February 2016

Social risk as an agent of change

  • By Jocelyn Fraser, PhD candidate, and Malcolm Scoble, Professor, Norman B Keevil Institute of Mining Engineering, University of British Columbia, Canada

Social risk in the mining sector is a legitimate business risk that must be managed strategically

Mining has always been a risky business. From the gamble of finding a mineable deposit to the challenges of building and operating projects in inhospitable regions, there is risk every step of the way. In the late 20th century, mining companies became adept at managing the triumvirate of traditional risk (legal, financial and operating), building expertise to mitigate threats to project production schedules and budgets, and ensuring that shareholders profited from their investment.

However, the past decade has seen two fundamental changes adversely affect the success of mining projects and disturb the business-as-usual approach. The first is a change in the definition of business success. Milton Friedman’s notion that the ‘business of business is business’ has largely been replaced as companies endorse a new standard of corporate performance – one that places a growing emphasis on social imperatives as well as financial performance, and where profits benefit stakeholders, not just shareholders. The second is the rise of social risk, characterised by increasing and costly incidents of mining-community conflict. From minor situations of company-community disagreement to sustained violent conflict, a failure to earn stakeholder approval has emerged as one of the leading causes of project delays and a key strategic risk. EY (2014) ranked civil opposition to mining projects as one of the top three risks to mining companies in 2014, and from 2008 – the peak of the super cycle – to 2016, earning a ‘social licence to operate’ was ranked in the top 10 mining sector business risks. In other words, for mining companies, whose projects can only be built where the deposit exists and where the life-of-mine can extend several decades, generating value for both company and community is becoming a strategic imperative.

The path forward is not an easy one.

The impacts of social risk

The rise of social risk is complemented by the need to earn the trust of an increasing number of stakeholders so that mining projects can be developed, commissioned, operated and reclaimed effectively. Incidents of costly company-community conflict are occurring even when companies are fully compliant with regulatory and legal requirements, despite initiatives by mining companies to earn social acceptance and despite the proliferation of tools and voluntary codes of conduct to support corporate social responsibility (CSR).

Several factors are intensifying the impact of social risk. The first is that social risk can occur at any stage of the mining cycle and is occurring in countries with stable political environments and good governance that are not typically considered high-risk jurisdictions by financial institutions and ratings agencies (for example, Australia and Canada). A study produced in 2014 by researchers at Harvard University and the University of Queensland examining the costs of conflict, estimated that a project with a capital budget of between $3 and 5 billion could lose up to $20 million per week due to delayed production in net present value terms due to social unrest (Franks et al, 2014).

Another factor is that social risk has increased during a tumultuous time in the global mining sector. The last decade has seen mining companies grapple with fluctuating commodity prices, revenues and profits; increasing costs and debt levels; competition for human capital; and the financial demands of developing low-grade deposits in remote regions. The cumulative impact of risk has diminished value for mining companies around the world. According to PwC, at the end of 2014, the market capitalisation of the 40 largest listed mining companies was down 50 per cent compared with four years earlier (PwC, 2015). Moreover, countries, as well as companies, feel the impact of social risk. In 2014, it was predicted that opposition to mining projects in Peru would cost the country $57 billion in foreign investment as continued social unrest, triggered by opposition to extractive projects, continued to cast a shadow over the country’s mining sector.

These factors contribute to a new reality for the mining industry, with effective companies recognising that social risk is a legitimate business risk that must be managed strategically. To be successful, CSR must be embedded as a strategic business imperative, a core element of risk management and a countermeasure to social risk.

Reframing corporate social responsibility as a strategic business imperative

There has been considerable discussion of late about the health of CSR. A growing number of mining companies understand the need to demonstrate social and environmental responsibility and generate benefits for stakeholders as well as shareholders. In October 2015, Barclays hosted a debate entitled ‘Is CSR Dead?’. Following the discussion by an esteemed panel, the audience voted overwhelmingly (75 per cent to 25 per cent) that CSR is very much alive, although in need of attention. Participants agreed that to deliver the breakthrough solutions required to address some of society’s most pressing problems, dialogue on business and society must continue (Barclays, 2015).

