchy of conservation measures aims to direct primary exploration and production to areas with the least biodiversity value. Typically, impacts on areas with high biodiversity values (e.g. protected areas) will require additional permits, longer planning and permitting timelines and more expensive management measures. Therefore, avoiding impacts on these areas will reduce the necessary costs of environmental management measures.
Habitat alteration or degradation: Habitat alteration or degradation is one direct potential threat to biodiversity associated with Project design and construction. Depending on the type of Project and its location, varying degrees of land clearing, habitat alteration and population immigration can result. All of these may extend beyond the immediate footprint of the Project e.g. through the development of additional access roads, water and power supply infrastructure, and workforce accommodation.
Impact on ecosystem services: Construction of new developments can also affect the provision of ecosystem services including: (i) soil formation and nutrient cycling; (ii) the provision of freshwater to local communities; (iii) protection from natural risks; and (iv) sacred sites and areas of importance for recreation and aesthetic enjoyment.
If impacts on biodiversity and/or ecosystem services are likely, Project sponsors should develop or ensure that the contractor develops and implements a construction environmental and social management plan (ESMP) in accordance with the mitigation hierarchy mentioned above. Construction companies should always request to review outcomes and recommendations of the Environmental and Social Impacts Assessment (ESIA) in order to develop their ESMP. Project sponsors should engage construction companies about their approach to implementing and the ESMP.
For further general guidance on GIIP relating to biodiversity conservation and ecosystem services refer to CDC E&S Briefing Note: Biodiversity and Ecosystems Services and IFC Performance Standard 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources.
Fund managers should ascertain and continue to ensure that every company (regardless of sector) complies with the fund’s business integrity requirements. For further information see Governance and Business Integrity.
Business integrity issues specific to Project design and construction
Construction activities are high-risk sector in terms of business integrity, and construction is one of the most prominent sectors in foreign bribery prosecutions. In addition to standard business integrity concerns, risks that are particularly relevant for Project design and construction include:
Project sponsors should have robust systems for managing and overseeing interactions with local and national government officials. Third parties are also a known risk in the sector and Project sponsors and/or contractors may be asked by officials to consider specific agents, vendors, and even employees. Thorough screening procedures are required to prevent such risks in procurement and hiring and to ensure that the company only works with the right contractors and partners.
For further information on corruption risks refer to Transparency International.
Several ESG issues may be material to a Project’s long-term value, depending on the specific circumstances and geography. The complexity and materiality of the risks associated with Project design and construction depends on a number of factors including the location, size, nature and inherent risks linked to the asset to be built/expanded, construction duration and the number and type of workers involved in the construction. In general construction activities present medium to high E&S risks and impacts.
It should also be noted that construction activities are linked to high corruption risks. Therefore, it is critical that fund managers assess all business integrity issues during due diligence and insist that companies having strong systems in place to mitigate any operational risks.
Some sectors including infrastructure, power generation, transmission and distribution, heavy manufacturing, real estate mining, agriculture and aquaculture, and forestry activities related to exploration, land clearing/preparation and/or planting typically present complex, significant and diverse ESG risks and impacts that can have material implications for long-term shareholder value. Therefore, addressing ESG matters should be a central element of due diligence, investment structuring and on-going ownership and monitoring. Fund managers should seriously consider using independent ESG experts to support them in transactions in these sectors. More information on the latter three sectors listed here (mining, agriculture and aquaculture, and specific forestry activities) can be found in CDC Sector Profile: Mining, CDC Sector Profile: Agriculture and Aquaculture and CDC Sector Profile: Forestry and Plantation.
Relevance of the design and construction phase: opportunities
Typically, the feasibility and design phases of a Project are the most effective time to apply the mitigation hierarchy. This can avoid the most significant and costly E&S risks and therefore help to avoid unnecessary additional costs to the Project (e.g. appropriate location selection and/or changes in the design of a hydropower plant can significantly reduce the reservoir area needed). Additionally, the feasibility and design phases of a Project are often the best, and sometimes only, point to identify opportunities to be implemented before they become too complex or costly to implement. Examples include energy efficiency measures linked to the use of specific construction materials and/or building siting, design and construction as highlighted above. The design phase of any new Project or even any expansion or modernisation offers a chance to improve overall process efficiency and to avoid or limit longer term costly impacts. Early engagement with Project developers by fund managers around design elements is key to realising long-term value.
In addition to the aspects highlighted above that are linked to the company’s assets, activities and workers, fund managers should take into account the following during the life of the investment, from screening to exit:
Situations requiring extra attention
Extra attention, longer timescales and more intensive ESG due diligence may be required in more complex situations. This will ordinarily involve engaging consultants to conduct a gap analysis against the applicable local and international E&S standards (typically IFC Performance Standards and World Bank Group EHS Guidelines). CDC’s guidance on Working with Consultants may also be useful.
Examples of more complex situations include:
For authoritative guidance fund managers should consult the applicable IFC Performance Standards and World Bank Group EHS Guideline(s).
Applicable IFC Performance Standards
The IFC Performance Standards most commonly applicable to Project design and construction sector are:
In addition, other IFC Performance Standards may be applicable depending on the specific characteristics and locations of a company’s operations. The screening stage of the fund manager’s ESG due diligence should always include a routine check for the potential presence of significant impacts covered by all the IFC Performance Standards.
Applicable World Bank Group EHS Guidelines
The most relevant World Bank Group EHS Guidelines for this sector are:
Additional references, standards and guidelines
Refer to the relevant CDC Sector Profiles.