Operating Locally: BSR’s Three-Step Approach to Delivering Lasting Value

Authors

• Michael Oxman

  Former Director, Advisory Services, BSR

Leading energy and extractive companies continue to develop new approaches to ensuring benefits to local communities and other key stakeholders from large capital projects and ongoing operations. These benefits include economic opportunities such as employment and the procurement of goods and services from local suppliers as well as benefits from social investments in education, health, and other community areas of need.

Although much progress has been made, BSR’s work suggests that companies need to forge more deliberate links between commercial and social performance than those implicit in the oft-cited concept of “social license to operate”—the minimum standard of company performance that is required for local acceptance of project activities. If “social license” is used as the primary driver of commercial value for investing in local benefits, there is a risk that these programs will erode due to changing interpretations of social license criteria, shifts in personnel from life-cycle transitions, and the gradual de-emphasis of these programs as major problems are perceived to be averted.

In most cases, shifting from social license to a more effective “frame” of supporting long-lasting, sustainable local benefits does not require more money and resources. Rather, companies can achieve positive local benefit outcomes equally well through a systematic analysis and recognition of the commercial and social value at stake. To do this, BSR recommends an approach that includes the following elements: a strong risk-management (social license) base, “investments” in a formal accountability-enabling system, and deployment of a framework that promotes innovation.

While this discussion addresses opportunities within energy and mining industries, BSR is planning similar thought pieces and service offerings on this topic for other sectors with local issues at the forefront of their operations or supply chains.

Risk Mitigation

Understandably, many company managers design local benefit initiatives with an emphasis on securing the major permits necessary for project execution and avoidance of major downside events such as severe interruptions in operations and overt displays of community opposition. Within the sustainability realm, risk management typically concentrates on the mitigation of adverse environmental and social impacts to employees, contractors, and communities that are closest to project facilities. Most of these programs are supported by external communications and community-relations efforts aimed at improving awareness among key stakeholders and regulatory authorities of both potential project impacts and corresponding company activities to mitigate these impacts.

Characteristics of Risk Mitigation

Typically, companies that successfully manage social and environmental risks have obtained or plan to obtain certification standards such as ISO14001, OSHAS 18001, SA8000, and others that help assure operational excellence in community awareness, safety, and environmental protection. For management of local risks, companies commonly deploy environmental, social, and health-impact assessments; corresponding social impact management plans; and the adoption of risk-mitigating policies and procedures.

Recently, sustainability risk management in the energy and extractives sector has expanded from traditional health, safety, and environmental issues to include human rights, anti-corruption measures, natural-resource efficiency, waste and chemical management, and heightened participation in transparency initiatives. As a result, energy and extractives companies are likely to support some of the following initiatives:

• Universal Declaration of Human Rights
• Voluntary Principles on Security and Human Rights
• Extractive Industries Transparency Initiative
• International Cyanide Management Code

The Limitations of a ‘Risk-Management’ Focus

While risk management is essential to preserving value, some key limitations and possible inadvertent consequences include:

• Community engagement and social investment: A risk-management lens often ends up focusing on the most visible local needs or topics such as those related to political priorities and thereby creates gradual perceptions of inequity or favoritism. For instance, while social-investment programs used primarily as mitigating measures against “low-probability/high-impact risks” may secure the social license or permits necessary to operate, these programs are likely to end when the project ends—and, in some cases, they may not even last beyond the exploration or construction phases. As a result, unanticipated challenges may have to be managed at significant company costs and without substantial local benefits.

  Without a community-engagement strategy that extends beyond immediate risk horizons, company managers may not pick up on nuanced local realities, conflicting agendas, or negative perceptions of company activities from groups that are less vocal.

  In other instances, the term “local” is used to refer to the entire population, which is usually composed of national, regional, provincial, tribal, and other groups that have unique interests and concerns. Failure to meaningfully delineate local population differences can lead to misdirected funding for programs aimed at benefiting “local” communities, enhanced tension or rivalries, and missed opportunities to maximize positive impacts.

