Think Risk: The intersection of human rights, capital, and renewable energy

Human Rights Due Diligence and DNV

The United States (U.S.) is an attractive market for banks and financiers to invest in energy infrastructure projects. The Inflation Reduction Act enhances the country’s investment case by creating USD 390 billion in incentives for the development of renewable energy and hydrogen projects.

USD 1.77 trillion invested in global renewable energy and transmission projects in 2023 USD 303 billion invested in U.S. renewable energy, electrified transport, and transmission projects in 2023
  USD 287 billion invested in Germany, United Kingdom (UK), France, Spain, and Italy renewable energy and transmission projects in 2023
  USD 676 billion invested in China renewable energy, electrified transport, and transmission projects in 2023

However, the large volume of capital flowing into the region creates risk. The growing appetite from investors to finance renewable energy and hydrogen projects may result in developers sacrificing proper risk mitigation to pursue faster delivery and maximum ROI.

This is called undisciplined capital, and it’s negatively impacting the renewable energy and hydrogen industry.

Fortunately, there are ways to mitigate the impact of undisciplined capital. It starts by thinking about risk across the project’s lifecycle and value chain.

Our area of expertise is analysing the intersection of human rights risk and renewable energy projects, and we are excited to share some practical guidance that can help developers and investors de-mystify human rights-related risks.

Investors and developers that want to pick a winning project must do three things:

  1. Identify and mitigate the human rights risks across the supply chain
  2. Ensure a robust stakeholder engagement plan is in place that creates shared benefits for communities
  3. Establish employee and labour standards that protect labour rights.

Supply Chain

Today, many human rights risks in renewable energy and hydrogen projects are upstream – where critical rare earth minerals are mined, and components are manufactured. Once out of sight and out of mind, governments, media and non-profit organizations are shining a light on human rights violations taking place across the renewable energy industry.

This risk is particularly acute for Battery Energy Storage System (BESS) project developers and investors because of cobalt mines in countries where they are reportedly manned by child and forced labour, experience ongoing security violations, and face terrible working and living conditions. 

The issue isn’t restricted to batteries alone. Solar panels in some countries are also subject to human rights scrutiny because the polysilicon for the modules is reported to be processed utilizing forced human labour in some instances.

Developers and financiers who have not identified and mitigated human rights risks will likely find themselves facing hefty fines, long and costly legal action, or the loss of brand equity. In fact, several countries now have regulations requiring that companies report on how they identify and manage human rights risks.

To help navigate these issues, DNV created a standards maturity matrix for a BESS supplier to help them understand that which is considered a minimum requirement, a standard requirement (enforcement in the next 1-2 years) and a best practice standard (enforcement in the next 2-3 years) for corporate responsibility in the BESS industry. Not only does the matrix help the supplier navigate reporting requirements that may be expected of them by various stakeholders, including investors, but it enables the supplier to understand how it may be screened by developers and investors for human rights.

In addition, during the past few months, in Europe, DNV has received an increasing number of requests from renewable developers and investors looking to invest in renewable energy projects with a focus on supply chain due diligence. DNV is working with a European developer to conduct due diligence on strategic suppliers in their solar supply chain for a solar project that is currently pre-FID (Financial Investment Decision). The developer will use the findings to identify and select the supplier(s) that carry the lowest risk from a corporate responsibility perspective, while also ensuring they will comply with lender requirements.

Sample of legislation and frameworks focused on protecting human rights

U.S. Section 1502 of the Dodd-Frank Wall Street Reform & Consumer Protection Act and EU Conflict Minerals Regulation (Regulation (EU) 2017/821 Requires detailed disclosure of conflict minerals, specifically tin tungsten, tantalum, and gold
Canada Bill S-211 Requires businesses operating in Canada to report on their measures to reduce and prevent occurrences of forced and child labour in their supply chains
U.S. Uyghur Forced Labor Prevention Act (UFLPA) Prevent goods manufactured in in the Xinjiang Uyghur Autonomous Region from entering the U.S. U.S. Customs and Border Protection denied 2,972 based on the UFLPA, and the Department of Homeland Security will step up its enforcement of the UFLPA in 2024
The United Nations (UN) Guiding Principles on Business and Human Rights (2011) Establishes expectation of businesses to prevent, mitigate and remedy human rights abuses that they cause or contribute to
Australia Modern Slavery Act 2018 Requires businesses operating in Australia to report on the risks, actions, and efficacy of the actions with regards to modern slavery in their operations and supply chains
UK Modern Slavery Act 2015 Annually report steps taken to prevent modern slavery in their operations and supply chains
International Labour Organisation (ILO) standards Elimination of forced/compulsory and child labour; right to freedom of association and recognition of the right to collective bargaining; elimination of discrimination; safe and healthy working environment
Equator Principles Human rights risks within the context of the social and environmental risk assessment of a project

A developer or investor may also be targeted by non-profit organizations, who are taking bold action to hold businesses accountable for human rights violations.

Amazon recently paid USD 1.9 million to migrant workers who suffered from human rights abuses while working at two of its warehouses in Saudi Arabia after Amnesty International published a report on the issue. As another example, Human Rights Watch published a report criticizing global automakers for their de-facto support of human rights violations associated with aluminium sourcing because nearly 10% of global aluminium production comes from using forced human labour.

Stakeholder engagement

Renewable energy projects that successfully transition from development to profitable operations have the buy in and support from local communities. That means developers and investors must ensure strong social due diligence and equity are included in project planning and design.

