E&S categorisation of projects: A, B or C, who decides and on what criteria

A single dam, a single port, a single power plant: three lenders around the table, and three risk labels that do not always align. One speaks of category A, another of category 1, the third of substantial risk. Behind these labels lies a single question for the E&S officer: what level of documentary requirement to target. This article explains who decides the category, on what criteria, why lenders sometimes diverge on a single project, and how to manage a dossier subject to several classifications without suffering study revisions and timeline slippages.

A single project, several risk labels

E&S categorisation is the first decision in a financing dossier. It classifies the project according to its level of environmental and social risk. From this classification flows everything else: depth of impact assessment, scope of consultation, intensity of monitoring, disclosure obligations.

The mechanism is well known when a single lender intervenes. We have described it for the voluntary framework of private banks in our article onEquator Principles and project categorisation. A project sponsor can then reason with a single grid.

The reality of a large infrastructure project is different. The financing syndicate frequently brings together several financiers: a development finance institution, a commercial bank signatory to the Equator Principles, sometimes a regional multilateral bank, sometimes a sovereign wealth fund. Each arrives with its own classification system. None is obliged to adopt its neighbour's.

The result is a project that carries several labels at the same time. These labels most often overlap, because the frameworks share the same underlying logic. They do not always coincide. When they diverge, the project sponsor must arbitrate, and this arbitrage has a cost.

Four frameworks, four scales

The main frameworks share the idea of classification by risk level. They use neither the same labels nor the same number of levels.

The Equator Principles adopt the historical IFC scale with three levels. Category A targets significant, diverse, irreversible or unprecedented risks. Category B targets limited risks, often site-specific and manageable through standard measures. Category C targets minimal or no risks. The text reserves category A for projects presenting "significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented" (Equator Principles 4).

IFC applies the same A, B, C scale for its own investments, aligned with itsPerformance Standards. It is this grid that has spread to the banking sector.

The African Development Bank uses a numerical scale. Its operational safeguards classify operations on a gradation from category 1 to category 4, category 1 corresponding to the highest risk and a dedicated category for operations passing through financial intermediaries (AfDB, operational safeguards). The principle remains the same as the A, B, C scale, but the vocabulary differs.

The World Bank has changed logic with its Environmental and Social Framework. It no longer speaks of categories but of a risk classification in four levels: high, substantial, moderate, low (World Bank, Environmental and Social Framework). This classification is reviewed throughout the project cycle, and not fixed once and for all.

These scales do not translate term for term. A category A is not exactly a high risk, and a category B does not exactly cover a substantial or moderate risk. For the correspondence between the IFC and World Bank frameworks, see ourcomparison of IFC PS and ESS. Remember above all that moving from one scale to another requires judgement, never a simple conversion.

Who decides, and at what stage

Categorisation is not declared by the project sponsor. It is decided by each lender, for its own commitment.

Among Equator Principles signatories, it is the mandated lead arranger that categorises the project, very early on, on the basis of information available at entry into discussions. At IFC, the decision rests with its internal E&S teams during appraisal. At the African Development Bank, it is the services responsible for safeguards. At the World Bank, the project team assigns the classification and keeps it up to date.

Three features are found everywhere. The decision is taken early, before the dossier is complete. It rests on the information then available, often a project note and a preliminary visit. It can be reviewed if new elements appear, upwards as well as downwards.

This last point is essential. A category is not set in stone. A project classified B at the outset can tip into A if the assessment reveals critical habitat or unanticipated population displacement. The reverse also exists, but it is rarer and more difficult to obtain. A lender lowers a category with caution, because it engages its responsibility.

The project sponsor does not choose its category. It can however anticipate it, document it and argue. A dossier that presents a solid risk self-assessment from first contact steers the discussion. A silent dossier leaves the lender to classify by default at the most cautious level.

On what criteria divergence arises

The frameworks share the same analytical ingredients. Divergence comes from their dosage and their scope.

The first ingredient is the nature of impacts: scale, reversibility, unprecedented character, sensitivity of the receiving environment. A single project can be read differently on this point. A power plant located near a wetland will be judged high risk by a lender attentive to biodiversity, and intermediate risk by another that weighs more heavily the planned mitigation measures.

The second ingredient is residual risk, that is what remains after application of measures. A lender that gives credit to a robust action plan can classify lower. A lender that categorises on gross impacts, before mitigation, classifies higher. This difference in method explains a large part of the observed discrepancies.

The third ingredient is the scope taken into account. Some lenders integrate associated facilities, cumulative impacts and the supply chain from categorisation onwards. Others focus on the direct footprint of the project. The wider the scope, the more the category tends to rise.

The fourth ingredient is the substantive framework mobilised. A categorisation based on the Performance Standards does not weigh the same thresholds as a classification based on the World Bank Environmental and Social Standards or the African Development Bank operational safeguards. The logics converge, the tipping points do not.

Finally, the timing of the decision matters. A lender that categorises on a preliminary note does not see what a lender arrived later, with the impact assessment in hand, will have before its eyes. The divergence is then not a substantive disagreement, but an information gap.

What divergence costs, in documents and delays

A divergence in categorisation is not a theoretical debate. It is paid for in deliverables and weeks.

The first cost is documentary. The most demanding lender sets the level of evidence. If one of the financiers classifies the project at the highest level, it will request an in-depth impact assessment, broadened consultation, independent review and enhanced monitoring arrangements. The project sponsor cannot serve a light dossier to one lender and a heavy dossier to the other. It produces a single set of deliverables, aligned with the maximum requirement.

The second cost is to the timeline. An upward revision of category during appraisal triggers supplementary assessments. Seasonal inventories, census of affected persons, climate assessment: this work takes months, not days. It often falls at the worst moment, just before financial close.

The third cost is contractual. The highest category entails the strictest covenants, the broadest disclosure obligations and the most frequent supervision missions. These requirements are negotiated in the credit documentation. To discover them late is to renegotiate late.

Managing a project categorised at several speeds

The right posture is not to seek the lowest category. It is to anticipate the highest and to build a dossier that satisfies it.

The first reflex is to map the expected lenders and their respective grid from structuring onwards. Knowing that an Equator Principles bank will join the syndicate changes the documentary target, even if the first financier is more flexible.

The second reflex is to target the maximum requirement from the outset. A single set of deliverables, sized for the strictest lender, avoids revisions. It costs more to produce at the start. It costs far less than an upward revision of category at the end of appraisal.

The third reflex is to document one's own risk analysis. A reasoned self-categorisation, supported by impacts and by planned mitigation measures, gives an anchoring point for discussion with each lender. It also allows defence of a lower category when it is justified, evidence in hand.

The fourth reflex is to treat categorisation as a living subject. Lenders revise their classification as information is refined. A project sponsor that tracks these developments and updates its dossier keeps control. This vigilance aligns with the logic of awell-prepared lender E&S audit, where the coherence of the dossier makes the difference.

Above all, one must know what lenders check when several classifications coexist.

E&S categorisation is not an administrative formality. It is the decision that governs the budget, timeline and documentary burden of the project. When several lenders intervene, this decision is taken in several copies, according to distinct scales, and the labels may diverge.

Three principles avoid the trap. Map early the lenders and their grids. Target from the outset the highest requirement rather than the lowest. Document one's own risk analysis to weigh in the discussion. A project sponsor that undergoes its categorisation discovers it too late. A project sponsor that anticipates it transforms it into a management tool.