Extractives sectors companies—those in the oil and gas or metals and mining industries—add tremendous value to the world economy, producing the essential inputs for products that improve the lives of billions. They also represent some of the largest companies in the world: the sectors generated $3.5 trillion in annual gross revenues, or around 5 percent of global GDP, in 2012. Eleven of the top 20 companies in the Forbes Global 500 list in 2013 work in the extractives sectors. While the sectors’ potential for negative environmental and social impact is undeniable, so too is their contribution to global economic growth and the development of resource-rich nations. In Nigeria, for instance, fuel exports accounted for 89% of total exports; in Mongolia, a single large-scale mining operation is expected to account for one third of the country’s GDP when at full production, after $10 billion of investment in the project. Effectively using the windfall generated by the industry is the key to economic growth in these countries.
Recognizing this, extractives companies invest ever larger sums in communities in which they operate, in areas as diverse as local supplier development, healthcare services, and agricultural development. A survey of 12 top companies in the sectors shows that, on average, they spend $186M, or $2.2B in aggregate, in social investment each year.[1] There is little consensus, however, on how to spend that money effectively. The failure to do so has both social and business consequences:
- On the social side, well-intentioned community outreach programs often fail to deliver sustainable social change at scale. For example, despite over half a century of oil extraction in Nigeria, with 2.6 million barrels produced per day in 2012, the country’s GDP per capita in 2012 was estimated at $2,800, only 180th in the world.
- On the business side, despite high levels of social spending, strife within local communities persists, undermining company competitiveness. To cite just two of many examples, unrest and attacks on foreign workers and pipelines in the Niger Delta caused Nigerian oil production to slip by 18% between 2005 and 2008; in addition to a horrific death toll, wildcat strikes in South Africa in 2012 caused production of platinum to drop by at least 23.3 tons, or 12% of the total annual global supply.
We believe there is a better way: shared value. Companies can create shared value by increasing their competitiveness while measurably improving the prosperity of the communities, regions, and nations in which they operate. FSG, in partnership with Harvard Business School Professor Michael E. Porter, the International Finance Corporation (IFC), Royal Dutch Shell, Hess, and Rio Tinto will explore opportunities for shared value in the extractives sectors in a white paper to be published in early 2014. The research will include interviews with key stakeholders including companies, government officials at the country, state, and local level, NGOs, and residents of host communities.
Our initial hypothesis is that to unlock social and business value, extractives companies need to think about societal issues in a fundamentally different way, one that several companies in the sector are beginning to embrace.
See our report Extracting with Purpose for our research findings.
[1] Review of company annual reports for Anglo American, Barrick Gold, BHP Billiton, BP, Chevron, ExxonMobil, Freeport McMoRan, Newmont, Rio Tinto, Royal Dutch Shell, Total, and Glencore Xstrata.
