backProject developers, export credit agencies and other stakeholders in energy and infrastructure projects that benefit from export credit finance will need to be aware of, and factor into their project planning, assessment and development, as applicable, recent changes recommended by The Organisation for Economic Co-operation and Development ( OECD ). These changes expand the requirements for environmental and social due diligence for export credit agency financed projects, especially with respect to human rights. The recommended changes are set out in a revised version of the OECDs Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (the OECD Common Approaches ), which was adopted by the OECD Council on 6 April 2016 and replaces the 2012 version. This article provides an overview of the OECD Common Approaches, a summary of the changes in the recent revised version and some implications for energy projects.
Overview of the OECD Common Approaches
Under the OECD Common Approaches, the governments of the Member countries of the OECD Export Credit Group [1] ( ECG ) commit to take account of issues relating to the environmental and social impacts of projects when granting officially supported exported credits through their relevant Export Credit Agencies ( ECAs ) or otherwise. The OECD Common Approaches, as the name suggests, outline common approaches with the aim of harmonising environmental and social assessment procedures so that the same competitive conditions apply for all ECAs. Such due diligence typically includes reviewing any environmental and social impact studies or reports produced by the project developer which may include an Environmental and Social Impact Assessment (" ESIA ") [2], the project developer's environmental and social management plans for the project, and any other relevant reports, permits, management and monitoring plans for the project, site inspections, internet-based research, interviews with employees and consultation with other stakeholders. The OECD Common Approaches apply to all projects with an officially supported export credit with a payment period of more than two years.
The Changes
Expansion of Category A Classification
The OECD Common Approaches classify projects according to the adverse environmental and social risk that that they pose, taking into account both impact and reversibility: Category A projects pose significant risk of adverse impact; Category B projects pose a medium level of risk; and Category C projects pose minimal or no risk. The requirements for review, impact assessment and mitigation plans are risk-weighted so there are no requirements for Category C projects, but detailed impact assessments and mitigation plans must be made for Category A projects. The OECD Common Approaches text includes an illustrative list to aid classification in Annex I ( Illustrative List of Category A Projects). The 2016 revision introduces an addition at paragraph 30 of Annex 1, Projects which may result in significant adverse social impacts to local communities or other project affected parties, including those involved in the construction and/or operation of the project. This addition acts as a sweep-up to catch any projects with significant adverse social impacts that do not otherwise match the types of project described in Annex 1. This highlights the illustrative nature of the list and further emphasises that classification is by impact and not by type; the list is not exhaustive and classification should not be approached as a tick-box exercise, rather each project must be assessed individually.
New definitions
The latest version of the OECD Common Approaches replaces the term Members with Adherents and provides new definitions that clarify the meanings of Environmental risk, Social risk, Final Commitment and Sensitive areas.
Significant growth over recent years in government export financing from emerging markets that are not ECG Members (and to which, therefore, versions of the OECD Common Approaches prior to 2016 did not apply) has undermined the underlying aim of creating a level playing field in this market and put ECG Members at a competitive disadvantage. In 2014, the combined new medium-and long-term support provided by China, Brazil, India and Russia was estimated to be $63.9 billion, up from 2013 ($50.5 billion) and 2012 ($43.4 billion). [3] China alone accounted for at least $58 billion in 2014, more than the G-7 countries [4] combined. In light of these developments, it was considered necessary to adopt changes to allow for expansion of the application of the OECD Common Approaches beyond ECG members. The new terminology of Adherents rather than Members signifies that non-Members of the ECG may elect to adhere to the OECD Common Approaches. Several key non-Members, such as Brazil, China, India and South Africa, regularly observe ECG meetings and the ECG has indicated that adherence to any of the OECD export credits disciplines ( de facto and de jure) by any non-Members on a voluntary basis would be welcomed.
For the new definitions of Environmental risk and Social risk, additional text has been appended to the existing definitions of Environmental impacts and Social impacts carried over from the 2012 version. The new wording provides for the consideration of the probability of such impacts occurring and the consequences of such an occurrence. This reference to probability accords with more general risk management principles and allows for differentiation between risks with low impact but high likelihood of occurrence and risks with high impact but low likelihoods of occurrence.
