THE LOGIC BEHIND ESSAFIN
Our software framework
The ESSAFIN Logic risk analysis tool doesn't rely on unverified voluntary reporting mechanisms or trial and error to evaluate ESG risk. Our ESG risk tool is used upfront before the investments are made, firmly based on ESG principles, and shaped by seasoned professionals with over 50 years of collective experience.
Financial institutions have considerable influence over their lending criteria for individuals, corporations, or governments pursuing project funding. In general, these criteria focus on a surgical review of the borrower’s ability to repay the loan. If the borrower meets the requirements of the lending institution, the funds are provided. Upon receipt of these monies the borrower is highly motivated to move their project forward in order to minimize additional costs associated with servicing the loan.
Understandably, this financial pressure is downloaded to consultants, scientists, engineers, and other professionals responsible for completing design specifications, procuring permits/authorizations, and, implementing construction. As a result of the pressure to get the project finished and operating, environmental and social values may not be thoughtfully considered as part of the process. Moreover, in jurisdictions where legislative requirements to protect environmental and social values are slack, or completely lacking, these values may receive no consideration.
The purpose and intent of ESSAFIN Logic is to identify and mitigate risk at an early phase before the project’s momentum results in potentiated impacts to economic, environmental, or social values. By applying this approach the positive outcomes are both real and verifiable. Ultimately, the goal of ESSAFIN Logic is to initiate an organizational behavior of continuous improvement and incentivize projects that voluntarily consider and incorporate environmental sustainability and social accountability.
THE 10 EQUATOR PRINCIPLES
The 10 Equator Principles have removed the barrier to environmentally sustainable and socially accountable financing.
Principle 1: Review and Categorisation;
Principle 2: Environmental and Social Assessment;
Principle 3: Applicable Environmental and Social Standards;
Principle 4: Environmental and Social Management System and Equator Principles Action Plan;
Principle 5: Stakeholder Engagement;
Principle 6: Grievance Mechanism;
Principle 7: Independent Review;
Principle 8: Covenants;
Principle 9: Independent Monitoring and Reporting; and,
Principle 10: Reporting and Transparency.
OUR EVALUATION METHOD
1. Life Cycle Thinking
ESSAFIN Logic incorporates Life Cycle Thinking (LCT) into the evaluation of risk for a proposed project. Selection of the project type, material sourcing, and the design concept all influence the cradle to grave assessment of environmental impact. Considering life cycle impact assessment (LCIA) with standardised temporal boundaries allows for an unbiased evaluation of risk. Given the importance of monitoring for both the Equator Principles and LCIA, ESSAFIN Logic gives additional recognition for corporations prepared to carry out project monitoring for the entire operational life.
2. Risk Characterisation
In line with Principle 1: Review and Categorisation, the risk characterisation phase assesses the potential for impact to environmental and social values based on existing information from similar projects. However, unlike the principle, risk characterisation refines the assessment with greater specificity. For example, a properly designed and constructed open pit mine in a region with limited environmental sensitivities and no historic or current human presence may be characterised as having low risk. Alternatively, the construction of a simple clear span bridge across a stream that is a major spawning area for salmon could have serious risk to the survivability of the species. The added specificity allows for financing well planned, innovative, and leading edge projects that can transform sectors which may otherwise be denied based on historic experiences.
3. Regulatory Setting
The regulatory setting section integrates the majority of the equator principles. Depending on the sophistication of the regulatory setting the jurisdiction may:
require environmental and social assessments (Principle 2);
legally enforce criteria and standards (Principle 3);
require implementation of environmental and social management systems (Principle 4);
mandate a public consultation process with a requirement to satisfy comments and concerns (Principles 5 & 6);
require third part validation of the process (Principle 7);
legally enforce covenants and security bonds (Principle 8); and,
require third party monitoring and annual reporting that is publicly available (Principles 9 & 10).
ESSAFIN Logic considers the Equator Principles in the regulatory setting section and provides additional weighting for those specific criteria. However, it is understood that the regulatory framework of a jurisdiction often applies as a safety net for the uninformed, or, to address poor historic corporate practices. This circumstance, combined with the reality that some jurisdictions with comprehensive regulatory systems do not implement, or, other jurisdictions have very limited legislative requirements, can generate considerable uncertainty for risk evaluation. As such, voluntary measures to achieve international standards (e.g., ISO) and a demonstrated commitment to life cycle thinking can offset a poorly implemented or limited regulatory setting.
4. Primary Assessment
The section forms the basis for understanding the project setting, the potential environmental and social impacts (both positive and negative), and, the mitigation plan for managing undesirable effects. The primary assessment will provide commitments that will ultimately be incorporated in the loan agreement. In instances where impacts are unavoidable, or, the risk rating is elevated, offsetting or financial bonds may be required.
The primary assessment will address the IFC Performance Standards which include:
assessment and management of environmental and social risks and impacts;
labour and working conditions;
resource efficiency and pollution prevention;
community health, safety and security;
land acquisition and involuntary resettlement;
biodiversity conservation and sustainable management of living natural resources;
indigenous people; and,
In addition to these standards, ESSAFIN Logic also provides consideration for an organization’s analysis of project alternatives and a cumulative effects assessment. The alternatives assessment allows the proponent to exercise unconventional thinking in order to reduce environmental and social impact at an early stage. The cumulative effects assessment consider impacts from clustering projects and opportunities to participate in the circular economy.
Lastly, ESSAFIN Logic emphasizes a thorough evaluation of the three pillars of sustainability. economy, environment, and society are inextricably linked and provide balance and stability necessary to minimize a project’s risk.
The final section addresses socio-economic impacts (positive or negative), cultural heritage, and archaeology. Although these aspects may already have been accounted for in the primary assessment, there are circumstances in which the principal environmental focus overshadows social effects and accountability. In the event there are unresolved community related issues, ESSAFIN Logic reserves supplemental criteria and weighting to address these risks.