• Workforce and supplier development (local content): To mitigate risks, these activities tend to be focused on local hiring, meeting contractual and regulatory targets, or on non-strategic commercial relationships that “keep the peace” rather than on strengthening or diversifying the local economy. Because of this limited scope, we have seen subtle problems such as tension among local employees or among expatriates and local workers erupt into larger conflicts and work stoppages. This is sometimes due to how these programs are managed—often by large contractors who are understandably focused on cost and schedule but who lack clear direction or coordination from the operating companies on workforce and supplier-development topics. The other limitation of an overemphasis on risk management is its focus on short-term “wins” that solve immediate problems but often result in the creation of local suppliers who, rather than evolving into viable commercial entities, become dependent on the company. Host governments often foment these problems by imposing local content or community-development targets that are unrealistic, politically motivated, or focused on the short term.
• Compartmentalization: Finally, risk management often compartmentalizes local-issue management into different functions such as community relations, human resources, or procurement without promoting adequate cross-functional engagement—an approach that is both inefficient and unlikely to lead to robust local benefit programs.

In the end, while a risk-management-only approach can elevate the business case for the creation and implementation of local benefit programs, it frequently does this by pointing to a problem that needs to be “fixed” (particularly when fire-fighting is necessary to manage immediate risks or problems) rather than an opportunity to create sustained value.

Accountability

One of the key remedies for the limitations of a risk-management-only approach is the addition of a clear accountability system that does several things:

• Establishes explicit local benefit objectives to mitigate downside risk and increase the likelihood of mutually beneficial outcomes. By acknowledging the commercial and social value at stake, companies can shift objectives from the avoidance of negative outcomes to the affirmation of genuine, long-lasting local benefits. As a result, company managers are more apt to create programs that further company interests while benefiting the local community—making the program more sustainable over the long term. In addition, by articulating local benefit objectives, all parties achieve greater clarity on the required external roles and responsibilities (discussed below) for delivering on program commitments.

• Recognizes shared interests and responsibilities. In BSR’s experience, many local benefit programs in the energy and extractives sector fail to achieve their stated objectives because of insufficient buy-in across major stakeholder interests. The “Overlapping Interests” chart below offers examples of interest areas that are more likely to secure traction because of the shared objectives that can be established across governments, civil society, and the private sector.

  

  In addition to shared buy-in, it is equally important for companies to clearly define and enforce stakeholder responsibilities. Frequently, however, companies are unwilling or reluctant to impress greater accountability (through, for example, commercial, budget, technical, and social-programming discussions) on partners, governments, and direct stakeholders of local benefits. As a result, we often see a pattern of well-meaning social investments or community-relations activities focused on expediting immediate “solutions”—sometimes creating community dependence on these programs or supporting an entitlement culture that ultimately enhances risk and drains company resources. Over the long term, these programs are unsustainable, and companies put their own commercial value at risk by continuing to spend and manage ineffective activities.

  While grand statements of “withholding” benefits to enforce accountability are very difficult and usually not practical, scrutinizing company interactions with local actors specifically for the purpose of inserting and enhancing external accountability alternatives are essential. In addition, the deployment of internal accountability systems that create links among traditional local benefit stewards (such as community-relations teams) and other corporate functions can leverage routine interactions with external stakeholders and increase the opportunities for enforcing mutual responsibility.

• Supports local benefit objectives with transparent corporate standards. More companies are including environmental and local benefit requirements in contracts with suppliers and host governments as well as via a broader range of voluntary best-practice initiatives such as the ICMM’s Sustainable Development Framework, the IPIECA’s Good Practice Guidance, the IFC Performance Standards, and the Mining Association of Canada’s Towards Sustainable Mining.

  As a result of these visible commitments, company processes such as environment and social impact assessments, socioeconomic baselines, and reporting activities are not only formalized but also take on a greater degree of public involvement and are more directly linked to both action and response.

With the clearer objectives, roles, and infrastructure noted above, company managers can begin to work in a more integrated fashion that leverages company resources (from the asset to the corporate level), mitigates duplicative efforts and processes, efficiently deploys third-party and independent expertise, actively manages civil society and multilateral partnerships, and proactively develops local capabilities with strategic and deliberate planning.