The new definition of Final Commitment gives specific guidance on its meaning in the context of the ex ante disclosure provisions in paragraph 39 of the OECD Common Approaches. Paragraph 39 stipulates that, for Category A projects, Adherents should require that environmental and social impact information (e.g. ESIA report, summary thereof) be made publicly available as early as possible in the review process and at least 30 calendar days before a final commitment to grant official support. The final commitment for the purposes of paragraph 39 is now defined as either the last board decision or the issuance of a credit, insurance policy or guarantee, depending on an Adherents procedures. Clarity on the meaning of this term should lead to improved common practice and greater consistency between Adherents regarding the required timescales for publication of environmental and social impact information.
New Screening Requirement
The new version of the OECD Common Approaches introduces a requirement for ECAs to screen all applications to identify whether or not there may be a high likelihood of severe project-related human rights impacts occurring and, where such impacts are identified, to carry out further assessments. [5] This amendment is significant because previously no further action was required beyond screening for applications for projects for which the Adherents share is below SDR 10 million and which are not in or near sensitive areas, or for existing operations for which an Adherents share is below SDR 10 million. Now, where screening determines that there may be a high likelihood of severe project-related human rights impacts occurring, applications should be assessed irrespective of the Adherents share and, where appropriate, subsequent review should be complemented by specific human rights due diligence. [6]
This is arguably the most significant change. The greatest impact of this change is likely to be on smaller companies applying for officially supported export credit.
Larger companies may not need to make any changes to their existing processes as a result of the latest revised OECD Common Approaches. Under the 2012 version of the OECD Common Approaches, consideration of human rights impacts did not factor until the classification stage (and, at this stage, it was considered within the wider umbrella of social impacts rather than as a standalone item) and classification was only required for projects for which the Adherents share was over SDR 10 million [7]. Larger companies are likely to have had experience applying for export credit support in excess of this SDR 10 million threshold and, as such, should have been mindful of human rights impacts when making their applications. Furthermore, the majority of such larger businesses have made public sustainability commitments and many have published sustainability reports, recognising that they are subject to public and investor scrutiny on social and environmental issues. As such, their existing internal due diligence processes generally already place significant weight on human rights. By the time that such company applies to an ECA for export credit, it should have already considered the probability and scale of any potential impact on human rights of a project. Indeed, where there is a high likelihood of severe human rights impacts, the company will often seek to avoid the considerable financial and reputational risk that the project would carry and throw it out prior to even making an application for export credit. Specific human rights due diligence is also nothing new for most of these companies.
However, smaller companies applying for officially supported export credit are unlikely to have made an application for anything near as much as SDR 10 million previously. Many smaller companies are first-time applicants. In these cases, the processes for gathering the necessary information and carrying out human rights impact assessments will often not be developed to the same extent as for a larger corporation. Some ECAs therefore expect that, in the short term at least, there will be a certain amount of hand-holding required for smaller companies. Indeed, for these ECAs, the challenge is two-fold: they must guide applicants to be aware of this new requirement at screening stage and the ECAs themselves must get used to applying it. The result is that, for some ECAs, the screening stage of the process now may take longer for this type of applicant. Some ECAs are ahead of the game and for some time have been considering human rights impacts at the screening stage for all applications, including those below the SDR 10 million mark. Smaller companies applying to these ECAs are, therefore, used to the human rights impact criterion at screening stage. The ECAs are equally set up to apply it so there should be no major changes to the timescales for the screening process. In addition, ECAs are now required to screen existing operations in which the Adherents share is below SDR 10 million. Again, the ECAs that were already assessing the human rights impacts of smaller applications have a head start.
Where a project applies for officially supported export credit to more than one ECA, the ECAs will often collaborate on due diligence, sometimes with one ECA taking the lead if that project falls within an area of particular expertise. In such joint due diligence efforts, ECAs which have already been applying a human rights impact criterion to all applications should impart their best practice. The primary aim of the OECD Common Approaches is to harmonise environmental and social due diligence processes for the purposes of levelling the playing field between ECAs from a competition perspective, but its secondary purpose of is to encourage knowledge-sharing with a view to enhancing the pool of collective international experience and expertise.
