Managing social risks is often overlooked in extractive ESG strategies due to the well-articulated industry measures for environmental and governance factors.
Paradoxically, it can also be the most important. Any project lacking a social license to operate is going to face significant headwinds.
This article highlights the pitfalls of ignoring social risks in extractive’s ESG strategies and provides a blueprint for developing an effective community engagement programme.
By definition, approaching the ‘S’ in ESG requires engaging with local communities and stakeholders, to ensure they understand potential impacts of the operation, can raise grievances about it, and see positive results after grievances are raised. Once seen as a regulatory box-checking exercise, socially sustainable business is increasingly recognised as a core component of a strong business model.
There is a clear business case for doing so. Failure to properly carry out community and stakeholder engagement poses significant risks for extractives. The list of examples of negative impacts seen by extractives over the past century after failing to properly engage with their social operating context is long, ranging from lost revenue, assets and share value to international legal litigation against firms and executives.
Reputation damage can occur when companies are perceived as not being environmentally responsible or when they are seen as not engaging with the community in a transparent and responsible manner. Companies must take steps to manage their reputation and to ensure that they are seen as good corporate citizens, particularly where a project involves indigenous land rights – an increasingly common factor. This extends to financiers of extractives. The State Bank of India saw huge divestment in bonds following announcement of a $1 billion loan to Adani for their controversial Carmichael mine in Australia where the firm was accused of misleading community engagement processes. More and more, investors are requiring firms to prove their ESG credentials to reduce material and indirect risk in their portfolios, particularly large institutional organisations.
Social risks present from two main sources.
The most obvious risk source is social conflicts. This can arise from disputes over land rights, compensation, and other issues. Companies must work to address these conflicts in a fair and transparent manner. This includes involving local leaders and community members in decision-making and ensuring that all parties are heard, and their concerns are addressed.
One of the most significant risks associated with mining is the impact on the environment. Mining companies must take steps to minimize the environmental impact of their operations. This includes mitigating the release of pollutants into the air and water. It may seem counterintuitive to relate environmental impacts to social risks, however mines are often located in remote areas where local populations rely on natural resources for survival. Pollution events can therefore permanently disrupt local supplies of food and water, generating grievances against the firm and disrupting social order. Community engagement is a powerful tool for identifying environmental factors posing social risks and opportunities and tracking the success of mitigation strategies.
There are some basic tenants of good community engagement which should be at the forefront of any programme.
Awareness
Engagement programmes must begin with an awareness of the cultural, social, and economic context in which they operate. This includes understanding the local laws, customs, and traditions of the community. Companies should work with local leaders and community members to ensure that their operations are in line with the values and beliefs of the community.
Transparency
Transparency is also key in community engagement. Mining companies must be transparent about their operations and the potential impacts they may have on the community. This includes being transparent about the environmental and social risks associated with mining. Companies should also be transparent about their plans for mitigating these risks and their commitment to sustainability.
Consultation
Another important aspect of community engagement is consultation. Mining companies must consult with the communities in which they operate to understand their needs and concerns. This involves engaging with local leaders and community members to understand their perspectives on mining and to identify potential solutions to any issues that may arise. Companies should also seek feedback from the community on their engagement efforts and make changes as necessary.
Communication
It may seem obvious, but one of the most important aspects of community engagement is communication. Mining companies must communicate effectively with the communities in which they operate. This involves listening to their concerns and addressing them in a timely and clear manner. Companies should also provide regular updates on their activities and any potential impacts on the community.
Development
Community engagement should also involve providing benefits to the communities in which companies operate. This can include providing jobs, training, and other economic opportunities. Companies should also invest in infrastructure and other development initiatives to support the long-term sustainability of the community. A more stable local community with a secure and diversified political economy will help to insulate the firm against potential unrest or conflict caused by external risk factors. It also reduces the reliance of the local community on rent seeking, which can dominate the local economy, particularly in the period before a mine is operational. This reduces the potential for social conflicts over compensation, as individuals have other sources of income. Furthermore, it can provide local suppliers with a richer talent pool, bolstering their ability to innovate and provide services at competitive prices.
These elements must be synthesised into a coherent strategy to be most effective.
There are a number of international standards which are used in sustainable business frameworks, including the IFC Performance Standards on Environmental and Social Sustainability and UN Declaration on the Rights of Indigenous Peoples. These offer guidance, however no two community settings will be the same, and so there is no blueprint for community engagement and social risk mitigation. Ultimately, mitigating social risks inherently requires an appreciation of context when developing ESG strategy. It is not as simple as allocating a budget for social responsibility programmes and allowing individuals to deliver programmes because they have a passion for it. Community engagement elements must be part of an optimised system of ESG risk identification and mitigation measures.
Developing means to assess and track the success of measures is key to any strategy. Quantifiable data enables effective communication of impacts to communities, and data-driven decision making for the organisation.
In conclusion, community engagement programmes are critical to managing ESG risk in the extractive industry. Companies must engage with local communities in a transparent, responsible, and culturally sensitive manner. This includes communicating effectively, consulting with the community, providing benefits, understanding the context, minimizing environmental impacts, addressing social conflicts. By engaging with the community in this way, mining companies can build strong relationships with their stakeholders, minimize negative impacts, and support the long-term success of their operational ESG risk mitigation strategies.
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