ESG and the successful delivery of major projects: key considerations for project proponents - Construction & Planning

The development of any successful major project goes through several stages.

Many proposed projects fail at an early stage, usually because they are not economically viable. Others pass through these stages yet fail to achieve their economic objectives, including failing to properly take account of environmental, social and governance (ESG) matters.

The various stages of a project include:

Acquiring the title or rights which underpin the project.
Obtaining environmental and planning approval.
Capital raising.
Conducting further due diligence on the project's viability, including considerations associated with project finance.
Obtaining final approvals for the project, including all environmental, development and construction approvals.
Constructing infrastructure necessary for the project, ensuring that the time, cost and quality of the construction meets required standards to achieve project viability.
Operating the project.
Selling or decommissioning the project.

Below, we explore the ESG matters that should be carefully considered at each of these stages.

Establishing the property rights necessary for the project to proceed

The project proponent must do sufficient due diligence to satisfy itself that it is obtaining clear title to the necessary assets or rights which underpin the economic purpose of the project.

First Nations rights and interests in land are formally recognised over around 50 percent of Australia's land mass. For projects being developed on First Nations lands or seas, genuine engagement with First Nations people is paramount. To protect against the future operational, regulatory, reputational and, ultimately, financial risks, project proponents should identify and consult First Nations people with connections to the land, sea and sites of cultural significance to obtain free prior and informed consent (FPIC) before finalising project plans.

FPIC has both procedural and substantive requirements. It is a principle derived from the right to self-determination, articulated in the United Nations Declaration on the Rights of Indigenous People (UNDRIP), and required as an indication of respect for Indigenous peoples, to enable them to realise their rights and to ensure their protection. FPIC should be realised before any rights are impacted, which means well before the project begins. Engaging in respectful consultation with impacted First Nations communities to obtain consent will assist in the planning and permit process and help prevent operational delays. It is also an important part of a social licence to operate. The Federal Court has recently demonstrated a willingness to identify principles consistent with FPIC in legislated consultation processes. ¹

Fulsome community engagement and a deep understanding of the potential impact of project externalities on the local community more broadly, and in particular more vulnerable members of that community, is also becoming increasingly critical.

This year, some major projects have been affected by injunctions or other allegations that relate to ESG matters. Subsequent claims that there has been a failure to properly take account of ESG issues can lead to very significant delays to the critical path to completion of the whole project. This is particularly so in a current regulatory environment where there has been a significant widening of the gap between social expectations and legal obligations necessary to operate. Delays to completion, and therefore income generation, will lead to a consequential diminution in the net present value of the project. In serious cases, such a delay can result in the assumptions in the business case being falsified to the extent that the project is no longer viable.

Environmental and planning approvals

It is also important to ensure that there are no fundamental environmental issues which will preclude the proposed project. These issues are also important at the time of establishing rights to the necessary property for the project. If there is a known environmental issue that will preclude development, the acquisition should not proceed.

Increasingly, public interest groups are searching for failures by project proponents and regulatory authorities in the approval process. If relevant environmental and planning approvals are not properly obtained, serious delays to the project can occur. Moreover, the existence of an approval from a regulatory authority does not guarantee that the approval will survive judicial scrutiny. Where a challenge is successful, the approval can be effectively scuppered. As has occurred recently in Australia, projects can also stall pending the determination of a legal challenge due to uncertainty about future outcomes, causing delay and loss.

Relatedly, equity participants purchasing an interest in the project after, and in reliance upon, approvals which have been granted, ought to complete their own due diligence to ensure that all proper processes were undertaken by the regulatory authority when issuing the approval and question whether the regulatory regime in the context of the relevant project is fit for purpose. In circumstances where the law in the project approvals space is being tested in novel ways, administrative law appeal risk should be evaluated at the outset and through the assessment and approval process.

Capital raising

Investor engagement over the project lifecycle brings its own ESG demands. In many cases investors are signatories to international standards such as the Equator Principles Association Equator Principles EP4 (July 2020), the International Finance Corporation Environmental and Social Performance Standards (2022), or the United Nations Principles for Responsible Investment (2006). Investors who commit to these standards are required to undertake a level of due diligence and understand project performance across a range of environmental and social standards including climate and biodiversity, labour and working conditions, land acquisition and resettlement, cultural heritage and Indigenous peoples.

There is evidence to show that strong ESG management by the project proponents can lead to a reduced cost of capital of up to ten percent. Investors and financiers have historically relied upon approvals given by regulatory authorities as evidence that any environmental issues associated with the project have been resolved. However, governmental approvals have recently been challenged because the process required of the relevant authority was not followed.²

Accordingly, there is a heightened need to ensure that approvals satisfy relevant legal requirements and otherwise satisfy the reasonable expectations of various stakeholders affected by the project. These matters involve issues beyond the satisfaction of strict legal requirements and generally extend to issues relevant to the social licence to operate, as discussed below.