Benefits to Companies and Local Communities Through Accountability

Effective accountability programming can lead to more efficient and effective local benefit programs in the following ways:

• Focus areas for local benefit programs are likely to be determined more inclusively. Because of the shared objectives and the emphasis on accountability, participation becomes mandatory to secure genuine internal and external buy-in. With this support, there is also a greater likelihood that the work will continue beyond the life of company operations. In the economic development realm, company managers can also increase local economic participation by modifying contracting and procurement procedures (“unbundling large contracts”) and considering changes to project engineering and design processes to facilitate competitiveness among local companies. However, these tactics are feasible only with the strong internal alignment and coordination frameworks noted above.
• Sustainability and CSR budgets avoid costly silos or inefficiencies. By setting expectations and incentives across functions, it’s easier to pursue collaborative solutions to local issues within the company. In addition, working with civil society partners and government institutions on explicit objectives can reinforce internal coordination for other company activities. For example, making commitments to work in partnership on the range of possible social and environmental issues associated with both construction mobilization (“ramp-up”) and demobilization (“ramp-down”) phases not only minimizes risk, it can help facilitate greater collaboration between construction and operations staff as they complete their hand-offs.
• Sustainability partners and beneficiaries are also accountable. With regard to local partners—including international development agencies, local nonprofits, training providers, and technical institutes—accountability mechanisms such as formal requests for proposals, competitive tenders, beneficiary commitments, and a greater emphasis on both program governance and milestones help protect companies from getting unnecessarily mired in local issues and serve as essential capacity-building tactics in support of local benefits.

Because of the longer-term views that are taken via the focused content noted above and the deployment of best practice tools in community engagement and local content, companies in this category are likely to see more visible benefits and a lower overall risk threshold. The systematic nature of company approaches and embedded roles and responsibilities for local benefits also creates synergies across disciplines.

Innovation

In addition to expanding commercial returns and enhancing local benefits, risk management and accountability systems also provide the foundation to gather inputs and ideas from internal experts as well as from communities and external practitioners.

Characteristics of Innovation

When applied to an organization, the term “innovation” refers to a culture that rewards creative, cross-disciplinary planning and continuous improvement in the management of local impacts and opportunities. These organizations take the accountability platform even further by elevating cross-disciplinary engagement on important issues to decision-making activities through, for example, project-oriented decision review boards. These structures help ensure that diverse perspectives are included in project development, and that project teams identify internal resource needs to achieve local benefit objectives. Inclusion of peers as well as external stakeholders and third parties in these or in supporting decision-making frameworks can also improve the quality of programs and the efficiency of implementation.

Many companies have even transferred internal local benefit responsibilities outside the company into trusts or foundations that help minimize management challenges and ensure that the benefits flow to the intended beneficiaries. (Related to this, BSR will soon be posting a study conducted with the World Bank on mining trusts, funds, and foundations on our website.) Enterprise centers such as BP’s in Azerbaijan offer other examples of company-initiated external entities (often with multi-stakeholder management or funding participation) that help integrate procurement, local supplier development, and SME support activities—thereby promoting the longer-term viability of local companies, reducing overhead costs, contributing to wider economic development, and potentially identifying savings in the supply chain.

Examples of emerging innovative approaches to delivering local benefits are listed in the following table, and contrasted with their framing within a pure risk-management philosophy.

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Water

Risk-management approach:

• Increase efficiency of water use.
• Protect existing water resources.
• Minimize exposure to conflicts over resources.
• Develop and maintain comprehensive project water-balance models.

Innovation approach:

Engage local water users to understand how company water use fits within broader social, environmental, cultural, and economic needs, and seek creative solutions to help all users meet these needs and thus reduce competition for resources.

Teck Resources took a rights-based, multidisciplinary approach to water conflicts at its Carmen de Andacollo operations in Chile. The company identified an alternative aquifer to meet its operational needs, while returning the original, higher-quality water source to the community for drinking water and also funding improvements in canals and irrigation technology for local farmers.

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Biodiversity

Risk-management approach:

Protect specific habitats, corridors, or endangered species.

Innovation approach:

• Incorporate a broader view of risks and opportunities around ecosystem services into environmental impact assessment and mitigation/ remediation plans (such as siting choices, project design, technology selection, and closure planning), and then offset remaining ecosystem impacts.
• Design community and livelihood programs to minimize negative impacts on ecosystem services and/or enhance ecosystem values and capitalize on market opportunities created by their protection (e.g. carbon credits and ecotourism).

BSR has engaged energy and mining companies to apply tools for measuring ecosystem impacts and integrating this information into project decision-making.

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Environmental Change Adaptation

Risk-management approach:

Integrate weather, physical climate impact, and other environmental change risk assessment into community planning and investment decisions.

