How can responsible international mining and oil companies use their social investment funds?

In this longer than usual post (six pages in A4, sorry), I explore the evolution of mining and oil companies’ approach to what they have come to refer to and report on as sustainability. I celebrate the progress many companies have made, and propose that most need to do more to comprehend and take account of their impact on, and potential contribution to society in a broad sense. This is the next frontier for companies wishing to act responsibly. There are many ways they can push forward this frontier, among them a creative use of their social investment funds. In illustration, I propose a few ways they can do this.

 

Health and safety, environment and community

Over past decades, international mining, oil and gas companies have gradually embraced a series of additional “non-technical” elements in their work. At first these were seen as marginal, but one by one they’ve come to be accepted as part of the core business. First, companies took on board the need to improve health and safety, and as a result their assets are no longer routinely the risky and dangerous places many once were.

 

Next, they accepted the need to pay more attention to the environment. This remains a challenge. While health and safety can, with the right funds and commitment, be brought under control in most circumstances, there is virtually no way extractive companies can operate without having a negative environmental impact. But they have made great strides and now typically treat as routine the need to protect the environment for nature and for other users, and to restore it in some way once they have extracted what they seek.

 

Third, they increasingly accept the need to treat local communities as partners; to provide them with benefits to balance the disbenefits which having a mining, gas or oil company as your neighbour can bring. Some of these benefits are simply part and parcel of normal operations: upgraded roads and other infrastructure needed for the mine also benefit other local users; the mine and its suppliers and contractors provide jobs; and so on. Other benefits are purely compensatory: for example building new homes and schools for mine-displaced communities. Others still are ways of buying the support of people whose goodwill will smooth the path for mining operations in the area: supporting local community projects, improving facilities at the local school or health centre, drilling a water borehole for a remote rural community, and so on.

 

This is all very well. Through adding and integrating health and safety, environment and community lenses to the way it views its place in the world, the industry now provides a safer work environment, a less disrupted ecology, and happier neighbours. All this contributes to what companies call their “social licence to operate”, i.e. helps them obtain the “soft permission” needed to dig and punch holes in the ground and extract the minerals they need to fuel the global economy and provide a return to shareholders. In short, health and safety, environment and community have become normal and important features of responsible company practice alongside more traditional elements like engineering, cost control, logistics, and good people and financial management. As such they commonly feature as chapter headings in the “sustainability reports” of most extractive companies.

 

Being a responsible actor within society: responsibility vs. accountability

There is a fourth element in this model of responsible practice which has yet to be fully integrated. It’s about taking responsibility to look beyond the short-term licence to operate, and consider what it means to be a responsible actor within society, viewed on a wider scale, and thinking longer-term.

 

Just to be clear about the difference here: the concept of a social licence to operate is premised on the need to have the permission of others to mine or drill. It’s often an informal permission, to be sure, but the very concept implies that it can be withheld or withdrawn by those with an influence over the company’s ability to operate in a given location. It’s therefore more about accountability than responsibility: accountability is when others reward or sanction one’s behaviour; responsibility is when one sets high standards for oneself, regardless of what others require. Responsibility comes into play especially in contexts where accountability standards are low, for example when the interests of some communities or environmental stewardship are not taken seriously by government.

 

So responsibility is about the values the company holds and the standards it decides to meet. While it may be held accountable for some of these by outsiders, it also holds itself responsible for keeping and meeting them. Thus internal accountability becomes key to being a responsible corporation. Being a responsible mining company may mean going beyond what is required by government partners in some political contexts, and it means examining the context through a societal lens.