New Greenhouse Gas Reporting Requirements
As part of the OECD Common Approaches' objective of promoting awareness of environmental and social issues and supporting other international initiatives in this field, the new version also requires Adherents to report to the ECG on the estimated annual greenhouse gas emissions from all fossil fuel power plants, and for all other projects where such emissions are projected to exceed 25,000 tonnes CO2-equivalent annually and such information has been provided as part of the due diligence exercise. Adherents should try to obtain and report the estimated annual in CO2-equivalent and/or the estimated annual direct greenhouse gas emissions by carbon intensity ( e.g. in g/kWh) for the six greenhouse gases generated during the operations phase of the project. Adherents should also consider international standards and guidance relating to support for thermal power plants and nuclear power plants. This includes the use of technology to reduce carbon emissions and sharing experience gained with respect to handling the potential impacts of nuclear power plants with other exporting countries.
Implications for Energy Projects
Energy project sponsors seeking export credit finance for their projects will need to factor the requirements of the revised OECD Common Approaches into their project planning, development and activities in order to succeed in their applications for export finance. Even before the revision, the illustrative list in Annex I ( Illustrative List of Category A Projects) already classed many energy projects as within Category A meaning that detailed impact assessments and mitigation plans must be made for such projects to have export credit finance approved. Such illustrative list includes the following energy projects in the oil and gas and hydropower sectors: large [8] dams and other impoundments designed for the holding back or permanent storage of water, large scale oil, gas, or liquefied natural gas development that may include any or all of: exploration (seismic and drilling); field development and production activities; transport activities, including pipelines/terminals, pump stations, pigging stations, compressor stations and associated facilities; or gas liquefaction facilities and installations for storage of petroleum, petrochemical, or chemical products with a capacity of 200,000 tonnes or more. The new item in the illustrative list - Projects which may result in significant adverse social impacts to local communities or other project affected parties, including those involved in the construction and/or operation of the project - has the potential to capture energy projects not falling within the foregoing explicit categorisation of certain oil and gas and hydropower projects such as coal-fired power generation projects.
Given the increased human rights focus in the revised OECD Common Approaches, energy project sponsors seeking export credit finance for their projects will need to have an enhanced understanding of the human rights effects of their projects. Companies in the oil and gas sector may find it useful to refer to the Oil and Gas Sector Guide on Implementing the UN Guiding Principles on Business and Human Rights (the Guide ) [9] in order to comply with the human rights due diligence requirements of the revised OECD Common Approaches and more generally in order to foster a culture of, and implement a responsibility for, the respect of human rights in their business activities. The Guide is sector-specific, and developed by Shift, a centre for expertise on the UN Guiding Principles on Business Rights, and the Institute for Human Rights and Business at the request of the European Commission (Directorate-General for Enterprise and Industry). The development of the Guide involved extensive research and stakeholder consultation, including with members of the oil and gas industry.
No sector specific guidance for environmental and social matters exists for the power sector. However, developers of power projects seeking international finance, including export credit finance, typically manage environmental and social risks and impacts by applying the Performance Standards of the International Finance Corporation ( IFC ), the member of the World Bank Group that invests in, and lends to, projects in the private sector. Requiring adherence to the IFC Performance Standards has become the norm for projects financed not only by IFC but also other multilateral development banks, as well as many commercial banks. Indeed, the OECD Common Approaches provide that when undertaking a review, Adherents should benchmark projects against all eight IFC Performance Standards, as well as all ten World Bank Safeguard Policies in the case of non-project finance projects. [10] Notwithstanding the foregoing, energy project sponsors (whether in the power sector or oil and gas) should be aware that compliance with the IFC Performance Standards does not necessarily mean that the project will pass environmental and social due diligence by ECAs for export credit finance, not least because of the new human rights requirements of the latest version of the OECD Common Approaches. Furthermore, the expansion of the scope of the OECD Common Approaches to cover Adherents rather than members means that ECAs outside of the ECG (such as the ECG-observers of Brazil, China, India and South Africa) could soon apply the OECD Common Approaches. This could make it more difficult for less responsible energy project sponsors to avoid best practices by seeking export credits from ECAs that do not follow the OECD Common Approaches.
