‘Cost involved in adopting environmental and social standards is an investment’

Nepal has long been talking about tapping its hydro generation potential to power its industries and households and export surplus electricity, which could help the flagging industrialisation process get a new lease of life and generate much-needed foreign income. As of now, Nepal is nowhere near the target due to government’s inefficiency, unfavourable policies and bureaucratic red tape. Yet, number of hydroelectric projects is gradually increasing. As more hydro projects are built, more people will be displaced, threatening livelihood; trees will be cut down, depleting biodiversity; and river flow will become erratic, affecting fishes and farmers, who use the water to irrigate fields. These environmental and social risks can be managed if people are relocated to safer places with adequate compensation, livelihoods are guaranteed, new trees are planted, and water level in rivers is monitored so that fishes do not die and farmers do not face water shortage. The Asian Development Bank and International Finance Corporation, private sector lending arm of World Bank Group, have been helping governments, lenders and hydro developers to manage these risks. Rupak D Sharma of The Himalayan Times met with Mary Porter Peschka, director of IFC, to discuss these issues, which are vital to make hydropower projects sustainable. Excerpts:

The IFC has been rallying for development of sustainable hydropower projects by encouraging governments, lenders and hydropower developers to embrace its environmental and social standards, which are also referred to as performance standards. What has been the response?

Our clients have to meet our environmental and social performance standards, as these features make projects sustainable. And sustainability is at the heart of the institution. But it is not only IFC-supported projects that are following our performance standards. Even projects in which we are not an equity partner or a creditor, choose to follow our performance standards or are inspired by our performance standards because they are beneficial. So, there are those who want to work with us because they have seen the benefits.

Projects implemented with the support of government-owned Investment Board and Dolma Impact Fund, a private equity, must follow performance standards of Asian Development Bank or IFC. But developers often complain these standards significantly raise project cost. What do you have to say?

That’s the major reaction often from private sector. But the academia and IFC have been able to show that cost involved in adopting environmental, social and governance standards is more of an investment, which can generate positive financial returns. So, as a triple ‘A’ rated financial institution, we’re doing our best to go out and show that it makes business sense to make those investments. We know our standards are high and we prefer to maintain those high standards around the world, irrespective of the context we work in. But in some markets and sectors, it’s going to take longer, cost more and require more support and capacity building to generate awareness about these standards. We are very committed to going on that journey with our clients.

Are you trying to say that even though the initial cost of adopting these standards is high, it will eventually pay off?

Yes. We did a survey among our clients and 91 per cent of them said they thought good environmental and social standards were good for their business. Academic empirical studies show a strong link between financial performance and environmental, social and governance reporting. A study conducted by Harvard Business School showed that firms with good performance on material sustainability significantly outperformed firms with poor performance on these issues. The study found that return on investment of such firms was six per cent higher. Other evidences throughout emerging markets show that adhering to high standards is a competitive advantage. Firms participating in sustainability indexes in Brazil, India, South Africa, and Middle East have outperformed their broader markets in recent years. This is why prominent global investors are increasingly seeking reliable public information about local firms’ environmental, social, and governance standards to make investment decisions.

It is also said IFC consultants, who look into environmental and social practices, are very expensive, and some of them are even flown in from as far as Washington, DC. Is this true?

The vast majority of environmental and social consulting work for our Nepali projects has been done by Nepali, Indian and Pakistani firms. Where highly specialised input, which is not available in region, is needed, we source it globally.

Have you discussed these issues with Nepal’s private sector? What is their response?

There seems to a real interest and hunger in Nepal to implement good environmental and social practices. Actually, a lot of private sector people that we have talked to genuinely want to follow these standards and actually don’t seem to worry much about cost. I’ve detected a real interest and enthusiasm. And I haven’t seen that everywhere in the world. So, that gives me a lot of hope for Nepal.

And what about the government? Even top bureaucrats and policy makers are not aware of these standards, isn’t it?

IFC has been working in Nepal’s hydropower sector for some time. Over the years, we have not only invested in projects, but provided advisory services too. The advisory services we provide also focus on building capacity of private as well as the public sector. We’ve worked with Ministry of Forests and Environment to help develop environment impact assessment manual. We’ve also started work in Trishuli River to undertake cumulative impact assessment of the river basin. The assessment will give us an opportunity to step back, take stock, see projects that have been developed in the river so far, become familiar with future development plans in the river and evaluate potential cumulative impacts on the basin, which is a public good that should benefit the country. Recently, we also conducted a study with multiple stakeholders here in Nepal to look at the mechanism of distributing (10 per cent) shares (of hydropower projects) to locals. So, we studied the implementation of the concept in varying contexts across country to try to find ways to develop some guidance on how to best implement it going forward and how to make sure local communities are truly understanding benefits and risks. Building a sustainable hydro project is not just about getting a private sector developer to adhere to our standards. It is about working with government, helping it formulate and implement best guidance for this context, and helping build capacity.

Risk management in hydropower sector is complex, isn’t it?

Hydropower sector in general is a complex area to work. There are land acquisition and resettlement issues that need to be addressed. There is the issue of diverting water which can affect farmers and fishes. During the construction phase there is often a large influx of construction workers, who necessarily do not come from the immediate area, and stay there for years. So there is whole host of environmental and social risks that need to be identified early on so that you can make a plan to manage them.