The mining sector’s traditional approach to CSR focuses on two areas. The first is philanthropic investment in causes important to someone in the organisation or community. Redistribution of wealth in this manner is valuable and should not be discounted. However, while there will always be a role for this transactional approach to CSR, it treats social responsibility as a sunk cost and, when times are tough, budgets and staff are often cut to protect the company’s bottom line.

The second area is performance optimisation – the idea of doing well by doing good. Performance initiatives might include local training and procurement, which can reduce company costs and generate value in community, energy efficiency, waste management or greenhouse gas emissions reduction. This approach also yields benefits and can result in quantifiable cost savings that are welcomed by the company. However, we believe there is a need for a more strategic focus.

We are advocating for a greater focus on a third dimension, which we call ‘purpose’. The objective is to enable CSR to drive business value; create value for stakeholders, rightsholders and shareholders; and enable better risk management. The idea is to work with communities to find the points of intersection between the needs of business and the needs of society, and collaborate to generate, not just redistribute, wealth. Harvard professor Michael Porter and his colleague Mark Kramer, who popularised the term ‘creating shared value’, have described this approach as implementing policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in associated communities (Porter and Kramer, 2011). This results in expanded economic and social value. An important premise of this concept is the development of a profitable business strategy with parallel goals – improving business performance while delivering tangible social benefits.

As a standalone initiative, creating shared value is not a perfect system, but we believe that it should become an integral part of the CSR toolkit, working alongside philanthropy and performance optimisation. We see four key benefits to reframing CSR to include a focus on creating shared value:

  1. As it is an economic approach tied to the bottom line, there are systems in place to measure and monetise success. This addresses a fundamental challenge with traditional CSR approaches, where efforts to monetise issues that do not have financial equivalencies have been challenging and where questions remain about the ability to prove a business case for CSR.
  2. The approach can be embedded enterprise-wide, rather than being owned by a single department, while being directed by individual business units. Within mining companies, where different sites can operate with a high degree of autonomy, this approach empowers local teams to work with local communities to identify areas for collaboration.
  3. During downturns in the commodity cycle, when traditional CSR programs tend to face staff and budget cuts, generating new economic value will resonate in the C-suite and at the Board level and should serve to protect the investment to secure the return.
  4. Last, but certainly not least, because communities will see direct benefit on issues that they identify as important, this approach may serve to mitigate social risk.

Transforming social risk and social responsibility

Mining companies are increasingly recognising the importance of engaging all stakeholders, not just shareholders or institutional investors, and of building collaborative relationships with communities proximal to resource deposits. However, good intentions on the part of business are often not sufficient to resolve differences and achieve the desired outcome. This is especially true in the mining sector, where the complexity of conflict and seriousness of repercussions necessitates a comprehensive, multi-disciplinary and integrated approach.

While CSR engagement strategies and reporting tools are plentiful, incidents of mining–community conflict have not declined in the past decade. In its 2013 report ‘Reverse the Curse’, the McKinsey Global Institute concluded that continued incidents of conflict represent dissatisfaction with the current model of resource extraction – one that has failed to transform resource wealth into longer-term prosperity for the communities that host mining operations (McKinsey Global Institute, 2013). We suggest that embedding CSR as a strategic business imperative could be transformative.

A first step in this strategic approach to CSR requires mining companies to break down entrenched organisational silos, increase collaboration and provide training to cross-functional teams. The objective of this enterprise approach to CSR is to build a team to execute shared decisions on project issues. Assembling an integrated team to address social issues should result in stronger internal alignment and create synergy across business lines. This alignment should then enable more effective social risk management and support the identification of opportunities for company-community collaboration to create value.

Once companies have built integrated teams, team members can work together to build a solid business case for social and environmental performance. This will support efforts by managers to integrate the social aspects of mining into the business strategy and identify the ways in which social risk management can protect value. Together, the interdisciplinary team can set measurable objectives to demonstrate that social responsibility is a critical component in the company’s ongoing strategy to optimise performance and reduce risk, and to report, in financial terms, the ways in which social engagement can generate savings and capture or add value.