 

A societal lens

Using a societal lens requires companies to ask additional questions about their context and the impact of their own presence within it. The kinds of questions they ask may include:

• How does the political economy within which they are operating function, and what are their own interactions with and influences on it?
• Who are the winners and losers in relation to their investment, and is this reinforcing or lessening fairness within society? Do women, young people or other specific sections of society stand to benefit?
• Is the government re-investing its royalties in society, e.g. in education, or to underpin an alternative economic sector that will replace mining when the ore body is exhausted?
• Is their own company’s procurement privileging local suppliers and manufacturers rather than importers, to help stimulate the economy; and perhaps going even further by seeking to purchase from businesses run by members of disadvantaged groups?
• What will be the impact on the political economy if a mine provides hundreds of millions of dollars per year to an opaque and corrupt government – especially when mining and oil provide so few local jobs, per extra dollar of GDP generated?
• What will be the long-term impact on the relations between the people and the government, of a foreign mining company building a local school to keep the local community sweet, when it is actually the government’s job to build schools?
• In conflict-affected contexts they will ask whether their operating practices might inflame existing conflicts.
• At a larger scale they may ask a much more fundamental question about their own role, e.g. a coal mine company may question its contribution to global goods and bads in the context of climate change.
• And so on….

 

All these are difficult questions; in fact more often dilemmas without a clear answer. Sometimes the only responsible answer is to say “we won’t operate here, no matter what the opportunity cost”. But usually it’s more nuanced than that, and mining and oil companies all-too-frequently do find themselves working in places where the government’s relationship with its people – or some of its people – is dysfunctional; where the people have less voice and less protection or access to fulfilment of their rights than they ought; where the presence of the mine may either damage the fabric of society, or help to knit it. And international companies aren’t consistently held accountable – yet – for taking these issues seriously; thus it’s a question of how far they want to or feel they can take responsibility for understanding the context in which they (plan to) operate, and how far they feel they can go in minimising negative impacts. To do so certainly entails taking a much broader and deeper look than merely at what will give them their social licence to operate here, today.

 

So responsible mining and oil and gas companies need to make sure that they are equipped to deal with such situations as expertly as possible. This is why they need political-economy analysts on their staff at all levels, with a role not just in analysing what benefits and harms might befall the company as a result of political risk, but also what benefits and harms might befall the people and the society within which they are drilling and mining. Above all, companies need to be willing and able to understand the impact of their engagement with the context over the long-term, and using a very broad frame of reference.

 

Just as health and safety, environment and community projects have become mainstream, and are included in the production budget, so the costs of this wider engagement in and with society need to be, too.

 

Funding mechanisms

Companies have long found ways to pay for the costs of health and safety, environment and community relations work, and these are all now factored into production budgets and organograms. Typically each physical company asset will have a fund available to contribute to local projects, and some of these not only improve community-mine relations (the social licence to operate) but also have an impact as social improvement projects in their own right. Many companies have set up foundations or trusts, which is a useful way of protecting their ability to make community and environmental investments when commodity prices are low – a mechanism to smooth out the impacts of income fluctuations.

 

As companies understand their interactions and relationships with society better and make adjustments to their policies, strategies, approaches and plans accordingly, they will become more adept at mainstreaming it into their core work. This will have an impact on their work in a variety of ways. There may be some projects they would no longer regard as feasible when examined through the societal lens – e.g. because it would require them to collaborate with a repressive government which tramples on people’s rights. Other projects take longer to get off the ground, as the company takes extra care to avoid operating in ways which frustrate particular – and potentially disruptive – sections of society. Company operating practices may have to adapt, for example ensuring that railways built for the transport of ore are also accessible to passengers. They may decline to extract oil at the too-rapid rate the host government demands – as the government of Sudan demanded – on the basis that this will provide short-term gains at the expense of the long-term production. In a country like Guinea, the expected rapid increase in GDP due to mining over the next decade will provide huge royalties payments into a not very transparent tax system, without creating many jobs for Guineans, the resulting frustration among sections of the population may lead to violence; and thus companies operating there may need to sit down with government and proactively advise on investment or job creation schemes – thus going quite far beyond the limits of what oil and mining companies normally see as their role.

