IFC Performance Standards Mitigation Hierarchy and the Important Role of "Offsets" in Sustainable Development

A primary focus of the environmental and social management program required by the Equator Principles and Performance Standard One of the IFC Performance Standards on Environmental and Social Sustainability (IFC Performance Standards) is mitigation of identified risks, along with the implementation of performance improvement measures. To this end, Clients are expected to design a mitigation approach that follows a structure — referred to as a “hierarchy” — of avoidance,minimization and compensation or offset.  While offset may be the least desirable mitigation strategy, it has a very important role to play in the implementation of the IFC Performance Standards and the promotion of sustainable development.
The elements of the mitigation hierarchy are:

1. Avoidance: a process whereby the Client identifies and implements technically and financially feasible changes to the project’s design, location or other approach that would avoid completely identified adverse risks and impacts. This is the ideal form of mitigation.
2. Minimization: To be employed where avoidance is not possible. Minimization approaches may include abatement of impacts, rectification, repair or restoration. These approaches imply that the risks have materialized into adverse effects, but that those effects are being remediated by the Client.
    
3. Compensation/Offset: where avoidance or minimization measures are not available, it may be appropriate to adopt measures to compensate for harm done or to offset the adverse effect with a comparable positive benefit. This is the least desirable mitigation strategy and is to be done where residual impacts cannot be avoided.

The IFC Performance Standards require that avoidance of risks should be given priority over minimization and offsetting or compensation for the actualization of risks.  That being the case, there is an important role to be played by the offsetting aspect of the mitigation hierarchy that should not be ignored. 

The overarching purpose of the IFC Performance Standards and related Equator Principles agreement amongst private banks to apply the IFC Performance Standards is to promote sustainable development.  There is an implicit and explicit recognition within these frameworks that development is a legitimate goal, so long as such development can be done sustainably, in a manner consistent with the expectations of the IFC Performance Standards and legitimate stakeholders. 

The Mitigation hierarchy and other aspects of the IFC Performance Standards require that best available technologies not entailing excessive costs or commercially reasonable efforts (as the case may be) must be employed to avoid or mitigate risks. But beyond these requirements it is consistent with the IFC Performance Standards and the principles of sustainable development for development to proceed even though environmental and social impacts will inevitably result. It will rarely if ever be consistent with the "development" imperative of sustainable development for complete avoidance of all environmental and social impacts to be the expectation.  All development will entail environmental and social impacts.  The question is not whether such impacts can be entirely avoided, but whether, on balance, those impacts are outweighed by the positive benefits of development.  This is, fundamentally, a question of offset as considered within the Mitigation Hierarchy of the IFC Performance Standards. 

The most important question in determining the appropriateness of an offset in a given circumstance is the legitimate expectations of Affected Communities and stakeholders. These expectations and associated normative constraints that would influence a project financier or sponsors' understanding of the appropriateness of offset are identified through Stakeholder Engagement, a primary part of IFC Performance Standards implementation.  Effective stakeholder engagement requires transparency of the risks associated with a project and the proposed solutions.  Engagement allows the project's proponents to better understand what they must do to make the project legitimate in the eyes of stakeholders and Affected Communities - a critical consideration in determining the extent and nature of offsets that would be necessary to address unavoidable or irreducible risks. That being so, the question of who is properly considered a "stakeholder" may be challenging, especially if there are cumulative or transboundary impacts related to a project that may not be possible to offset. 

Despite the challenges of implementation, the "offset" element of the Mitigation Hierarchy is important because it encourages consideration of the "big picture" pros and cons of development.  It is the only part of the mitigation hierarchy that involves a weighing and balancing of economic, social and environmental interests - a process that is fundamental to the concept of sustainable development. In light of this importance, "offset" should not be overlooked as a legitimate consideration in the context of sustainable development.