People everywhere rely on gasoline to run our cars, natural gas to heat our homes, and minerals and metals to establish infrastructure and generate electricity. All of these are extracted from beneath the ground or sea. Many emerging market countries that possess such resources have benefited little from their extraction, and people everywhere have lived with environmental impacts from mining, exploration, and drilling making the notion of “responsible extraction” something of an oxymoron.
Not according to Ethical Corporation, whose April 30-May 1 Summit in Houston, Texas will bring together more than 120 senior leaders from these industries to discuss issues and share best practices. The summit aims to help companies minimize risk and inclusively maximize opportunity by integrating social responsibility directly into operations.
Attaining and preserving the license to operate is at the heart of a reliable, sustainable supply chain of these key materials, and the industry acknowledges that “Corporate Social Responsibility” (CSR) is required to do so. What has become clear, however, is that the historical approach to CSR, tracking philanthropic funds disbursed rather than social outcomes, is no longer sufficient. Real CSR requires and demands full integration. Companies must increasingly consider how to enhance their relationships with stakeholders to prevent operational delays, how to incorporate local people and businesses into their value chain, how to effectively build trust with both investors and regulators, and perhaps most importantly, how to incorporate a socially responsible mindset into their business culture and operations.
In addition to the upcoming Ethical Corps Summit this is also the subject of a recent Shared Value Initiative report that examines how important social investment is to extractive industries. Extracting with Purpose: Creating Shared Value in the Oil and Gas and Mining Sectors’ Companies and Communities includes a literary review of more than 200 publications and draws on interviews with more than 150 experts from the public, private, and social sectors. The report demonstrates that the absence of a shared value approach can have severe—and negative—business consequences. Instead, companies must consider the financial, environmental, and social effects of their projects on all stakeholders both in the near and long term. Kyle Peterson, FSG’s Managing Director and co-author of the report will be championing the findings at the upcoming summit.
There are some shining examples in the report, and industry leaders from ConocoPhillips, Shell, Anglogold Ashanti, Rio Tinto, and Bechtel will showcase examples of shared value through innovative thinking and practical investments at the summit. Yet, despite the progress some companies have made, many still struggle to adopt new approaches due to three primary organizational and cultural barriers.
First, for most large extractive companies, the currently accepted organizational structures are designed to maintain hierarchy and minimize integration between operational and functional business units, making innovative change difficult. Second, many community engagement departments struggle to effectively quantify the “bottom-line” business impacts of CSR programs. Finally, many companies are often skeptical of the benefits of collaboration and wary of its administrative demands, even though research has shown collaboration to be vital to long term program effectiveness.
At the Ethical Corp Summit in Houston, industry players will seek to understand how progress in these three areas can better position the extractives industry for both profit and social impact.
1. Align Corporate Structures and Behaviors for Success
The vast majority of companies analyzed in the SVI study recognize they rely on either people or the environment for the profitability of their business. Yet, most struggle to appreciate the importance of engagement with constituents associated with these key assets. Within companies, social engagement professionals are typically isolated—and sometimes sidelined—from the core business operations. Similarly, operations managers frequently minimize the potential effects of stakeholder concerns. Financial reports acknowledge the business risk from societal issues, but how those issues are addressed is generally not part of the most important company report. Most companies document how they interact with communities and governments through sustainability reports, further reinforcing the fallacy that these strategies are not integral to business effectiveness.
2. Effectively Measure Complete Costs & Benefits
Measuring the return on social investment is notoriously difficult, but with work, it is possible. Companies hire myriad accountants to measure the costs and benefits associated with a financial decision. The people who conduct these analyses vastly outnumber those charged with determining, implementing, and tracking the impact of CSR programs. As a result, companies accustomed to highly sophisticated business metrics sometimes assume social investment is less rigorous or effective. But clearly understanding the full costs and benefits—including the social impact—of a project is crucial to investment and operational decisions.
Professionals in this industry are well acquainted with simulation and scenario planning to better evaluate opportunities and challenges, and such tools could develop equivalent value in examining social and environmental strategies. Preparing an organization and its leaders to fully consider a range of options during the risk analysis phase of a project can drive more inclusive decision making that considers all stakeholders, thus reducing risk and optimizing opportunity. Some innovative tools, such as the IFC’s Financial Valuation Tool and PWC’s Total Impact Measurement and Management Framework can evaluate a project’s social and environmental costs and more holistically capture total financial cost and return beyond what is traditionally accounted for.
3. Increase the Motivation & Meaning of Tri-Sector Collaboration
What is abundantly clear from the SVI report—in both theory and experience—is that no one individual, organization, or sector is adequate to the task of truly sustainable, responsible extraction of valuable natural resources. “True multilateral collaborations in which all relevant actors share their expertise and resources” is critical.
“…no one individual, organization, or sector is adequate to the task of truly sustainable, responsible extraction of valuable natural resources. “True multilateral collaborations in which all relevant actors share their expertise and resources” is critical.”
This requires a shift in perspective of all players, especially as it pertains to how companies are regarded. Businesses should be regarded—and accountable—as development partners who can help solve societal issues of concern to both government and social organizations, rather than contractors who pay for the privilege of extraction. Clearly, Ethical Corporation agrees. In addition to business leaders, they have included key leaders from the social, public, and academic sectors as well, including the Consensus Building Institute, PYXERA Global, the University of Massachusetts, The World Bank, and The United Nations to actively participate in the summit, highlighting exemplary ways to accelerate trust among public, private and social players at multiple levels. The investment cycles of extractive companies are long, often evaluated in decades rather than years. As such, their commitment to effective organizational relationships and social programs (in the form of operating principles and practices) should match the longevity of their operations.
Michael Porter, a founder of the Shared Value Initiative, emphasizes that strategic investment in socially responsible programs is no longer optional. “Aligning the business interests of extractives companies with community needs and priorities is the only real solution for companies and communities alike.” Leaders in this industry agree. I’m looking forward to learning more from those on the vanguard of progress, committed to making this innovative thinking the new normal.
Ethical Corporation hosts the first “Responsible Extractives Summit” in North America in Houston, Texas April 30-May 1. Follow the conversation at #RESA15.
PYXERA Global contributed to the Shared Value Initiative Report as one of the 150 expert interviews, based on two decades of experience consulting engaging, facilitating, and managing cross-sector partnerships to develop supporting workforce and reliable, high quality local supplier networks in the extractive industries.