Effective management of ESG risks in major infrastructure projects
31 August 2015
By Mark Hoff, Jaideep Das, Sarah Murfitt and Alec Martin, ERM
This chapter was first commissioned for and published in Infrastructure Investor’s Infrastructure Risk Management. The web link to the book is: www.infrastructureinvestor.com/risk/
Risk and project management are often part of a company’s or investor’s business processes, but non-technical risks and the influence of Environmental, Social and Governance (ESG) factors are often overlooked or not fully accounted for.
Emerging markets present a wide range of ESG challenges, but in fact research shows that the trend in severe delays and overruns is actually higher in developed countries. This can clearly be attributed to those countries not sufficiently addressing environmental and social issues. In emerging markets, however, insufficient design, planning and regulatory capacity, the lack of smart IT tools as well as a shortage of skilled labour and project management capacity, are also often common issues, thereby stressing the need for a social or people-based approach.
To be successful in this respect, a company needs to look at the lifetime impacts and benefits of a scheme (for example in terms of water, energy and local communities). This can apply from the earliest conception – that is ‘communicate at point zero’ and ‘incorporation of sustainable design’ in the project development or process. It continues to be important right through to the operational phase in order to maintain social licence, operating margins and investment value, particularly if an exit is considered. Infrastructure projects need to meet ESG objectives within a prescriptive regime of cost control and future revenue generation, but doing so effectively can actually increase value and future revenue.
This chapter focuses primarily on project-level implementation of ESG management; these could be part of a project finance model for infrastructure assets, but the underlying ESG issues and lessons learnt are likely to be applicable to all types of infrastructure investments, project developments and portfolio companies.
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