Considering the construction sector globally represents more than 50 percent of the world’s wealth, is one of the largest sectors in terms of economic output and employment, and has a considerable environmental impact - it accounts for 36% of the global energy consumption and accounts for up to 39% of all CO2 emissions; the integration of ESG factors is vital for our investment practice.
To make ESG integration consistent throughout our investment process, we have a three steps check of ESG risk and impacts at the individual project level. First, the structuring team assesses the ESG risk level of an investment based on the IFC exclusion list, the project’s characteristics and the AAIF. Secondly, the ESG team conducts in depth diligence on the proposed project site and development partner. Finally, the investment committee makes decisions considering the ESG information presented by the structuring and ESG teams. All three steps involve the participation of either the ESG team or taskforce, as described below.
A. Initial Screening and Notification
The first step is the Initial Screening and Notification process for new projects, which determines the extent of environmental and social due diligence required. The ESG workforce reviews all pertinent documentation provided by the prospective partner, as well as additional relevant sources including public records and databases. With that information, the team assigns an Environmental and Social (E&S) risk category, using an approach consistent with the International Finance Corporation (IFC) Performance Standards.
We evaluate the potential risk of a project on a case-by-case basis, and the E&S risk categorization system enables us to monitor and evaluate our potential exposure to environmental and social risk aggregated at the portfolio level:
Category A Projects: are likely to have significant adverse environmental and/or social impacts that are irreversible, sensitive, diverse, or unprecedented. In the absence of adequate mitigation measures, Category A Projects are considered high risk. Example, large developments in sites of significant environmental importance or where resettlements of large groups of people are required.
Category B Projects: are likely to have limited adverse environmental and/or social impacts, are generally site-specific, largely reversible and readily addressed through mitigation measures. Category B Projects are considered medium risk. Include, but are not limited to, small to medium scale housing of up to 2,500 units in non-sensitive environmental areas, and retail developments in urban infills.
Category C Projects: are likely to have minimal adverse environmental or social impacts. Include land acquisitions to be sold after obtaining urbanization and/or licenses/ permits.
Additionally, the structuring team reviews the E&S risks of a proposed project or partner according to the following:
• If a project involves an excluded activity as listed in the IFC Exclusion List, it will not be considered for investment
• If a development partner has a history of environmental and social incidents that have not been adequately managed, it will not be considered for partnership
All findings during the preliminary investment appraisal are documented and a summary of key risks and opportunities is detailed in the investment memorandums reviewed by the Investment Committee.
Subsequently, in cases where environmental and social issues are identified, corrective actions according to the impact hierarchy proposed by the IFC will be stipulated in agreement with the development partner. We monitor the progress of the corrective actions as well as the E&S performance of the projects throughout their execution.
B. Due Diligence
After all ESG risks have been categorized and documented, we define the appropriate due diligence required by risk level:
• Review of E&S good standing, E&S compliance, and property rights for proposed development site (All Categories). Regardless of the sourcing of the proposed project (i.e. in-house sourcing, project presented by known partner or by potential partner), the due diligence process begins with a desktop review or a visit to the competent authorities to assess previous or current social and/or environmental disputes involving the proposed development site. At a minimum, the review includes previous and current land use, property rights clearance, current occupancy and terms, and environmental sanctions.
• Review of the development partners' track record on E&S issues including potential non-compliance with national regulations or negative publicity (Categories A and B). We have developed long-term relationships with well-established development companies and currently work with trusted partners. Nonetheless, as part of the environmental and social due diligence process we conduct a thorough review of a potential partner's track record including but not limited to compliance with environmental and social laws at the local and national level including previous sanctions, and existence of environmental and social policies and initiatives including Environmental and Social Management System (ESMS).
• Review of the development partners' performance against international standards or industry best practices regarding environmental and social issues (Categories A and B). In order to achieve superior risk adjusted returns through our development projects, we look for best-in-class partners who are specialist in our projects' asset types and align with our social and environmental commitments.
• Review of the development partners' actions to mitigate potential environmental and social issues associated with operations (Category A only). When reviewing the track record of a prospective partner we assess the previous actions taken and mitigation plans designed when considering E&S issues. We conduct a desktop review of the legal documentation of environmental and social management plans for previous projects of large scale. We categorize large scale as development sites over 10 hectares, residential developments more than 2,500 units, large retail developments in urban locations, and projects where local regulations require environmental and social surveys and mitigation plans.
• Site visit to the proposed project site (All Categories): As part of the project due diligence, we conduct site visits to gather additional information and corroborate/contrast the findings of the desktop review as described above.
Upon completion of the due diligence, its findings, conclusions, and recommendations are presented in an Environmental and Social Due Diligence report (ESDD). The recommendations include the actions required for the proposed investment to proceed to closure. These describe the contractual mitigation, management and, monitoring measures required.