ESG RISK 9: Political Risks
Overview
ESG Risk 9 – Political Risk assesses the likelihood and potential impact of political developments that could disrupt a hydropower project’s approval, financing or operation. It covers government instability, policy shifts (e.g., permit revocations, expropriation, currency controls), corruption and bribery, conflict, terrorism and civil unrest, as well as politically motivated interference. Off-taker risk—the buyer’s ability and willingness to pay for power—is also evaluated. For transboundary schemes, cross-border water-use disputes or divergent regulatory regimes can amplify exposure. An Extreme Risk score here signals that unmitigated political threats could spur permit delays, project cancellations, cost overruns or significant reputational damage.
Additional Guidance
Political risks include a wide range of factors. Often it is the case that reduction or mitigation of political risks needs to be through government actions, such as: political and regulatory reforms; energy sector reform; establishment or strengthening of an integrity commission or similar; and/or transboundary agreements. However, it may be the actions of government that raise the political risks to begin with, and mechanisms in government to address key political risks are poorly resourced and largely ineffective.
A particularly sensitive aspect of an early stage project is the risk of politically-positioned or politically-aspiring individuals making promises or raising expectations to communities on project benefits that cannot be guaranteed.
There are aspects a developer can ensure, including its own corporate policies and assurance processes, sound fiscal management, evidence-based compliance practices, and anti-corruption policies and processes.
Corruption is a particular aspect of political risk that is very difficult area to evaluate, as it is often not visible. Business transactions, financial records or personal finances that appear unusual or unexpected and cannot be fully explained may be indicators of possible bribery or corruption. Whilst mitigation measures can and should be employed to ensure ethical business practices, it can be difficult to conduct business in a region in which basic business transactions are delayed whilst participants are waiting for facilitation payments, or other forms of “the way we do business here”. In the worst of cases, it is impossible to progress a business venture whilst retaining a commitment to ethical business practices.
Corruption risks may occur:
Within a business or other organisation, such as issues with how finances are managed (embezzlement), or recruitment and promotion (nepotism);
From outside of the business, such as a supplier offering kick-backs, or bribery in the supply chain; and/or
Bribing of public sector officials, e.g. to award a tender or concession, short-cutting of assessment or preparation requirements, non-transparent approvals, or failure to address licence or permit requirements.
Sources of information that can help inform ratings for ESG Risk 9 Political Risks include:
A political risk assessment that systematically considers political factors that may affect the developer's ability to operate effectively in a particular country.
Review of the country’s history, government stability, and other potential political risk factors.
Websites that assist in the identification of ongoing conflicts, such as the Global Conflict Tracker or CrisisWatch.
Local knowledge regarding local situations of conflict, such as warring ethnicities or communities on opposite sides of a river or upstream and downstream of the project.
Glossaries of types of corruption, such as the Glossary of Corruption by the United Nations (UN) Office on Drugs and Crime, and CORRUPTIONARY A-Z.
World Bank Worldwide Governance Indicators for control of corruption.
Opportunities for early stage actions that could reduce the risk of a project option might include:
Consider alternative locations and designs so the project can avoid present or future conflict.
Avoid projects that themselves create or exacerbate conflict.
Identify steps that a project could take to help resolve or minimise conflict.
Engage early and frequently with government stakeholders.
Establish a broad base of public and political support for the project, and prevent opposition to the project from becoming politicised.
Review relevant transboundary frameworks, their robustness, their ability to foster cooperation, and their ability to anticipate, avoid and withstand future conflict.
Take out political risk insurance.
A significant opportunity in considering political risks at the early stage is to incorporate ethical safeguards into all project entity policies and practices, such as: a business code of ethics; an employee code of conduct; a business integrity pact; anti-bribery or anti-corruption policies; procurement threholds and procedures; internal and external auditing; procedures for reporting and investigation; whistle-blowing arrangements; and confidentiality limited to legally protected information.
