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It Pays for the Extractives Industry to Consider Social Benefits

“There’s something like $25 billion worth of mining projects tied up or stopped by local communities’ opposition to extractive activities,” Mark Cutifani, chief executive officer of Anglo American Plc, said in recent a Bloomberg interview. This represents 31% of new investments in the entire mining industry in 2015 – investments that cannot make a profit for companies or support long term mining communities.

Traditionally, companies in the extractive sector have taken a band-aid approach to community relations in order to secure a “social license to operate;” the company builds a soccer field, a school, or a hospital and this allows for a temporary “rest” among local community members. However, as FSG’s research has shown, these efforts do not build a lasting positive relationship between companies and communities, and tensions resume on a regular basis.

For the Las Bambas copper project in Peru, Glencore built “six-bedroom houses, a bull ring and a soccer pitch atop a 4000-meter (13,000-foot) mountain” to secure their “social license to operate.” Yet, because of the way mining companies and communities have usually operated, it is almost certain that these costly requests will continue to come from surrounding communities for the duration of the project, which can last for decades.

To change the conversation between corporations and communities, FSG helped develop a management principle called shared value, which seeks opportunities for business growth while solving social problems. These opportunities could decrease the company’s costs of operation, increase revenue or enhance productivity while addressing social problems, such as environmental degradation, youth unemployment or certain health issues.

There are typically 3 types of activities that can be described as shared value:

  1. Reconceiving products and markets. Consider Pacific Rubiales that is recycling water used in oil extraction process for agricultural purposes. The company estimates that it will save about $400M over the lifetime of the project and will create approximately 2000 jobs.
  2. Redefining productivity in value chains. BHP Billiton has invested in building capabilities among local suppliers, estimating the gains to $121M by leveraging this new source of labor. As for local suppliers, they have earned an estimated $400M and employ 5000 people.
  3. Creating an environment that supports the business. AngloGold Ashanti focused on reducing the incidence of malaria in the local community, dramatically reducing the number of employees taking sick leave from 7500 to 90 per month. As a society, the burden of the disease dropped 72% over two years.

As FSG recommends in its report on shared value in the extractive industry, these companies have been able to successfully lead shared value strategies through 4 key factors:

  1. Taking a long term view rather than a quick fix approach, both to solve social issues and generate business opportunities.
  2. Demonstrating leadership within the company by defining a shared value strategy, changing the organizational mindset and motivating talent.
  3. Measuring each opportunity, accounting for the full costs and benefits throughout the lifecycle of an initiative.
  4. Collaborating with stakeholders – including communities and government leaders based on shared goals.

As long as companies think about local communities solely in terms of costs and risks, they will continue to be trapped in a spiral of short-term responses to long-term issues. But as examples from the industry illustrate, companies and communities can benefit when they change their mindset and see social issues as a business opportunity. The potential payoff of shared value opportunities for the extractive industry is invaluable. 

Philippe Sion

Managing Director