Indigenous Consultation, Social Impact Evaluation Drive Certainty

Developers are increasingly considering environmental, social and governance (ESG) factors as part of their analysis to identify material risks before following through with capital investment. Mexico’s regulatory environment provides the energy sector with guidelines meant to identify ESG-related risk factors.

The country's stringent regulatory requirements were not meant as an inhibitor to project development but rather to ensure its timely and successful completion. Central to this process is a community-informed development strategy, which allows companies to build projects that create added value to the communities in which they will reside, rooted in a foundation of social legitimacy. “What differentiates an environmental impact assessment from any other government permit is the citizen consultation process required for its approval,” said Luis Vera Morales, Founding Partner, Vera & Asociados.

Vera outlined the three main instruments of social participation: an environmental impact assessment, a social impact assessment and an indigenous consultation. Company outreach to local communities, whether written or verbal, is important: it demonstrates initiative and respect toward the communities the company intends to become a part of. It also enables communities to articulate their concerns, which in turn helps both parties identify appropriate solutions to problems that could ultimately disrupt development. However, this process should not be initiated haphazardly, warns Vera. Ideally, it should be preceded with companies trying to understand community members, including their cultural nuances, language dialects, demographics and predicted concerns. Otherwise, companies risk butchering their developments even before they can begin to take shape.

An adequate social impact evaluation involves the identification of social concerns and a rigorous effort to involve all affected stakeholders in the deliberation and development of proposed projects. Beyond being a helpful practice to help secure financing, it has become a legal obligation under the 2014 Energy Reform, which has formalized the evaluation criteria and outlined compliance standards. “In this regard, the social impact assessment should be understood more as a process than as a study,” said María Cristina Hernández, Partner, Vera & Asociados. Comprehending this process will help companies develop well-rounded social impact and investment reports necessary to file for permits. The reports should include information regarding the project’s areas of influence, the identification and characterization of communities, prediction and estimation of positive and negative social impacts and, finally, a full social investment plan.

Potential omissions or a failure to take the process seriously could have very costly repercussions for companies. What is more, social pressure has repeatedly led to project delays and damaged business images, which has a salient impact on overhead costs, totaling millions of dollars. In figures, 25 percent of companies had their project proposals turned down because they failed to turn in reports, 14 percent saw their project annulled in courts due to community litigations and 28 percent of projects have faced fierce social resistance during development.

Indigenous consultation considers to propose energy projects directly to the Indigenous communities that would be affected. The overarching goal is to develop a strategy through which both parties can benefit from the project’s development. The input of Indigenous people is especially important regarding impact on the environment, which often serves as a lifeline to communities. In Mexico, there are an estimated 6 million people who speak an Indigenous language, spread out across the country’s territory. Here, the indigenous consultation process facilitates negotiations in good faith, free from intimidation or bribery.