Avoid a Fatal Flaw: Include social due diligence in your independent engineering review

Environmental and Social Due Diligence (ESDD) assessments play a crucial role in financial evaluations for institutions, mergers, acquisitions, project milestone audits, and gap assessments. These assessments are often part of larger independent engineering reviews that incorporate environmental and social factors – and for?good reason.

In 2024, EY identified environmental, social, and governance (ESG) risks as the top business risk for mining and metals companies worldwide, highlighting heightened investor expectations and increased stakeholder scrutiny—up from risk #8 in 2023. Similarly, Deloitte emphasized ‘social purpose’ as the leading business trend, underscoring the need for organizations to prioritize broader societal goals beyond profit margins.

For this discussion, we’ll focus on the “S” in ESDD—the social evaluation. Consider a scenario where a transmission line is being confidentially prepared for a ‘go-to-market’ strategy. An independent review will help the seller understand the various engineering, organizational, governance, environmental, and social risks before the asset is listed.

When conducting a social due diligence as part of an independent engineering review or on its own, several critical elements should be considered:

1. Comprehensive Request for Information (RFI): A thorough RFI is essential for an independent review. Detailed and relevant documentation provided through the RFI process forms the foundation for a risk assessment. Key documents may include (but not limited to) social impact management plans, consultation logs, stakeholder engagement plans, grievance logs and remedies, mitigation plans, and impact-benefit agreements. These documents help determine the extent to which protocols meet jurisdictional and organizational criteria.
2. Understanding Jurisdictional and Organizational Expectations: Assessing social risks requires understanding the legal requirements and regulations in the asset’s jurisdiction, applicable global standards, and the asset proponent’s internal corporate guidelines. This baseline, supplemented by industry standards and global best practices, helps benchmark the asset and identify any gaps.
3. Measuring the Right Social Variables: An asset's procedures, plans, and activities relating to social variables need thorough evaluation. Key social variables could include human rights, Indigenous rights (including free, prior, and informed consent), cultural heritage, working conditions, labor practices, and land acquisition. Assessing these variables ensures a comprehensive understanding of the asset’s social impact.
4. Consistent Risk and Opportunity Rating: Risks and opportunities should be categorized as low, medium, high, or fatal flaw. This consequence and likelihood assessment guides the due diligence process, highlighting associated mitigation measures where possible. A consistent rating system ensures clarity and uniformity in evaluating social risks and opportunities.

Incorporating SDD into an independent engineering assessment will address the top business risk facing energy and mining companies in 2024, ensuring your assessment doesn't begin with a fatal flaw.

Note: Tip Tuesday for Social Performance is a collection of my thoughts and a few ‘how to’ insights to share knowledge with fellow practitioners.