For the extractives industry, 2013 will bring key challenges, but at BSR we are optimistic that leading companies will continue to integrate sustainability into their core business models and identify new opportunities to collaborate within and across sectors on mega-issues such as climate change and poverty alleviation.
With continued growth in demand for energy and minerals to meet global needs, this year promises to bring both opportunity and challenge to companies in the mining and energy sector. What follows is our take on some of these items, especially those at the site-specific or local levels.
- Local social license to operate: Debates over the environmental and social impacts of natural gas developments in the United States, labor and community unrest in Africa and Central Asia, and the increasing application of free, prior, and informed consent (FPIC) principles in engagement with indigenous peoples are just some of the 2012 headlines that highlighted the growing significance of social license to operate as a commercial driver. Quantitative evidence now confirms what many have long known or suspected: Capital project delays due to “above-ground” or nontechnical risk issues are substantial and more common than many other technical or commercial factors. Given this, the most successful companies will be the ones that have realistic capital project timelines and operating budgets that account for robust community-engagement strategies grounded in building trust and partnering with communities.
- Integration of CSR into mainstream business: While we are seeing greater awareness of CSR among leading companies in the industry, it remains on the periphery for many companies. In particular, the business processes and systems needed to manage the complexities of social and environmental performance—specifically the coordination across functions responsible for environmental impact, legal issues, procurement, HR, government relations, and community affairs—are still lagging. Looking ahead, the full integration of CSR into business strategy, functions, and operations by international and national/local companies alike will be critical for successful capital project development and execution. This includes robust management systems that draw from industry-leading practices and deployment of practitioners that understand the intersection of business priorities and societal expectations.
- Collaborative approaches to cumulative sustainability impacts: The cumulative environmental and social impacts of mining and energy projects—as well as the combined activities from other industry sectors such as agriculture and manufacturing—are leading policymakers and many companies to think differently about their contributions to sustainable development. From air quality and carbon emissions to demands on biodiversity, climate adaptation, and land and water use, there are significant opportunities for companies to partner with government and civil society in 2013. It’s also important for companies to consider partnering with local government to smooth the “boom and bust” cycles of energy or mining activity that can significantly affect local employment and business, tax revenues, and real estate swings.
- Changing expectations about human rights issues: The energy and mining industries’ large-scale projects have substantial physical and economic impacts on host countries—often affecting entire national economies as well as localized individual communities. Given this, as well as the social, economic, and political stakes associated with these projects, it’s important for companies to consider human rights—not only to mitigate downside risk (such as preventing abuses by security forces), but also to enhance social-investment programming and corresponding delivery of local benefits that help companies secure and maintain social license. Considering these aspects of human rights requires engaging company management, employees and contractors, government officials, local communities, and civil society. The Guiding Principles on Business and Human Rights provide a useful framework. This year, it will be standard practice for companies to focus on integrating human rights into due diligence approaches to proactively identify and address issues.
- Local content and growing demands for benefit sharing: Countries continue to seek out opportunities to capture a greater proportion of the benefits of resource extraction through legislation and regulations, hard and soft fiscal assertiveness, prohibitions on foreign takeovers, and export taxes. While this pressure is not new for the oil and gas sector, the regulatory emphasis is now growing in the mining industry, which has seen a number of governments, from Ghana to Indonesia, put in place strong local content provisions. Company responses to these pressures will not only influence commercial strategies and host government relations, but will also influence social license outcomes.
- Accountability and responsibility for social and environmental performance in the supply chain: Suppliers’ CSR performance can significantly impact the operational, reputational, and financial success of their customers. There is more pressure than ever for companies to implement practices that promote transparency, avoid corruption, advance environmental sustainability, protect human rights, and facilitate “local content” objectives in the supply chain. In response, more companies are grappling with how to set clear expectations, establish assurance mechanisms, and balance cost implications of managing their supply chain. While this is leading to contract amendments and new procedures for monitoring, oversight, and reporting, greater coordination between customer and supplier will be required to achieve intended outcomes and benefits.
- Evolving NGO agendas and relations with business: Over the last few years, we’ve seen the number and types of NGOs flourish. NGOs, which range from collaborators to critics, are not a homogenous group, and many operate with hybrid strategies, whereby individual companies are both friend and foe on different issues or across distinct geographies. In the years ahead, we expect the NGO landscape to continue its evolution with new issues, organizational models, and modes of operating—particularly as NGOs respond to their own stakeholder pressures for greater accountability in governance, impact, and transparency. With these changes and as companies push into new geographies, companies will need to reconsider their relations with NGOs and look for constructive ways to find common ground.
- Balancing the competition for water resources: Climate change and population growth are putting increasing pressure on the global water supply, particularly in developing countries. With limited supply and greater demand by water-intensive industries such as mining, oil sands, and natural gas developments, concerns regarding competition for water resources are likely to rise and become a source of friction for communities and industries, such as agriculture surrounding large-scale projects. We have already started to see leading companies invest in innovative solutions for sustainable water management and expect to see greater investment in this area in the near future.
- Labor relations and regaining worker trust: A series of violent confrontations in South Africa, Kazakhstan, and Indonesia, among other countries, have brought labor issues to the forefront for multinational companies, labor unions, and their local partners. Among mining and oil and gas companies, employees and, perhaps more significantly, contract workers have begun to demand better pay and working conditions--particularly in countries with poor governance and weak protection of worker rights. Going into 2013, companies will find it increasingly important to review and improve their labor-management practices, as well as those of their contractors and business partners.
- Revenue transparency and corporate and government accountability: Corruption and lack of government accountability are considered the biggest obstacles to growth in many resource-rich nations. In the past year, both the U.K. and U.S. governments have strengthened requirements (U.K. Anti-Bribery Act and U.S. Dodd-Frank Act) around revenue transparency for the energy and mining industries. While there are different views on the effectiveness of regulatory and voluntary mechanisms, NGOs and companies both agree that greater transparency is necessary to hold authorities accountable for providing essential services like clean water, health care, and education. Companies see support for multistakeholder initiatives such as the Extractives Industry Transparency Initiative as critical to moving forward. For 2013, transparency will continue to be a critical item on the business and sustainability agenda.
A version of this article first appeared in the International Resource Journal.