Innovation approach:

• Analyze local business opportunities stemming from climate disruption.
• Drive a climate-compatible development strategy, and ensure that local development programs contribute to community resilience (to declining natural resources and volatile weather).

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Local Content

Risk-management approach:

• Meet regulatory and/or social license targets.
• Provide training and capacity-building for suppliers.
• Delegate local content responsibilities to large contractors through contractual provisions.

Innovation approach:

• Leverage local content to deliver economic development and business value through lower costs and risks rather than viewing it primarily as a regulatory (oil and gas industry) compliance or (mining) CSR issue.
• Engage large contractors beyond contractual provisions to leverage collective efforts toward local content objectives.
• Extend local content efforts to second- and third-tier suppliers (including raw materials producers) and small and medium enterprises where feasible.

The Baku Enterprise center created for the BTC pipeline project in Azerbaijan helped develop 562 SMEs that won 1,600 new business contracts worth US$249 million.

From an overall organizational perspective, ExxonMobil integrates local content (workforce and supplier development) with community investment in its three-pronged National Content program to improve both efficiency and impact.

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Community Engagement

Risk-management approach:

• Design stakeholder engagement and community development plans for community relations and social investment teams.
• Undertake company-led and participatory community-needs assessments.

Innovation approach:

Use community-led visioning and other emerging participatory techniques to identify long-term needs, improve internal community cohesion and collaboration, and provide direct information about community needs to multiple corporate functions.

BSR worked with a member mining company in Central Asia to facilitate a series of community-led visioning conferences in the four villages around the mine. Relying on “Future Search” principles and methodology, BSR first facilitated the creation of four multi-sector steering committees to own the initiative, guide the process, and convene the conferences. Each conference brought together a range of stakeholders—including herders, local business people, youth groups, local government, and the mining company itself—and each ended with a 15- to 25-year vision for how that community sees itself in the future. The steering committees now provide continued guidance to their communities to help them turn their visions into reality. BSR also suggested a process to the mining company for integrating the community visions into company strategy and operations as a way both to support community needs and demonstrate internally how these community-led initiatives can help business units meet their own strategic and operations goals.

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Human Rights

Risk-management approach:

• Respect human rights and implement the Voluntary Principles.
• Conduct human rights impact assessments.
• Provide human rights training to all levels of the organization.

Innovation approach:

• Integrate human rights impact assessments with the design of other environmental and social impact processes to ensure coordination and optimize local development opportunities.
• Extend human rights philosophy to shape design of community-development programs (e.g. access to water, marginalized groups) and use multi-stakeholder partnerships to promote human rights.

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Social Investment

Risk-management approach:

• Invest in basic community needs such as education, health, and livelihoods.
• Use development sector best practices in program design and implementation.
• Incorporate monitoring and evaluation for socioeconomic development programs.

Innovation approach:

• Recognize the link between human development and business value—how strategic investment in aspects of education and health that serve both community and company interests can deliver business value (e.g. vocational training, vaccinations against communicable diseases, and family health care can enhance recruitment and productivity of current and future workers).
• Support economic diversification (extending beyond local content initiatives) to create long-term, sustainable businesses that drive local and regional economic development.
• Align various social investment and local content programs to achieve the greatest possible impact in key focus areas.
• Create economic opportunity for women and other marginalized populations in workforce-development programs.

The Angola Partnership Initiative (API) offers a concrete example of a strategic, multiyear, multi-sector program to make benefits sustainable. API was established in 2002 as a public-private partnership between Chevron and other development partners, including USAID, to support SME development, government capacity-building, education, and basic food security in Angola. API offers financial, technical, and training support to help improve the commercial viability of small farmers and agricultural enterprises.

Note: The examples provided above are for illustration purposes, and BSR acknowledges that many of our members have strong risk-based and innovation examples not mentioned in this table.

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In summary, while companies have already made significant progress in maximizing local benefits, there are many opportunities to increase impact for business and local communities through an approach that incorporates the key elements of risk management, accountability, and innovation.  Some other examples of local programming (such as BSR’s work with Shell Wind Energy) may be found on BSR’s website.

We look forward to working with our members on further innovation activities during the course of 2011. For information on how BSR can help your company improve its local benefit programs, contact Michael Oxman at moxman@bsr.org.