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Advisory Board member Sarah Fortt forwarded us this piece from her colleague Austin Pierce, an associate at Vinson & Elkins, where his practice focuses on helping clients navigate stakeholder expectations on ESG matters. He regularly works with companies on issues regarding disclosure and reporting (both required and voluntary), responses to government and investor inquiries, and the development and execution of strategic projects. Austin’s experience is global, having helped clients on matters throughout the Americas, Europe, Africa, the Asia-Pacific, and the Middle East.

One of the major attractions of ESG is that well-developed strategies are supposed to mitigate companies’ environmental and social risks and help a company maintain its “social license to operate” (“Social License”). A company’s “Social License” refers to the perception of its business practices by various stakeholder groups and those groups’ acceptance or approval of the company’s operations and projects. It is comprised of multiple elements but can in many ways be boiled down to perceptions of the legitimacy, credibility, and trustworthiness of a company and its operations. This, and a continued focus on impact, is part of why ESG is expected to encompass approximately one-third of global assets under management by 2025. But even ESG can have its problems.

A host of standards have been developed to guide companies in their incorporation of ESG concepts. Governments are establishing regulatory frameworks as well, such as the EU’s surge of policymaking regarding the definition of sustainability. However, a report from the First Nations Major Projects Coalition (the “FNMPC Report”) has found that most of the major ESG standards have not engaged with, or even considered, Indigenous communities in their requirements. 

This creates a disconnect where products, actions, and entities are being labeled “sustainable” without having to consider Indigenous communities’ perspectives on impacts to their communities and lands important to them. Along with this disconnect comes the risk that companies’ ESG strategies, even if developed in good faith, may be labeled as “neocolonial” or otherwise accused of failing to fully consider impacts to marginalized stakeholder groups. This gap in a company’s Social License can increasingly have direct impacts on its operations, even if they have aligned themselves with prominent ESG standards. However, companies concerned about such impacts may be able to mitigate risk by understanding and incorporating the concept of free, prior, and informed consent (“FPIC”).

Indigenous Perspectives in Existing ESG Standards

The FNMPC Report specifically examines the standards produced by four organizations—the Global Reporting Initiative (“GRI”), the Sustainability Accounting Standards Board (“SASB”), the Taskforce for Climate-Related Financial Disclosures, and the Climate Disclosure Standards Board—as well as the 2020 World Economic Forum’s “Stakeholder Capitalism Metrics”. It found evidence of only one instance of consultation with Indigenous communities in the development of these standards. Moreover, the FNMPC Report noted that Indigenous peoples were largely absent from the requirements of these standards and that they provided no substantial guidance for the incorporation and inclusion of Indigenous communities in project development and decision-making. The FNMPC Report does note that a handful of SASB standards regarding extractive industries include reference to Indigenous communities but caveats that it is primarily considered a regulatory risk and only includes high-level statements on FPIC and related international legal instruments.

These concerns extend beyond the examined standards as well. For example, the EU Sustainable Finance Taxonomy (the “Taxonomy”) is intended to set criteria for projects to be deemed “sustainable” in European markets. However, this Taxonomy primarily focuses on environmental criteria, with limited consideration of social factors or items at the nexus of environmental and social sustainability. Discussion of Indigenous rights is limited to a reference to certain international human rights standards, which mention that Indigenous rights may require particular attention. However, of more direct bearing to the risk of ESG strategies being labeled “neocolonial”, the Taxonomy’s current criteria defines environmental sustainability for various activities that may impact Indigenous communities’ lands without allowing for Indigenous communities to shape the consideration of what is deemed sustainable.

In response to these gaps, the FNMPC Report challenges, “how can ESG-approved investments be deemed to be responsible or to even meet the spirit of ESG criteria if their impact upon Indigenous rights, people and communities have not been vetted by Indigenous people?” However, the FNMPC Report also provides an overarching guideline to address this concern: “Like any investment that may affect Indigenous lands, waters, territories, people, and/or rights, ESG criteria will only be successful if they are harmonized with Indigenous practices…and aligned with the doctrine of [FPIC].”

What is FPIC?

FPIC is a principle that has developed primarily in international law. It was first enshrined in the 1989 International Labour Organisation Convention 169 on Indigenous and Tribal Peoples (“ILO 169”) and subsequently in the 2007 UN Declaration on the Rights of Indigenous Peoples (“UNDRIP”). Under these instruments, FPIC is primarily a government responsibility, i.e. that governments must engage in a process aimed at obtaining FPIC prior to taking actions, such as authorization of resource exploitation or land modification, that would impact Indigenous communities and their lands. 

