The current global energy crisis has created unprecedented momentum behind renewable energy, with the International Energy Agency predicting that the world is set to add as much renewable power in the next five years as it did in the previous 20.[1] As global demand for clean energy increases, development and acquisitions of renewable assets have become more frequent, and the number and diversity of active players in the market have increased.
This uptick in investment into renewable energy capacity is welcome news given some dire warnings from the academic community regarding global warming. There are however factors that undermine overall societal impact if not managed carefully by developers, investors, and operators. The energy sector has long battled with corruption risk. Further, clean energy supply chains rely on low-carbon technologies requiring rare minerals; the extraction of these minerals has a past chequered with human rights and corruption challenges.
The good news is the decision to invest in green energy does not have to be a trade-off between what is best for the climate and what is best for local communities. Below we discuss some of the key challenges and how to navigate the risks.
Corruption Risks Abound
The development of renewable energy assets is particularly vulnerable to corruption risks due to complex regulatory environments, government involvement, and time pressures to deliver new projects. Activities giving rise to these risks evolve during the lifecycle of the assets but range from obtaining planning concessions and generation licenses to government JV partnerships to importing equipment and material, to name a few.
A particular risk connected to renewable energy is navigating political fronts; community pushback around the placement of seemingly unsightly infrastructure, legacy fossil fuel interests as well as other competing political demands can slow down or even stall progress before physical development starts. Any steps taken to influence the political/regulatory process need to be managed closely from a corruption risk perspective. Where developers need to engage local parties to navigate local legislative requirements, significant corruption risk presents itself.
Case Study - Skyborn Renewables
In September 2022, Global Infrastructure Partners (GIP) completed the acquisition of WPD Offshore. The acquisition included WPD Taiwan's wind energy projects, which were later rebranded as Skyborn Renewables. The acquisition was a significant milestone in GIP’s commitment to global renewable power generation.[2]
In March 2023, the Taiwan prosecutor’s office issued a statement alleging that local officials received bribes through unnamed subcontractors involved with the offshore wind project. The alleged bribes were paid to smooth the way for the development of WPD Taiwan's wind energy projects back in 2020[3]. While the alleged activity took place prior to the acquisition by GIP, it has created risks for the company. It could now face financial penalties and reputational damage. The investigation is ongoing, and Skyborn Renewables has said that it is fully cooperating with Taiwanese authorities.
Interactions With The Extractive Industries
The modern renewable energy sector currently hinges on extracting rare minerals. Energy storage solutions and batteries for electric vehicles are forecasted to be one of the main drivers for the growing demand for cobalt and other rare minerals. Not only does the extractives industry present its own corruption risks (The OECD Foreign Bribery Report shows that one in five cases of transnational bribery occurs in the extractives sector), but the supply chain for these minerals has also been subject to controversial practices. Such examples include allegations of worker welfare issues in the production of solar panels, batteries, and wind turbines.[4]
In recent years, cobalt has experienced unprecedented global demand, driven by the explosive growth in the sales of Electric Vehicles (EV) and other energy storage solutions which use Lithium-ion batteries. With forecasts suggesting that EVs will make up about half of new car sales worldwide by 2035, the global demand for cobalt is only expected to increase.[5]
It is estimated that the Democratic Republic of the Congo produced 74% of mined cobalt in 2021. During this period, output from the artisanal and small-scale mining (ASM) sector is estimated to have increased to 12% of the DRC’s total supply. [6] The modern slavery concerns surrounding cobalt primarily rest with the ASM sector, which includes approximately 250,000 people, including at least 35,000 children, many of whom could be counted as subject to forced labor. Research by Amnesty International found that children as young as seven are working in cobalt mines, often for less than $2 a day.[7]
There are other key minerals such as lithium, nickel, and manganese which are used in energy storage solutions that are also linked to forced labor and human rights violations. In addition, while Congo is at the heart of human rights volitions linked to cobalt, there are other countries such as Zambia have also faced allegations of forced labor in their mining industry.[8]
These reports highlight the need for the companies and investors operating in the renewable energy industry to monitor their supply chain and remain vigilant of the modern slavery risks that impact the sector.
Identifying and Managing These Risks
The corruption and human rights risks endemic to the sector can present significant commercial challenges, and manifest in a variety of ways depending on the jurisdictions involved. Thorough risk assessment at each stage in the process is essential.
This includes understanding the local market context prior to development – not only from an operational perspective but also taking into consideration local sentiment and political environment. Local protests, potential displacement of local communities, or any security needs will require appropriate mitigation measures.
Once an asset is operational, it is important to regularly monitor high corruption risk activities and related controls. Government interactions do not stop once licensing and permitting are complete, and they are not limited to customs concerns. More murky risk factors to monitor include interactions with local community leaders, "social" or "charitable" activities, and payments for security to the local police or military officers.
From a human rights perspective, the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals[9] has outlined key recommendations to identify and mitigate supply chain risks, including risk assessment, proper controls, due diligence, and active third-party monitoring/audit.
New legislation such as the EU Corporate Sustainability Reporting Directive (CSRD)[10] strengthens the rules concerning the social and environmental information that companies must report, including their considerations for human rights and bribery and corruption within supply chains. Effective due diligence and documented procedures for risk management similar to the OECD guidance will be critical to comply with the legislation.
[1] https://www.iea.org/news/renewable-power-s-growth-is-being-turbocharged-as-countries-seek-to-strengthen-energy-security
[2] https://renews.biz/80498/gip-closes-wpd-offshore-acquisition/#:~:text=Global%20Infrastructure%20Partners%20(GIP)%20has,closed%20on%2015%20September%202022.
[3] https://news.ltn.com.tw/news/society/breakingnews/4233958 ;and: https://renews.biz/84326/skyborn-cooperating-with-taiwan-investigation/
[4] https://assets.cleanenergycouncil.org.au/documents/resources/reports/Addressing-Modern-Slavery-in-the-Clean-Energy-Sector.pdf
[5] https://www.goldmansachs.com/intelligence/pages/electric-vehicles-are-forecast-to-be-half-of-global-car-sales-by-2035.html
[6] https://www.cobaltinstitute.org/wp-content/uploads/2022/05/FINAL_Cobalt-Market-Report-2021_Cobalt-Institute-3.pdf
[7] https://assets.cleanenergycouncil.org.au/documents/resources/reports/Addressing-Modern-Slavery-in-the-Clean-Energy-Sector.pdf
[8] https://assets.cleanenergycouncil.org.au/documents/resources/reports/Addressing-Modern-Slavery-in-the-Clean-Energy-Sector.pdf
[9] https://www.oecd.org/daf/inv/mne/OECD-Due-Diligence-Guidance-Minerals-Edition3.pdf
[10] https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
