Environmental & Social Standards in Project Finance: Overview, Current State of Play

Global development banks and other financial institutions have been imposing environmental and social (E&S) requirements on borrowers in project finance matters since the 1990s. Cultural considerations, reputation, stakeholder pressure and, in the case of development banks, a desire to protect and support the communities and natural resources in their relevant geographic areas, all drive these requirements, but the ultimate goal is sustainable development.

This memorandum provides an overview and summary of seven existing E&S frameworks. It is important for both borrowers and these financial institutions to be familiar and have a facility with the varying E&S standards found in these and other similar frameworks. For borrowers, integrating the different but overlapping E&S standards at the outset is critical to success: the standards impose complex and comprehensive requirements, the compliance with which can affect the timing and viability of the loan, and success of the project overall. These same considerations apply for the financial institutions, which should also try to understand what may be considered best practices. Although there is clear overlap in the E&S standards of the ADB, EBRD, EP, IFC, OECD and World Bank, as well as acknowledged collaboration among many of them, these standards are not coextensive and different institutions can apply them in ways that result in different requirements and outcomes. Elements of these E&S standards are seen in the non-project finance context as well, with mandatory and voluntary disclosure of E&S matters becoming increasingly important to shareholders, investors, asset managers and other stakeholders. Understanding these E&S standards in project finance could, therefore, help predict what these stakeholders might want or need more generally in the future.