 

This is where the social investment funds come in

All extractive companies set aside funds for community projects, but they should really look at them more as “society funds”, designed to help ensure that their impact on society more broadly is a positive one. It is tremendously important for companies to set the mandate for staff running these funds as clearly as possible. This means getting the purpose right, and I’d suggest that an appropriate generic purpose might be:

 

Supporting initiatives which increase the social, economic and environmental capital in the societies where the company operates.

 

This reflects the very simple and basic idea that when minerals are extracted and sold, it is the capital and patrimony of the nation – the society – which is being used up on a once-only basis. Therefore the process should be done in such a way as to capitalise society in one way or another, i.e. use the natural endowment to endow society with public goods.

 

This implies widening the kinds of activities to be supported quite significantly. It doesn’t necessarily mean stop funding the kinds of community projects most often undertaken, but it does imply adding new ones. These would depend absolutely on the context, and should be defined accordingly, but it is possible to illustrate my point with a few generic examples.

 

Governance: societies in so many places where minerals are extracted face a problem of inadequate governance, and this is often revealed even more clearly when mines are dug, oil wells are drilled, and large sums of money are paid out. Governance is thus an obvious area of focus for mining and oil companies. Some of the ways companies can use their social investment funds to help improve governance, without being seen as “interfering”:

 

• Support national and local civil society initiatives to educate voters and monitor elections in places where democracy is still quite new and evolving.
• Build a governance component into other initiatives, e.g. enlist the parent-teacher association in decisions over how to improve the local school, and in overseeing or managing the company’s contribution; support local patients’ oversight groups to monitor health clinics’ choices and performance; support local groups advocating with government for improved health or education services; take steps to make sure community development initiatives are genuinely inclusive, providing benefits and giving a voice to those on the margins of the community.
• Sponsor debates on radio and TV about policy issues linked to natural resource extraction and management.
• Fund research and the dissemination of research results on issues related to governance, such as how natural resource extraction skews governance and how this can be mitigated; use long-term grants to link universities from different contexts to work together and pool knowledge on this issue.
• Sponsor visits by local and national government, MPs, journalists and civil society to countries where natural resource endowments are being well and fairly managed for the good of society.
• Provide training and other support to journalists through journalists’ associations or unions, thus contributing to improved political accountability.
• Support non-governmental participation in and monitoring of the Extractive Industries Transparency Initiative.
• Support civil society – nationally and locally, including in localities far from the mining area – to publish and disseminate transparent data about mining operations and payments made to government by mining companies; and to ask government how royalties and taxes have been used.
• Build the capacity of civil society groups to advocate and hold government, companies and other powerful economic actors to account.

 

A well governed environment is ultimately a public good and a better investment environment, so the impacts of initiatives like these would eventually be a benefit to the company.

 

The Economy: mining and oil companies generate economic growth, jobs, sub-contracts and taxes, and they build or attract public infrastructure, so are contributing value to society. Nevertheless, there are additional things they can do using their social investment funds, to help make sure the economy grows sustainably, e.g.:

 

• Support micro-finance NGOs which help capitalise small businesses, and enterprise advisors who can advise businesses on expansion and diversification plans.
• Invest in improved infrastructure in remote areas, such as broadband.
• Support research and policy advocacy/design into ways that mining- and oil-dominated economies can diversify and create more jobs and economic opportunities, in collaboration with universities. Subsequently, support the implementation of policy. This would be both locally, in mining regions, and nationally. Build research and advocacy capacity by supporting networks involving established and newer universities.
• Invest through local institutions in non-mining vocational training opportunities for young people.

 

These kinds of investments would make for a healthier economic and thus social and political climate in which to operate, and would create an environment in which the ultimate exit of the company, once the mine or well is spent, would be substantially easier for all concerned.

 

Social: The presence of the extractive industry in countries and localities has both positive and negative social impacts. Social investment funds are already used to mitigate the local negative impacts, and can go further, e.g.:

 

• Encourage public debate and action about the impact on society of creating employment honeypots in remote and underserved locations, and of how negative impacts can be mitigated; where appropriate, seed-fund some of these mitigation strategies.
• In countries where indigenous people are marginalised in the political economy, and yet disproportionately affected by mining, support moves to harness this opportunity to foster greater integration. E.g. by linking indigenous groups with mainstream civil society to create an integrated debate about how to harness the benefits of mining for the whole society, rather than sections of it.
• Support civil society initiatives to promote greater equality in society, e.g. for men and women, and for ethnic different groups.

