The International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability are the benchmark for managing environmental and social risk in internationally financed projects. This guide summarizes what each one requires and what it means in practice for a project in Latin America.
What they are and who requires them
IFC, the World Bank Group institution that invests in the private sector, published the current version of its eight Performance Standards in 2012. They began as a requirement for its own clients, but many more institutions apply them today:
- Equator Principles banks. In non-designated countries, which include Colombia and most of Latin America, they assess projects against the Performance Standards and the World Bank Group Environmental, Health and Safety Guidelines.
- IDB Invest and other development finance institutions, whose sustainability policies refer to them.
- Export credit agencies of OECD countries.
- Investment and infrastructure funds that adopt them as internal policy.
The upshot is that, for an energy or infrastructure project seeking international debt, meeting them is in practice a condition of access.
PS1: Assessment and management of environmental and social risks and impacts
This is the umbrella standard. It requires the project to identify its risks and impacts, including those of associated facilities, cumulative impacts and supply chain risks; to manage them through an environmental and social management system; to engage with stakeholders throughout the life of the project; and to have a grievance mechanism.
In practice: the impact assessment prepared for the national permit is rarely enough on its own. The management system, the stakeholder engagement plan and the cumulative impact assessment are usually missing.
PS2: Labor and working conditions
It protects direct workers, contracted workers and, for child labor, forced labor and safety, workers in the primary supply chain. It requires human resources policies, fair terms of employment, non-discrimination, freedom of association, a workers' grievance mechanism and a safe and healthy workplace.
In practice: lenders look closely at contractor management, worker accommodation conditions and supply chain traceability, for solar panels for example.
PS3: Resource efficiency and pollution prevention
It requires techniques and performance levels consistent with the Environmental, Health and Safety Guidelines; efficient use of water and energy; management of waste and hazardous materials; and quantification of greenhouse gas emissions when they exceed 25,000 tonnes of CO₂ equivalent per year.
In practice: where national regulations and the World Bank Group guidelines differ, the project is expected to meet whichever is more stringent.
PS4: Community health, safety and security
It addresses the risks the project passes on to communities: traffic, hazardous materials, diseases associated with labor influx, the safety of infrastructure and equipment, and the conduct of security personnel.
In practice: this translates into a traffic management plan, an emergency response plan that involves the community, and security management consistent with the Voluntary Principles on Security and Human Rights.
PS5: Land acquisition and involuntary resettlement
It applies to physical displacement and to economic displacement (loss of assets or of access to livelihoods) caused by land acquisition or restrictions on land use. It requires displacement to be avoided or minimized, compensation at replacement cost, and livelihoods to be restored, including those of people without formal title to the land.
In practice: it is one of the most common gaps in linear projects and in projects that occupy large areas. The land acquisition process required by local law does not always cover tenants, sharecroppers, informal occupants or resource users.
PS6: Biodiversity conservation and sustainable management of living natural resources
It classifies habitats as modified, natural or critical, and requires no net loss of biodiversity in natural habitat, where feasible, and net gain in critical habitat. It also covers ecosystem services and primary production supply chains.
In practice: it requires a critical habitat assessment and, if triggered, a biodiversity action plan. Because it may call for additional surveys, it is best tackled early.
PS7: Indigenous Peoples
It requires adverse impacts on Indigenous Peoples to be avoided, a process of informed consultation and participation, and their free, prior and informed consent in specific circumstances: impacts on lands and natural resources subject to traditional ownership or under customary use, relocation, or significant impacts on critical cultural heritage.
In practice: identification follows the criteria in the standard, regardless of state recognition. Statutory prior consultation is an important foundation, but it may need supplementing to meet PS7.
PS8: Cultural heritage
It protects tangible and intangible cultural heritage. It requires heritage to be assessed, a chance find procedure to be in place, and the communities who use it or have used it to be consulted.
In practice: in Colombia, the preventive archaeology program overseen by the national archaeology institute (ICANH) covers much of the requirement. What is usually missing is extending the chance find procedure to all contractors and considering intangible heritage.
How they apply: categorization and proportionality
PS1 applies to every project with environmental and social risks. Standards 2 to 8 apply according to the risks identified: a project with no Indigenous Peoples in its area of influence does not trigger PS7.
Lenders also categorize each project by the magnitude of its risks (Categories A, B and C under the Equator Principles). The category determines the depth of the assessment, whether an independent review is required and how often monitoring takes place.
Where to start
If your project is in development, a gap analysis tells you what is missing against each standard and in what order to address it. If you are already in talks with lenders, the next step is environmental and social due diligence.
To understand how the standards differ from local regulation, read Colombian environmental license vs. IFC Performance Standards.