Manuel Ortiz
Director General
ERM México
Roberto Frau
Roberto Frau
Social and Sustainability Team Leader
ERM México
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View from the Top

Mexico Lagging Behind in Social Management

Wed, 02/19/2014 - 17:09

Q: What opportunities has ERM spotted for its services in the Mexican power generation market?

MOM: Power is one of our strategic sectors. We are focusing on growing that area of our business and on carrying out projects for different companies in the sector. The recent surge of renewable energy in Mexico means that many projects require integrated services in their approach to sustainability. Being sustainable does not just mean carrying out an environmental impact assessment or getting the right permits. A sustainable commitment needs to go much deeper than that. It must look at stakeholder engagement, understand the needs and expectations of local communities, and plan for the minimization of environmental damage before the project even starts. The different and complex services that sustainability entails are very well-matched to the portfolio that ERM provides at the global and local level. Clients often come to ERM asking for one service, but soon realize that they require more services at different stages of the project cycle. Our ability to offer those services under one roof allows us to become involved in the country’s highest profile projects in wind, hydro, biofuels, and increasingly solar. Our clients are generally not new in the market. They might be new to Mexico, but what they really need is support in managing the sustainability challenges of complex projects.

Q: Natural gas will play an increasingly prominent role in the Mexican energy mix in the future; what implications will this have for your company?

MOM: ERM also works in oil and gas, so this would still be positive for us. There is also a lot of investment in the sector and we hope there will be more. Given that the price of gas is currently very low, investing in gas-fired power generation and related infrastructure is of course more attractive. However, the situation with renewables is very different. High oil and gas prices in the past have enabled renewable energy technologies such as wind and solar to become increasingly cost-competitive with fossil fuels. Despite the recent drop in natural gas prices, the renewable energy sector has gained sufficient momentum to continue benefiting from growing economies of scale and lower technology prices.

RF: Compared to solar or wind energy, natural gas is a bigger pollutant but it is already replacing the use of more polluting hydrocarbons, which is a marked improvement. Renewable energies and natural gas complement each other very well. Mexico is seeing increasing demand for both, creating great development potential for each sector. Mexico is going to become a very interesting global case study on how natural gas and renewables can be surprising partners as both are going to develop simultaneously.

Q: How does ERM convince its clients that money spent on sustainability is an investment rather than an expense?

MOM: There is plenty of proof available to show that taking a holistic approach to sustainability too late in the project cycle ends up being much more expensive. We have seen specific examples of this happening in Mexico. This has led to clients coming to ERM at a very early stage of a project to ask us to check every aspect and raise any red flags, even if problems are not being expected. The market is becoming much more sensitive to the need for early risk identification, as it saves a lot of money and can make projects more viable. Many projects become unviable because of apparent sustainability risks that were not addressed early on. The question is no longer whether this is a necessary expense or not, it is now how much should be invested and at what stage of the project cycle.

Q: What are the main sustainability challenges that projects face and how can they be prevented or overcome?

RF: The social component is the biggest obstacle. Mexico has become mature in environmental and risk management over the last couple of decades, but proper stakeholder engagement is lagging behind, which is where a lot of sustainability risks can emerge later in the project cycle. In our experience, projects often involve many partners, among which one Mexican entity claims that it has long experience in the area and that the communities are fully supportive of the project because it will bring jobs. Sometimes, the other partners are skeptical, and carry out a social risk analysis anyway. But others trust their Mexican counterparts and assume all will be fine. Unfortunately, this regularly leads to foreign companies underestimating the social risk component involved in these projects. As the market continues to grow, there is a risk of all companies are being grouped together, with some tarnishing the reputation of the rest. ERM integrates this thinking into its practices, and has a specific consulting team that identifies social risks early on. Our thinking is that there are two ways of managing social risk in a project. You can hope for the best and pray that nobody ever opposes you or you can actively manage these relationships and turn them into an asset. Reputation is an aspect that can differentiate companies from the very beginning. The strategies we suggest can help them and their product stand out.

Q: How successful are companies in the renewable market in avoiding social problems?

RF: Unfortunately, many are not avoiding these problems effectively. There is an implicit assumption among renewable energy companies that they are doing good things for the world. This has led them to have an implicit belief that nobody would oppose a wind farm or a minihydro plant. They believe they are the good guys, as opposed to mining and oil and gas. Sadly, they enter proceedings with that mentality, without acknowledging that any development for any type of project will have an impact on the environment and the surrounding communities. Take Juchitan in the Isthmus of Tehuantepec, for example. Before the arrival of the wind industry, there was no industrial activity there. For the local people, the wind farm is the first industrial facility they have to deal with. A social license to operate from communities is much easier to maintain than to regain. If companies do not work to maintain social acceptance and lose it, it is gone forever.

Q: How has Mexico’s national consciousness about environmental and social sustainability evolved in the past years?

RF: In the last few years, it has become evident that Mexico has started to lag behind in terms of international best practices. Other countries around the world, and in Latin America, are moving ahead of Mexico in seeing that sustainability is an integral part of a project’s commercial decision-making process. With Mexico lagging behind, the renewable energy sector is going to have to catch up with the rest of the world a lot quicker than the rest of Mexico if it wants to be successful.