On most internationally financed hydropower projects, the lenders appoint an independent environmental and social advisor. The role goes by several names, including lender’s E&S advisor, independent environmental and social consultant (IESC) and lender’s technical advisor for environmental and social matters, but the purpose is the same: to give the lenders an independent, expert view of the project’s environmental and social risks, and to follow those risks through to operation.
Why lenders appoint one
Lenders financing large infrastructure need confidence that the project meets the standards they have committed to, typically the IFC Performance Standards, and that it will continue to do so. The Equator Principles, for example, require an independent review of the assessment documentation for higher-risk projects, and independent monitoring and reporting after financial close. Development finance institutions have equivalent requirements under their own safeguard policies.
Hydropower projects are usually in the highest risk category because of their scale, their effects on rivers and the communities that depend on them, and the long construction period. That makes an experienced advisor particularly important.
What the advisor does, phase by phase
- Before financial close. Environmental and social due diligence: reviewing the ESIA and management plans, visiting the site, identifying gaps against the lenders’ standards, and agreeing an Environmental and Social Action Plan with the sponsor.
- At financial close. Helping the lenders translate the findings into the finance documents, so that the action plan, conditions and environmental and social covenants are clear and workable.
- During construction. Periodic site visits and monitoring reports, tracking progress against the action plan and covenants, and flagging emerging risks early.
- Into operation. Monitoring reservoir impoundment, commissioning and long-term commitments such as biodiversity management and livelihood restoration.
Independence and relationships
The advisor works for the lenders, and their independence is what gives their findings weight. That does not mean the relationship with the sponsor should be adversarial. The most effective advisors are constructive: they explain clearly what is required and why, and they help the sponsor find practical, cost-effective ways to get there. The aim is a well-managed project, not a long list of findings.
What lenders should look for
- Sector knowledge. Hydropower risks are specific. An advisor who understands flows, sediment, fish passage, resettlement and dam safety will ask the right questions early.
- Seniority. The person whose name is on the proposal should be the person on site and writing the report.
- Proportionality. Findings should distinguish clearly between material issues and minor ones.
- Continuity. Using the same advisor from due diligence through construction avoids issues being rediscovered and keeps costs down.
- Clear reporting. Reports should be written for credit committees, not only for specialists.
What sponsors can do to make it work
Sponsors get the most from the process when they share information early and completely, put their own environmental and social team in front of the advisor, and treat the action plan as a project management tool rather than a compliance burden. An independent gap analysis before formal due diligence can save months.
How we can help
Confluentia acts as lender’s environmental and social advisor on hydropower and pumped storage projects, from early screening through due diligence and construction monitoring. See our track record or get in touch.