In the absence of industry-specific guidelines for environmental, health and safety issues, the OECD Common Approaches note that Adherents may refer to relevant international sources of guidance such as, for example, where appropriate, the Hydropower Sustainability Assessment Protocol and the Core Values and Strategic Priorities of the World Commission on Dams ( WCD ) Report for hydro-power projects. [11] The Hydropower Sustainability Assessment Protocol (the Protocol ) reflects the efforts of the International Hydropower Association ( IHA ) and key stakeholders in the hydropower sector, including financial institutions, such as the World Bank and Citibank, and prominent non-government organisations such as the World Wide Fund for Nature, to address criticism of some hydropower industry practices by introducing an environmental audit tool, which enables the production of a sustainability profile for a project through the assessment of performance within important sustainability topics. The Protocol actually reflects the culmination of a long process of debate and dialogue initiated by IHA in response to the WCD final report in 2000 and the five core values and seven strategic priorities in such report.
The OECD Common Approaches also refer to benchmarking against international standards for the nuclear industry such as the Convention on Nuclear Safety, the Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management, and the relevant aspects of the International Atomic Energy Agency (IAEA) standards for nuclear power plants and other nuclear facilities. [12]
The OECD Common Approaches provide the option for Adherents to benchmark projects against more stringent standards than those standards suggested in the foregoing paragraphs. [13] This is perhaps indicative of the general trend towards increasing awareness and progressively more rigorous assessment criteria with respect to social and environmental impacts of large scale energy and infrastructure projects. Indeed, the OECD Common Approaches are, in themselves, part of a wider initiative to raise the bar in the international community with respect to guardianship of human rights and the environment, and subscription to it is voluntary so it can be presumed that Adherents to it seek to comply with this spirit of continuous improvement. This is the fourth revision to the original OECD Common Approaches which was agreed in 2003 and other international standards appear to similarly be constantly evolving (for example, the European Unions 2009 Nuclear Safety was amended in July 2014) so staying ahead of the curve is not an easy task. Nonetheless, to the extent possible, companies looking to make applications for officially support export credit should endeavour to meet the current most stringent relevant international standards, rather than adopting a formalistic compliance approach to achieve minimal observance of the conditions of the standards cited in the OECD Common Approaches.[1] The ECG Members are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States (i.e., all OECD countries except Iceland).
[2] An ESIA is a requirement under OECD Common Approaches for all Category A projects.
[3] Ex-Im Bank, 2014 Competitiveness Report, June 2015, 19, available at http://www.exim.gov/sites/default/files/reports/EXIM%202014CompetReport_0611.pdf(downloaded 26 April 2016). ECA volumes for non-OECD countries reported by Ex-Im Bank reflect what activity would be regulated by the Arrangement on Officially Supported Export Credits.
[4] The G-7 countries are: the United Kingdom, Canada, France, Germany, Italy, Japan, and the United States.
[5] Paragraph 6, the revised OECD Common Approaches.
[6] Paragraph 14, the revised OECD Common Approaches.
[7] According to the International Monetary Fund, the SDR (short for Special Drawing Right) is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies.
[8] The OECD Common Approaches uses the definition of the International Commission on Large Dams (ICOLD). ICOLD defines a large dam as a dam with a height of 15 metres or more from the foundation. Dams that are between 5 and 15 metres high and have a reservoir volume of more than 3 million cubic metres are also classified as large dams.
[9] Available at http://www.shiftproject.org/sites/default/files/OG/ECHRSG.OG.2.pdf (downloaded on 26 April 2016).
[10] Paragraph 21, the revised OECD Common Approaches.
[11] Paragraph 25, the revised OECD Common Approaches.
[12] Paragraph 25, the revised OECD Common Approaches.
[13] Paragraph 26, the revised OECD Common Approaches.