Once an integrated team has been recruited and trained, the next step in strategic CSR is considering a new approach to community relations – one that is transformative. Goodwill investments in infrastructure are often the easy choice for mining companies that are looking to secure support. Many communities have significant infrastructure needs – road construction, power access, water treatment or housing – that they are hard pressed to finance, while local service providers often advocate for investment in schools or medical clinics. These are all worthy causes, and there is a definite appeal of investing in infrastructure as the resulting project is tangible and the community (and company representatives) can visit it, use it and know that it was built by, or purchased with, money from a specific company.

However, we believe that there is unrealised value in complementing what might be described as the ‘tried and true’ approach to CSR by attempting to secure the types of partnerships that might generate, rather than simply redistribute, economic value for the community and the company. We like the example provided by Anglo American Thermal Coal, which was able to transform an operational problem into a community opportunity and create value for both the company and its stakeholders. The company’s challenge was an operational safety and environmental issue associated with increasing volumes of water in its underground mines in the Witold region of South Africa. The facilities are located near the community of eMalahleni, where there is a shortage of drinking water. Following a period of consultation, the company collaborated with the community and BHP Billiton Energy Coal South Africa in a private–public partnership to build the eMalahleni water treatment plant, which produces potable water (Merta, 2014). The municipality buys a portion of this water to provide clean drinking water for its residents. Operating costs are further offset by collecting fees from other industrial users of the plant. In addition, a new small business has been created using gypsum, a by-product of the water treatment, to produce and sell a building material now widely used in local construction.

Looking to the future

Proving the connection between financial performance and performance on social issues has been problematic for business. Transformative CSR, specifically creating shared value, addresses this issue by implementing measures to create new streams of economic value that enhance the competitiveness of the company while addressing economic or social issues in host communities.

By reframing CSR as a strategic business imperative, mining companies may be able to build more positive relationships with communities that host operations, reduce conflict and increase the probability that projects can gain the approval required to build and operate facilities that impact on society and the environment. Moving forward, we believe that best-practice examples of CSR will share two features. Strategic CSR will be a business strategy with parallel goals: improving company performance while delivering economic value to host communities. CSR programs will focus on issues affecting both company and community, recognising that the more closely tied a social issue is to a company’s business, the greater the opportunity to drive change. The result is the proverbial win-win – improving business performance while delivering tangible social benefits.

The idea of combining care and compassion for mining communities with sound commercial imperatives is not a new one. However, we believe that the time has come to embed the practice across the mining sector. Incidents of social risk adversely impact both company and community. Taking a more strategic approach to engagement could be one way to build both a stronger business case for CSR and more productive relationships with stakeholders. 

References

Barclays, 2015. Is CSR dead?. Available from: https://www.youtube.com/watch?v=Kdu01FhtngU

EY, 2014. Business risks facing mining and metals: 2014–2015. Available from: www.ey.com/Publication/vwLUAssets/EY-Business-risks-facing-mining-and-metals-2014%E2%80%932015/$FILE/EY-Business-risks-facing-mining-and-metals-2014%E2%80%932015.pdf

Franks D M, Davis R, Bebbington A J, Ali S H, Kemp D and Scurrah M, 2014. Conflict translates environmental and social risk into business costs. Available from: www.csrm.uq.edu.au/publications?task=download&file=pub_link&id=709

McKinsey Global Institute, 2013. Reverse the curse: maximizing the potential of resource-driven economies. Available from: www.mckinsey.com/insights/energy_resources_materials/reverse_the_curse_maximizing_the_potential_of_resource_driven_economies

Merta E, 2014. eMalahleni water treatment plant. Available from: http://wiki.gtk.fi/web/mine-closedure/wiki/-/wiki/Wiki/eMalahleni+water+treatment+plant/pop_up;jsessionid=ff05e91be2d5f4d7395f01309098

Porter M E and Kramer M R, 2011. Creating shared value, Harvard Business Review, January–February 2011. Available from: https://hbr.org/2011/01/the-big-idea-creating-shared-value

PwC, 2015. Mine 2015: The gloves are off. Available from: www.pwc.com/ca/en/mining/publications/pwc-mine-2015-06-en.pdf

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