Failure to effectively manage Environmental and Social (E&S) issues in a business can lead to a range of financial, legal and reputational consequences for the company, some of which includes; unexpected costs associated with payment of fines for non-compliance with environmental, sanitary, health, safety and labor laws, workplace accidents and low productivity, legal requirements, damage to employees health, irredeemable contamination or obsolescence of equipment, and damages arising from legal liability for damage to the environment, human health or property.
In the last edition, we described unsustainable production practices and how much of a challenge it contributes to the achievement of sustainable development in developing nations. At the centre of unsustainable production patterns lies environmental and social risk, pertinent to private sector players.
Environmental & Social (E&S) risks refer to the potential negative consequences to a business that results from its direct and indirect impacts on the natural environment or on its Stakeholders (i.e. employees, customers, community).
A typical globally cited example of organisational damage from E&S risks is the 2013 Tazreen Fire which claimed the lives of about 112 workers in Bangladesh. The employees were working overtime producing clothes for top American retailers including Walmart. Consequently, all companies known to procure the services of the Tazreen factory and its workers were mandated by the Clean Clothes Campaign and the International Labor Rights Forum to contribute to a fund established to make payments to the families of the 112 workers killed and those permanently injured.
A more recent example in Nigeria is the Codeine scandal of May 2018, which resulted in the temporary shutdown of three pharmaceutical companies by the National Agency for Food and Drug Administration and Control (NAFDAC). Although Codeine is a pain killer, it is equally an addictive opioid that should not be sold without prescriptions. However, due to negligence in supply chain management, there was an illegal distribution of codeine without a formal prescription, leading to the abuse of the drug.
These are just a few incidents which have created negative consequences for the affected business operations, finances and reputation. Clearly, the cost of incorporating sustainable production patterns and consumption across a business’ supply chain is far affordable compared to the cost of the damage that could result from its absence. With more incidences and organisational damage in recent times, there is need for a more effective Environmental and Social Risk Management system in every organisation, especially within the manufacturing and Fast Moving Consumer Goods (FMCG) industry and the Oil and Gas Industry.
An Environmental and Social Risk Management System refers to a set of policies, procedures, tools and internal capacity needed to identify and manage an organisation’s exposure to environmental and social risks. It has become more important now more than ever for Private sector players to be more accountable to the environment and community in which they operate in. Progressively, certain sectors have made considerable progress in factoring the integration of E&S Risk management procedures into their operations. Recent happenings in the Oil and Gas sector have resulted in the financial community adopting Sustainable banking Principles following the role they assume in funding these activities. Consequently, E&S activities of major players in the manufacturing sector, Oil and Gas sector, Agricultural Sector as well as other extractives have been somewhat regulated to an extent.
The Nigerian Sustainable Banking Principles (NSBP) was created by the members of the Bankers Committee in recognition of the Nigerian banking sector’s role and responsibility in delivering positive development impacts to the society whilst protecting the communities and environment in which it operates. NSBP consists of 9 over–arching Principles which includes : Managing environmental and social risk in business decisions; Managing the bank’s own environmental and social footprint; Safeguarding Human Rights; Promoting women’s economic participation/empowerment; Promoting financial inclusion of communities and groups with limited or no access to the formal financial sector; Meeting the imperatives for good governance, transparency and accountability; Supporting capacity building in the sector; Promoting collaborative partnerships to accelerate sector progress and Reporting to take stock of sector progress and attendant needs. Out of the nine principles, the first two principles relate to the management of Environmental and Social Risks. There are also specific guidelines for financial organisations that directly invest in certain risk volatile sectors of oil and gas, power, and agriculture. As such, these institutions cannot invest in any organisations within these three industries that do not assess E&S Risk management.
Therefore, although the NSBP requires that Banks integrate environmental and social considerations into their own operations, activities and decision-making process, they also avoid financing business projects that result in adverse negative impacts to the environment. The objective of this is to ensure financial institutions can effectively access and manage the level of E&S risk exposure associated with clients. Where avoidance of E&S risk is not possible, banks are required to engage with the client to minimize and/or offset identified risks and impacts. At a minimum, Banks’ E&S policies must commit to strictly review and potentially decline clients or engagements that do not comply with local E&S laws and regulations. Incorporating the Nigerian Sustainability Banking principles proffers many benefits to the Banks that incorporate them. A recent survey by the IFC revealed that that there are several benefits banks have obtained from incorporating sustainability into their strategy and business practices, ranging from improved reputation to improved investor confidence.
Environmental and Social Risks occur in every industry, hence the need for an Environmental and Social Risk Management Policy in every industry and organisation.
The Mining Industry, for one, has the potential to cause a range of environmental and social risks, including, but not limited to, water use and availability, contamination of land and water, harmful emissions to air, noise pollution, large footprint/land take, extensive rehabilitation required at mine closure, health and safety of workers, security, resettlement, physical and economic impacts on local residents. In the construction and operation of rural mini grids, waste disposal of lead-acid batteries and lithium batteries, stress on local water use and supply, construction impacts (including community and occupational health and safety), all pose as systemic risks, if not managed well affect the environment. Different Industries in the Manufacturing sector are also plagued with several environmental and social risks; the most common ones are work place safety, use of child labor, use of harmful raw material, false advertisement e.t.c.
Can we then Achieve Sustainable Production Patterns?
In as much as Environmental and Social risks can result in consequences such as negative publicity, production delays, threats to operating licences and unforeseen expenditures, the most detrimental effect is on the environment and community a business operates in. Therefore it is imperative for Governing bodies and Associations to focus on implementation and accountability from private organisations of universal Environmental and Social risk management across production lines in the country. This will more likely move the nation a step towards achieving the Sustainable Development Goals come 2030.
Furthermore, E&S conditions and requirements should be integrated into daily business operations of all businesses in order to avoid costly consequences, even as banks need to be more committed to the requirements of the NSBP and ensure that credit is not extended to projects that have severe negative impacts on the environment.