October 2018

The evolving nature of social licence to operate

  • By Terence Jeyaretnam, Partner, Climate Change and Sustainability, EY

Social licence to operate has historically been a key risk for the mining and metals sector, but it is evolving into a strategic risk that is much more complex to identify and manage

Boardrooms across Australia are debating the notion of social licence to operate. The debate has opened up due to two key factors:

1. The Royal Commission on banking, and the resulting reports by regulators, have highlighted the need for increased focus on corporate social licence to operate.

2. The draft ASX Corporate Governance Principles are currently being updated, with a proposal to introduce the concept of social licence to operate. However, this proposal has come under heavy scrutiny by company directors and is likely to be toned down.

Defining social licence to operate

Moffatt et al define social licence to operate (SLO) as the increasing pressures on industry performance and the associated societal acceptance of resource development and extraction operations (2015). Abrahamsson et al argue that social aspects related to mining, such as inclusive recruitment, participation in community planning and creating safe workplaces, can also affect a company’s social licence to mine (2016). The Minerals Council of Australia (MCA) has said that SLO amounts to an ‘unwritten social contract’ between companies and the communities in which they operate. This contract is based on both company performance and the amount of trust the local community has for the company (Lacey, 2013).

An increasing risk for the mining and metals sector

EY annually publishes the top ten business risks facing the mining and metals sector. SLO has again been identified in 2018 by EY as one of the top ten risks. EY states that:

‘managing the needs and expectations of communities, governments, employees and other stakeholders who provide companies with their social licence to operate can be a delicate balancing act of agendas and issues. Environmental accidents, employee strikes and worker fatalities suffered by some companies can result in collateral damage for the whole industry. There needs to be a shift from a reactive and compensation model of social investment to one that is far more strategic and collaborative.’ (2018)

EY notes that there is often an expectation gap between what a mining and metals company offers and what a community wants, and, as a result, several mining companies have had to abandon projects. Examples cited include Newmont’s deferred near-term investment in its US$5 billion copper-gold Conga project in Peru in 2016 due to community opposition, and the Guatemalan Government revoking Tahoe Resources’ mining licence for its flagship Escobal mine due to a long-running dispute with local groups, which resulted in a collapse in its share price. A court has since reinstated the licence, but the company has been unable to restart operations due to a blockade at the mine (EY, 2018).

The future social licence

SLO has generally acted as a compact between a company and affected stakeholders. It generally exists outside the regulatory licencing process, and indeed depending on the nature of the issues may or may not be more onerous than those requirements imposed by regulators. However, it is almost always borne from the action of some key influential stakeholders.

The future of SLO will continue to evolve. I believe key changes will include:

  • Societal participation (beyond local communities) – social media and the internet moving information faster than ever before will see issues-based stakeholder participation en masse. Companies will need to strategically manage this engagement.
  • Mushrooming disclosure regimes – an increased level and extent of disclosures on impact, both positive and negative, will be needed alongside measures of value being created to local, regional, national and global communities. Investors will also be relying heavily on such disclosures.
  • Governance founded on an accountability framework – frameworks will measure performance not only on financial, environmental and social metrics, but also on stakeholder inclusivity and responsiveness.
  • Minority voices amplified – rights of indigenous and other minority communities facing not just direct impact, but generational misgivings, will block project proposals due to the cumulative impacts of ongoing expansions and new tenements.
  • A focus on ownership – new business models will be sought whereby community or locally-owned operations would be favoured over traditional models. Inclusive (or social) procurement will be a key pillar of such models.
  • Litigation increasing – there will be more litigation, especially for past damages. Provisioning will therefore become a key issue for companies and regulators.
  • Risk accumulation – of the types of risks identified by EY as key risks for the sector, a number of risks may co-exist, leading to terminal conditions. Examples may include SLO combined with regulatory interventions.

SLO will also become a necessary part of doing business in other sectors such as banking, insurance and finance, energy, food and grocery, consumer products, real estate and media and entertainment.

The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

References

Abrahamsson L, 2016. ‘Challenges in obtaining a social licence to mine’, AusIMM Bulletin, December.

Ernst & Young (EY), 2018. ‘Top 10 business risks facing mining and metals 2017–2018’ [online]. Available from: www.ey.com/Publication/vwLUAssets/ey-top-10-business-risks-facing-mining-and-metals-2017-2018/$FILE/ey-top-10-business-risks-facing-mining-and-metals-2017-2018.pdf.

Lacey J, 2013. ‘Can you legislate a social licence to operate?’, The Conversation [online]. Available from: theconversation.com/can-you-legislate-a-social-licence-to-operate-10948.

Moffat, Kieren, Lacey, Zhang, Airong and Leipold, 2015. ‘The social licence to operate: a critical review’ Forestry: An International Journal of Forest Research

Feature image: Adwo/Shutterstock.com.

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