Does impact investing guarantee ESG performance?

Another potential stumbling block for green transition projects can be unanticipated opposition from local communities. Assuming that solar projects will have universal acceptance because they are ‘clean’ can lead to project delays, amendments and reputational damage, especially where environmental justice is a concern.

Environmental justice began as a movement in the USA in the 1980s, born of the realization that a disproportionate number of polluting industries, power plants and waste disposal areas were located near low-income, under-resourced or communities of color. The movement was set in place to ensure fair distribution of environmental burdens among all people regardless of their background.

While environmental justice issues are more often associated with large infrastructure projects or polluting factories and power plants, impact investors should heed the warnings from renewables projects that have fallen foul of environmental justice.

One example is a proposed 50-megawatt solar and 12-MW battery storage project in Archer in northern Florida, which has become the center of a clash between renewable energy developers and residents. The project would span roughly 600 acres with the panels tucked behind a buffer of trees. Yet in the eyes of the residents of this historically Black community, many of whom are descendants of slaves and some of the nation’s earliest Black landowners, a utility-scale solar array is no different from a coal-fired power plant and would be a blemish on their community. While people who live in rural areas often do not want their land to be disturbed by what they consider to be industrial infrastructure, the concerns here run deeper than that. Many residents can trace their lineage back six generations and graves at the local cemetery date to the 1830s, and residents don’t want that land to be in the shadow of solar panels.

The State of Virginia has a high concentration of historically and culturally significant sites. Various solar developers are running into opposition to proposed projects on sites such as the Cedar Mountain Battlefield and Raccoon Ford, which have important significance in Civil War history. Conflict tends to arise when developers fail to conduct adequate due diligence about the historic and cultural landscapes on or near potential development sites. Conversely, developers that engaged with local communities and the relevant interested groups, have proposed creative mitigation solutions to unavoidable impacts early in the planning process, which have satisfied opposition and assisted with permits being granted.

These examples illustrate that renewables projects, while essential components of the transition to cleaner energy, are not immune to community opposition. They underline the importance of learning about a community that might oppose a development through early and effective due diligence and stakeholder engagement as part of a thorough ESG strategy, prior to making an impact investment.

A company with a mission, products or services that are intended to generate positive social or environmental impacts should not automatically be assumed to have an awareness of its most material ESG topics, or to have systems in place to manage them. Here are key actions for investors to make ESG-compliant impact investments in renewable energy projects, particularly solar:

1. Treat renewables projects as any other investment and subject them to thorough ESG due diligence – with particular attention to supply chain management, environmental impact, social issues and stakeholder engagement.
2. Investors in solar energy projects can enlist support from experts to help undertake independent investigation to ensure that they have solid evidence of the origins of the materials used in their supply chains world-wide.
3. For projects in the US, enquire whether solar panels are being obtained by a company that has signed the Solar Industry Forced Labor Prevention Pledge organized by the Solar Energy Industries Association (SEIA), which supports the development of an industry-led solar supply chain traceability protocol as a tool for identifying the source of primary raw materials and inputs and tracking their incorporation into finished products, including solar modules.
4. Ensure that stakeholder engagement is included in the ESG review as a material topic, including conducting the right public outreach to understand where environmental justice or historical preservation issues may be present.

Based in Boston, USA, Alan Kao is Ramboll Environment & Health’s Global Director for ESG Services. He helps global clients with developing ESG and net zero strategies, sorting through the myriad of sustainability reporting and disclosure frameworks, identifying ESG risks and opportunities during due diligence, and integrating ESG topics across portfolios and enterprises.