Definition
The report titled ‘the Independent Social and Environmental Due Diligence Review’ is a report that is based on the methodology and criteria as defined by the Equator Principles. This report is ordered by developers, banks, and investors who adhere or are members of the Equator Principles. The report indicates if the investment or portfolio adheres to the principles. Often, this is a due diligence that members of the Equator Principles accept.
– Use: to verify that investments, acquisitions, or real estate portfolios adhere to the Equator Principles.
– When ordered: usually during the due diligence phase of an investment. This is when the project is under a binding contract – either a purchase contract or a loan agreement. The reports may also be ordered as a step in the Equator Principles member approval process.
LOGAN offers ESG Consulting and one focus area is the Equator Principles and the reports that members need to certify their projects or portfolios. Since LOGAN has offices regionally in Latin America, it has broad coverage including Mexico, Colombia, Peru, and Central America. Asset evaluations usually include a construction or development aspect, however, they may also be ordered for constructed projects (acquisitions). Evaluations can also be developed for portfolios of assets – this is usually a scope ordered by fund managers who have portfolios of properties. LOGAN has a methodology to evaluate each asset, then summarize the overall adherence of the fund or investment vehicle.
Types
Below are the types of projects that most commonly order an Independent Social and Environmental Due Diligence Review:
Financing of greenfield projects – usually these are projects that have major social and environmental impact for a given area or neighborhood.
Corporate Loans – these loans are often given for real estate funds or real estate developers at a entity level or portfolio level. The entity giving the loan may need to verity that such loan is in conformance with the Equator Principles.
Project Refinancing – sometimes there is a need for new capital for projects. New loans given by members of the Equator Principles, may require this type of due diligence report to be completed prior to funding.
Acquisition Financing – sometimes new real estate acquisitions are financed by members of the Equator Principles and may need to be studies for compliance to the standard.
Bridge Loans – bridge loans allow for some borrowers to finish construction or lease up of real estate projects. Sometimes foreign sources of capital are needed in order to ‘bridge’ the gap in financing. When the investor or lender is a member of the Equator Principles, an asset level report may be needed.
Process
Investigation
Project – this is completed on the asset level evaluations. The plans of the project are studied, and government sources of information are consulted. This phase also includes interviews with the management of the project to understand its history, and how it was conceived.
Company – the company or sponsor of the project is also researched to determine its history, background, and some of the projects it has completed. This also includes conversations and interviews with the owners or managers.
Review and Evaluation: The project, portfolio or company is then compared to the standards of the Equator Principles in order to determine the level of adherence to such principles. Sometimes this is done on a quantitative basis and ranges of comparable companies or projects are consulted. Also, there are qualitive methodologies implemented to qualify the subject of the study.
Production of the Report: The report is compiled in narrative form that includes an explanation of the methodology, the research completed and investigations of the subject, and finally the evaluation of the subject. A final evaluation and conclusion are given as to the subject in terms of its social and environmental impact and adherence to the Equator Principles.
Compliance Commitment: The customer commits to comply with all laws, regulations, environmental and social permits necessary to meet the standards.
Impact Factors
Environmental – greenhouse gas emissions, efficient utility use (electricity, water), contamination levels, preservation of natural materials (use of recycled materials), reduction in excess wastes.
Social – health, well-being, and integration within the social construct of the neighborhood or area.
Organizational – competitiveness, access to information, employee performance and satisfaction, communication levels.
Economic – efficient operation and reduction of costs, optimization of project lifecycle, and increased productivity and value growth of the subject.
Important Inputs
– Company and project history
– Evaluation of the environmental and social impact (EIAS)
– Project ranking or comparison against competitive ranges
– Environmental and social management plan (PGAS)
– Environmental and social management system (SGAS)
– Stakeholder impact plan (SEP)
– Interviews with management and stakeholders
Recent Trends
New laws which govern sustainability in Latin America and company responsibility for impacts on the environment
Rules developed in Latin American countries that govern sustainable investments – and have begun to include evaluation of such factors as social impact and environmental impact of investments.
Implementation of ESG principles by the IFC and other development banks in the region.
Increased participation in organizations that provide standards for social governance and environmental protection (GRESB , Principios de Ecuador, PRI).
Deliverable
The report consists of the following sections:
1. Introduction – objective, scope and methodologies used.
2. Project identification, description of the subject, phases, physical characteristics, lifecycle and purpose.
3. Description of standards applicable to the project or subject.
4. Evaluation of the subject against the ESG standards and or ranges of other comparable projects or companies. This is done on a quantitative and or qualitative basis.
5. Action plan to bring the project – portfolio into conformance with the Equator Principles.
6. Appendices – relevant information of the project and standards. This can include overviews of the subject, and data relevant to the project.
7. Conclusion – final conclusion of the adherence to the standards applied.