Debt funding

Project financiers will be very interested in ensuring that adequate title to the relevant rights is available and that the interests and rights of First Nations people have been dealt with in a way that ensures the project's success.

Likewise, the financiers will need to be satisfied that the environmental and planning approval process is sufficiently advanced, such that the risks associated with approvals are manageable. Even if the current problems inherent in some vague language used in legislation are resolved, it is apparent that community interest groups will be imaginative in ensuring that there is strict compliance with any relevant ESG requirements mandated by law.

Obtaining final planning and environmental approvals

Prior to construction commencing on site, all of the final environmental approvals and pre-construction certifications are required. These approvals generally relate to minor issues such as how construction is to be performed without unduly disturbing the local environment (for example, regulating construction of a pipeline across an existing stream).

Nonetheless, these approvals are important and, if not obtained in an orderly fashion, can delay the project and increase costs or otherwise where not complied with result in actions being taken that are still unlawful.

Construction

The construction of any major project requires a sensitive approach to matters arising under State and Commonwealth legislation. However, environmental and social issues that go beyond legislative and regulatory requirements can arise if stakeholder expectations are not met. This may arise in respect of the expectations of First Nations people regarding certain projects. Nevertheless, the management of these expectations extends to other stakeholders and can relate to matters involving material selection, water consumption, human rights and procurement practices. Despite significant efforts to identify heritage issues prior to commencement of construction, it is necessary to manage new heritage issues which arise as a consequence of discovering matters of Aboriginal heritage during construction.

Unknown heritage issues can also give rise to the abandonment of projects, even after construction has commenced. The proposed construction of the Hindmarsh Island Bridge in South Australia is an extreme example. Objections were raised by Doreen Kartinyeri and others that it would desecrate a site of traditional Aboriginal secret women's business, which could not, for cultural reasons, be disclosed to men. Owing to these heritage issues, in 1994 the Federal Aboriginal Affairs Minister Robert Tickner issued an order stopping the project. But after an unsuccessful High Court challenge by the objectors, construction of the bridge recommenced and it was officially opened on 4 March 2021, a delay of 27 years.^³

Operation

When operating a project facility, solid environmental and human rights due diligence management plans should be in place. This includes modern slavery due diligence programs that allow the project proponent to be confident that the facility is not exposed to modern slavery and that any modern slavery disclosures are verifiable. The facility should also consider ensuring operational grievance mechanisms are in place to manage human capital and human rights risks within the workforce, and within the community impacted by the project. Environmental and social impact assessments may no longer suffice to identify all the ESG risks to which a project is exposed.

While not always a legal issue, the social licence to operate is also an important consideration. A failure to have regard to these issues, which in many cases will exceed the legal requirements, may cause significant reputational damage or even loss of the project.

Decommissioning

Issues associated with the decommissioning of projects are becoming apparent, as facilities and infrastructure past their economic life are increasingly being decommissioned. Examples include AGL's decommissioning of the Liddell Power Station and Energy Resources Australia's decommissioning of the Ranger uranium mine in the Northern Territory.

Often overlooked 30 or 40 years ago, the costs of decommissioning are very high and are to be borne by the project proponent(s). The relevant State Government authorities will often require bonds to ensure that the relevant decommissioning work is done properly.

Accordingly, it is important, both at the outset of the project and during its operation, to understand the cost implications associated with decommissioning and to make provision for it. During the course of operation, it may also be appropriate to manage the project in a way which limits decommissioning at the end of the asset's life.

Looking ahead

Strong ESG risk management brings significant benefits, not only to the environment and stakeholders impacted by the project, but also to project proponents. Strong stakeholder engagement can help to identify and address concerns, as well as any issues that arise early in the project cycle.

Consideration of human rights, including FPIC and environmental (including climate and biodiversity) risks, helps minimise any external project impacts and also identifies and mitigates risks that may arise in the development and operation of the project.

In the past, ESG risks and impacts have been considered as non-financial risks. However, there is now little question that many of the risks arising (for example, climate risks) are considered material to the business with both commercial and financial implications. Organisations that ignore the need for strong ESG management do so at their peril.

Footnotes

¹ See the Federal Court's decision in Tipakalippa v National offshore Petroleum Safety and Environmental Management Authority (No.2) [2022] FCA 1121 (the NoPSA case) and the Full Federal Court's clarification of the requirements for consultation on appeal, Santos NA Barossa Pty Ltd v Tipakalippa [2022] FCAFC 193. See also Corrs article, FPIC in the Australian context: now and into the future, 1 May 2023.

² See the NoPSA case (supra).

³ Kumarangk Coalition, 'Stop the Bridge: respect and protect Kumaranggk / Hindmarsh Island', State Library of South Australia, 1994.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.