October 2014

Community Relations

Responsible investment: the reward of managing social risk

By Monica Ospina

It may be tempting, at a time of low commodity prices and incessant demands for low-cost production, to focus on short-term costs rather than long-term issues like building a collaborative relationship with communities in a mine’s area of influence. But smart mining companies consider the trends around investor demands. Since the 2008 financial crisis, institutional investors have become more aware of the need to have healthy short- and long-term portfolios. They cannot afford to carry companies exposed to social conflict or without risk mitigation programs customized to their operation.

This comes in part with the rapid growth of the Principles of Responsible Investment (PRI). This independent initiative was convened by the United Nations in 2005 and officially launched by UN Secretary-General Kofi Annan in 2006. It looks to encourage investors to integrate environmental, social and governance (ESG) factors in their decision making when buying or investing in companies. PRI motivates companies to incorporate good practices such as sustainability and corporate social responsibility (CSR). This heightened focus on responsible investment means that mining companies must demonstrate that they have implemented sustainability practices around ESG to secure long-term funding.

Shareholders are committed to their investments on a scale of 10 to 20 years and want to know that the companies they invest in have developed procedures to keep those assets healthy. This means managing social risk. Unrest among people impacted by a mining project will lead to conflict and disrupt operations, possibly through protests, road blocks or vandalism. These can result in anything from short-term production slowdowns to the government’s permanent shutdown of the mine.

Consider a hypothetical town in South America where a truck from a nearby mine hits and kills two chickens owned by a local farmer. If the company has implemented good practices in community relations and opened communication channels through ongoing dialogue or grievance mechanisms, the chickens’ owner knows where to go and what to do to present his or her case, and trusts the company to provide compensation for the loss.

But if the mining company has not acknowledged its stakeholders, is disrespectful toward the community, and is too distant to communicate with locals, those two chickens might cause the community to explode in anger, leading to social conflict. It is difficult to quantify the costs of such a conflict, but ignoring the risk exposes the company to millions of dollars in losses if roadblocks cause a production stoppage, negative headlines and a tarnished reputation.

In building good relations with stakeholders and ensuring CSR is done right, a company needs to consider elements other than philanthropy. Too many in the mining industry rely on this approach. However, donations to local churches or NGOs do not do the job of community engagement and risk management. Effective community relations should involve building partnerships, often around creating socio-economic opportunities for local people. This includes a commitment to local procurement and planning the development of the project around the capacity of local economies and education.

Management at a mining company also must incorporate community relations into their overall operation. From the start, mining companies should have a professional approach to communities in their direct and indirect area of influence. That is the time at which the mining company should begin to engage with the community, finding ways to understand the socio-economic environment and build long-term relations. Like the operation, this is an ongoing process and part of daily activities.

Additionally, companies need to know how to manage accidents when they happen. What is important is whether there is an effective plan for dealing with problems. If the company has already forged a solid relationship with the community and has communication channels, problems can be discussed and resolved more easily and respectfully.

Monica Ospina is founder and director of the social
economic development consultancy OTrade, with a
focus on the extractive industries (otrade.ca).

It is important to understand how expensive it could be to ignore sustainability and CSR, especially when the growth of PRI indicates that investors agree on the need for well-managed companies that are able to mitigate social risk, avoid social conflict and ensure a healthy environment for a long-term mining operation.

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