In fact, U.S. regulations require companies to ensure renewable energy projects create shared value for the communities where they are located. Energy infrastructure investments by the US Department of Energy require Community Benefits Plans (CBPs) as part of all Bipartisan Infrastructure Law and IRA funding opportunity announcements and loan applications. CBPs are based on the policy principles of:

  • Engaging communities and labour
  • Investing in America’s workers through quality jobs
  • Advancing diversity, equity, inclusion, and accessibility through recruitment and training
  • Implementing Justice40, which directs 40% of the overall benefits of certain Federal investments to flow to disadvantaged communities.

Commercial investors and corporate offtakers are also using global frameworks like Equator Principles to ensure thorough and continuous stakeholder engagement models, economic benefits for local communities, and absolute consent and participation of local and indigenous communities during the entire lifecycle of a project.

Turnkey solutions like DNV’s ADAPTIVE for Equity (A4E) provides a collection of proven approaches, strategies, and activities that enable developers to create a CBP that complies with the Justice 40 initiative under the National Environmental Protection Act (NEPA) or to strengthen the foundation upon which a project, program or policy is built.

In fact, the Americans for a Clean Energy Grid is today leveraging the A4E framework to secure stakeholder understanding, support, and collective decision making around siting and permitting of transmission lines in the US.

Why is this important? A national survey of developers has shown that community opposition is slowing the pace of renewable energy projects1. Investor uncertainty grows each time a renewable energy project is slowed down or cancelled because of community opposition. In fact, a growing number of international investors are refusing to finance projects that do not include a robust, structured stakeholder engagement process that complies with global frameworks like Equator Principles, IFC Performance Standards and, increasingly, the Task Force on Nature-related Disclosures (TNFD)2.

Employees and contracted labour

Our experience is that successful renewable energy projects are the ones developed by companies with a robust corporate and supplier code of conduct.

A good code of conduct must cover corruption, anti-harassment, and discrimination, right to collective bargaining, occupational health and safety (OHS), whistleblowing and grievance channels. Importantly, this code of conduct must be rigorously applied at the project level to cover all direct and indirect contractors.

Where we often see companies falling short is on implementation at the project level and is how operations and maintenance providers find themselves in conflict with asset managers and owners.

The assessment a project’s OHS is dictated, foremost, by an asset owner’s OHS policy and management system and these are subject to regular evaluation. Even existing systems are audited and held up to stringent requirements, as was the case in a recent evaluation by DNV of a wood pellet manufacturer, whose sites are periodically evaluated for the maturity of their health and safety systems to ensure that deficiencies, if any, are identified and remedied to comply with the latest, most stringent requirements.

Human resource policies around anti-discrimination, diversity and equity, and rights around collective bargaining, fair wages, protection of migrant labour force are expected to be in place and enforced, as per the stipulations of the UN Guiding Principles on Business and Human Rights and ILO conventions. In the past year, when reviewing company policies according to this standard, we have found that policies to ensure the rights of migrant labour, in particular, are weak, if present at all, and in the context of subcontracting labour for infrastructure projects the increasing number of manufacturing facilities supported by the IRA in North America, this presents a significant gap in mitigating human rights violations. The onus of responsibility extends beyond crafting airtight supplier codes of conduct and requires enforcement of the same through regular inspections of working conditions.

Easy ways to embrace and embed Human Rights

A number of solutions exist upstream of these financial industry benchmarks that ensure respect for human rights are engrained in corporate culture and filter down to the project and supplier level. These include:

  • Development or optimization of an Environmental and Social Management System (ESMS). For large, complex and/or international companies, ISO 14001 certification helps to serve as a framework for development of an environmental management systems and ISO 45001 for health and safety
  • DNV’s International Sustainability Rating System (ISRS) assesses management system maturity and materiality and is applied to identify a company’s noteworthy activities (strengths) and opportunities for improvement (weaknesses). From there, DNV applies a modular-based approach to prepare a company for integrating an organizational human rights framework, developing a human rights improvement roadmap, self-assessing its own human rights management system, and, ultimately, enabling the company to prepare for reporting and disclosing its targets and metrics
  • At the project level, a critical issues analysis early in the project development process can help to detect Project Categorization according to Equator Principles, and to guide the project development processes not only according to regulation, but according to internationally recognized environmental and social standards
  • Also at the project level, a human rights due diligence assessment in accordance with the Guidance Note on Implementation of Human Rights Due Diligence under the Equator Principles will provide investors, particularly those attracted internationally, an added level of comfort with the social risks impacting their investment.

A simple truth

At the end of the day, renewable energy projects impact the inalienable rights of people. The choice facing developers and investors is whether that impact is positive or negative.

Today, going the extra mile to protect people and create positive impacts is still technically opt-in. However, as demonstrated at COP28, society is increasingly demanding developers and investors show that they are mitigating human rights risks and creating an equitable future.

The companies that will emerge winners are the ones who perform due diligence to identify and mitigate both current and future human rights risks. They will win because no end user wants to power their supply chain with electrons associated with forced labour, drive an EV powered by “blood cobalt,” or build a project that causes economic or medical harm to people.

1 Community Opposition and Grid Challenges Slow the Pace of Renewable Efforts, National Survey of Developers Shows - Inside Climate News
2 The Equator Principles - Equator Principles (equator-principles.com)

3/12/2024 8:00:00 AM