However, other standards have adopted the concept for the purpose of companies’ own actions. For example, although the United Nations Guiding Principles on Business and Human Rights do not explicitly discuss FPIC, Article 12 notes that business enterprises need to respect the rights of marginalized groups, such as Indigenous peoples, that are incorporated in other UN instruments. Moreover, several industry organizations, such as the Equator Principles, International Council on Mining and Metals, and the Forest Stewardship Council have expressly incorporated requirements regarding FPIC into their own policies and standards.

The formulation and strength of these FPIC requirements is not uniform. In many instances, current frameworks only require entities to have FPIC as the objective of consultation, i.e. they do not treat the failure to obtain FPIC as the death of a project. However, others have argued that FPIC must entail some form of actionable veto of a project on the part of Indigenous communities. The debate over this delineation is still ongoing. Nevertheless, while there are concerns about what a veto power would mean for various enterprises, some standards have clearly stated that obtaining FPIC from impacted Indigenous communities is a prerequisite for certain actions.

The Risks of Excluding Indigenous Perspectives

Failure to fulsomely incorporate Indigenous communities into companies’ approaches to sustainability and ESG, particularly where there are impacts to Indigenous communities, risks those companies’ sustainability- and ESG-claims facing criticism for “neocolonial”, or otherwise stakeholder-biased, approaches. While the FNMPC Report does not use this specific language, it does not shy away from the implication. As discussed above, the FNMPC Report implies that ESG claims are hollow when the discussion of impacts to Indigenous communities does not include those communities’ perspectives. While ESG standards have continued to grow more robust, in part to avoid accusations of greenwashing, there has generally not yet been the same level of response to concerns about the elision of social issues, such as Indigenous rights. 

However, these issues have recently been the subject of renewed focus. Recent projects to impact Indigenous communities without those communities’ approval have often required companies to undergo substantial lawsuits, regulatory proceedings, and publicity campaigns. These have costs, both reputational and financial. And the effect on companies is growing. A report published by Moody’s found that the absence of a Social License from relevant Indigenous communities in Canada can negatively impact corporations’ credit ratings. And, separately, I have previously discussed how the vindication of Indigenous rights in a 2020 decision from the Inter-American Court of Human Rights may affect the permitting of lithium mining projects in Argentina, Bolivia, and Chile. These developments indicate that how companies approach Indigenous rights has an increasing role in their direct operations.

What Companies Can Do

Incorporating a robust approach to FPIC can be a powerful risk mitigation tactic for companies concerned about the implications of a project impacting Indigenous communities. However, this should be a truly robust approach. While prevailing understandings of FPIC under both international legal instruments and voluntary frameworks largely indicate that it does not constitute a veto right, compliance with these standards is not the same as receiving a Social License from impacted Indigenous communities. And Indigenous communities have started to express as much, such as in the findings from the FNMPC Report.

Therefore, companies concerned about maintaining their Social License should generally aim to obtain FPIC from any impacted Indigenous community. While this process must inherently be driven by the specific circumstances, communities, and impacts involved, companies can generally employ the following practices as a starting point:

  • When possible, build rapport with potentially impacted communities prior to project planning. Typically, consultations with Indigenous communities go better when there is a pre-existing relationship between the community and the company in question. Prior engagement can show that these discussions are more than a “check the box” exercise. It also allows the time and interaction required to establish trust. Such trust can help persuade communities that may be reluctant about a particular project to feel comfortable enough to at least entertain the proposal. 
  • Engage with Indigenous communities through their own decision-making channels. Indigenous communities have long had their own systems of governance, many of which have been preserved (or reclaimed) in present day. Engaging with Indigenous communities through these systems demonstrates a respect for their decision-making processes. It also centers and contextualizes the community’s understanding of project impacts, which can help to prevent companies from spending time and resources on issues that are not of concern. Navigating these systems will likely take time. Outsiders may not immediately understand the full scope of these systems or even who the appropriate community representatives they need to consult with are. However, ultimately, a community’s FPIC can only really be obtained if that community’s decision-making processes are respected.
  • Establish clear, mutually agreed upon terms for what constitutes FPIC. Ultimately, FPIC derives from a notion that Indigenous communities have a right to determine their own social, economic, and cultural development. That means that the form FPIC takes may not be the same between different communities. Taking the time to make sure parties have the same understanding of what would constitute FPIC helps both sides, as it helps to set clear goalposts for what is required.
  • Recognize the time needed to obtain FPIC. Rushing through the FPIC process can often be counterproductive. Therefore, a company’s best bet is to allow ample time for the process. While not a silver bullet, doing so can help a company avoid more costly project delays if the consultation process runs into snags immediately prior to permitting or development.

These principles can help companies to structure their considerations of FPIC, whether as part of crafting an ESG strategy or incorporating these concerns into an existing one.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of Vinson & Elkins or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for more than 35 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of regulatory development, working across a range of disciplines. He was one… View Profile