 

As a result of these kinds of projects, society will be less divided, and the extraction of its natural endowment of resources will have contributed to fostering greater unity and sense of nation.

 

Environment:  a healthy, well managed environment is a classic public good, therefore an indicator of a functional and forward-thinking society. Contributing to this is thus a subtle way of contributing to societal well-being. It’s fairly typical for mines and oil companies to restore land after use, and to fund small tree-planting projects and the like near their assets as an environmental or carbon sequestration offset. Using the societal lens, they might also use their social investment funds to:

 

• Sponsor research and engender debate about energy choices and sustainable mining/oil extraction, designed to promote good policy choices in an era of man-made climate change. This is not the same as direct lobbying: the objective of this would be to foster informed debate and informed policies.

 

Through this kind of project, companies would foster the kind of vibrant policy debate which is needed for an open society.

 

How to manage the funds

As to the mechanisms best suited to these kinds of projects, each company needs to figure out the best approach. Clearly there will be tensions and a degree of discomfort at the idea of supporting non-core interventions which may also seem a bit too “political”. But mining is after all already a highly political act. And there are ways to distance the company from direct involvement, e.g. by funding a national “umbrella grant” to a disbursing agency (likely a national NGO), or by giving large grants to NGOs operating internationally. It seems to me that there are three cardinal rules to follow:

 

1. Get the purpose right: be as clear as possible regarding the purpose of the fund, and review its use and impact regularly accordingly.
2. Staff up accordingly: e.g. if the fund is to support the kinds of activities listed above, ensure that staff involved in decisions and monitoring are knowledgeable about those kinds of activities. Where needed, engage advisors with the requisite skills.
3. Develop monitoring and evaluation indicators appropriate to each project, rather than trying to determine them generically on a company-wide basis.

 

In conclusion

In this article, the focus is on what companies can do through creative use of their community or social funds. Some of the illustrations are examples of service provision, but most are about supporting ways for people to engage in shaping their society, through research and policy debate, or through their economic choices. Of course beyond their community or social funds, there many other ways companies can – and some do – proactively contribute to societal value, through the strategic and operational choices they make.

 

Why should companies spend shareholders’ money on issues that don’t seem to be directly necessary to provide their social licence to operate – and are also harder to address, because they concern very complex societal issues which may seem outside the competency areas of the average oil or mining company?

 

On the first part of this question – why spend scarce resources on societal issues not obviously connected to our commercial interest – there are two main answers. First, if you plan to operate somewhere over the medium term, it may be more in your interests than you think, to invest in a stable and better governed society. But the second reason is a more powerful one: it is about responsibility. The mineral reserves belonging to a country belong to society, as represented by their government. They are part of the patrimony and can only be extracted and sold once. Therefore they represent capital in its purest form, and it is the government’s responsibility to use the royalties to improve the capital base of society in some way: infrastructure, skills training, basic education, secondary and university education, etc. Frequently governments do not do enough of this. At worst, the funds are used to fuel a patronage-based political system which undermines rather than strengthens society; even in better cases they are just used to cover recurrent costs. In these circumstances the company has a responsibility to go further than simply saying “we pay our royalties, it’s up to them to do the right thing”.

 

The second question – how to work on societal issues? – is indubitably harder to answer. If the challenge of extracting minerals from deep below the earth’s surface seems tricky, it is nothing compared to the challenge of contributing to a “better society”. Nevertheless, it’s not impossible, it’s a key element of “sustainability” and therefore highly relevant in the run-up to Rio + 20, and there are many ways it can be done with the resources already available. One step on the way to doing so is to revise the purpose and goal of companies’ social investment funds.