LAWS666 — Unit 5 — Problems and Exercises

Private Sector Voluntary Codes & ESG (Market-Orientation & Litigation Safe Harbors)?

1/3 Concerning the Trump Labor Department’s lecturing professional investment managers by proposed rule to ignore ESG (since abandoned), and so how to invest, what do you make of this? The brouhaha attracted considerable interest in the investment world, while you can read the financial industry commentary on Secretary Scalia’s draft rule via looking at the Law Library’s Green Finance Guide. The point is not to criticize the Trump Administration as such, but rather to demonstrate how deeply ESG has taken root in the private sector investing community. So when the government effectively wanted to discourage if not outright prohibit ESG investing, the investment industry very strongly opposed the measure.

2/3 Please read the Equator Principles closely, and ask yourself how they would apply to individual projects in both the US and developing countries (since coverage is global, not just in developing countries, although it is most visible perhaps in international projects because it mandates what amount to minimum standards)? Try to understand the mechanics of application (what are the actual tests, etc.). When you look at the Equator Principles membership, you will notice that among others Bank of America, Wells Fargo and JP Morgan are all members (hence the idea you can see this already in the Charlotte practice, since they are major law firm clients there and elsewhere).

Why do you think banks insist on EP, and how would you characterize compliance in legal terms? The original Equator Principles date back to the early 2000s, but they are already at version 3.0. The most recent additions include mandated climate change GHG-related disclosures, plus extension of EP’s scope beyond project finance as such, to what you might call “project-focused” loans (including bridge loans, etc.). The difference is that project finance is premised traditionally on non-recourse finance involving a special purpose vehicle created for a concession-based specific project with a projected life of at least 20-30 years, usually involving something like a build-operate-transfer (BOT) or build-operate-own (BOO) financing model. What do you think these consist of in the real world? (Jeopardy style, what is infrastructure?) Project-focused loans may not be non-recourse, but the focus is on the usage of the money regardless of the structure of the financial transaction.

The EPA as government agency has until recently strained to avoid the language of “climate change,” but you will notice that the private sector is entirely comfortable with incorporating it into their analysis of prospective loans. How do you think “enforcement” works in such a private sector voluntary code and safe harbor arrangement? What do you think happens if a potential borrower were to convince an Equator Principles member financial institution of its bona fides in terms of promises, but then simply disregards the promises once it has its project finance loan funds in hand?

3/3 Concerning the implicit comparison of the Freeport Grasberg mine and the Tangguh LNG project, we shall appoint a student group to work on this problem and report back. The practical insight is that the Papuans as Melanesians from a stone age culture within living memory faced off against a Western investor and (mostly Javanese) Indonesians from a modern culture, and as a result were essentially placed in the same position as nineteenth century American Indians. There was a struggle for land in which the locals were largely moved off their traditional lands to enable its exploitation by the newcomers, at the same time as Papuans largely lost their demographic majority in the overall local population through government programs encouraging inward migration from Java and other more developed areas of Indonesia.

The Indonesian government adopts a somewhat paternalistic attitude towards the Papuans, while letting be known their impatience at their seeming lack of gratitude for its development efforts. Meanwhile, the Papuans tend to be regarded less than favorably by many ordinary Indonesians. They look different as Melanesians, they speak different languages, and are regarded as primitives not least because their customary attire may consist solely of a penis gourd (nonetheless, there are Westerners who praise them as a sophisticated culture from which we should learn, see Jared Diamond, The World Until Yesterday (2012)). There is a small but stubborn guerrilla independence movement among some Papuans, drawing heavy-handed Indonesian military responses from time to time (against separatism, but in practical terms pressuring local villagers to reveal their haunts). However, the Papuans’ biggest grievance is essentially loss of traditional lands and so their way of life (as opposed to what might be called impingement on any sense of budding Papuan nationalism). So are mostly academic claims of indigenous peoples’ third generation rights under a human rights analysis recognized as a matter of state practice, and what is the legal significance of such a failure?

Tangguh is a multi-billion dollar BP project located also in Irian Jaya, Indonesia like Freeport’s Grasberg project, but it is the antithesis of Freeport Grasberg, and they recently signed contracts on expanding Tangguh from one to three LNG trains at a cost of several billion dollars. This differential treatment is partially a factual predicate for saying that Freeport lost several billion dollars essentially because of their questionable longer term behaviour leading to them being forced to divest a majority of the Grasberg project in order to secure an extension of their concession. As lawyers, you should be able to reverse engineer BP’s concerns that Tangguh not turn into another Freeport, and to understand the structure of the social and environmental framework to avoid another Freeport, or more generally the kinds of cases that formerly were filed regularly under the ATCA. So please articulate the legal basis of BP’s strategy and approach with a view to being able to replicate it elsewhere. What are its key elements?

We shall appoint different student groups to work and report back on two problems addressing on the one hand private ordering in the sense of implicit differences between the approaches visible in the contrast between the Freeport-McMoran Grasberg mine and BP’s Tangguh LNG project, versus our “known vs unknown unknowns” in terms of the decarbonization push now contemplated largely by the private sector, which seems crucial in the climate change context. To what extent does the business opportunity narrative drive change, versus traditional regulation or even international agreements as treaty law?

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