Environmental Concerns and Societal Issues
ESG – what is all the fuss about?
For many years now, people (the government, investors, the general public) have sought a method to evaluate a company that extends beyond the standard financial reports. ESG (environmental, social, and governance) reporting is designed to fulfil this need.
Environmental criteria take into account how a corporation behaves as a shepherd of the environment, including sustainability.
Social criteria look at how a company maintains connections with its workforce, vendors, customers, and the community in which it operates.
Governance criteria are concerned with the leadership of a corporation, executive remuneration, audits, shareholder rights and internal controls.
Currently, policing ESG strategies is largely done by investors and the decisions they make. But lawmakers around the world are drawing up legislation, so this will soon become the norm.
Obviously, with the very large number of variables involved, tracking a corporation’s ESG policies and strategies is a major issue and we cannot hope to cover all of that in this blog, so we plan to start right in the middle of the problems – social strategies. Even more specifically, we will focus on the Social Licence to Operate.
All companies have many formal legal and regulatory licences that are required to operate a legitimate business. It is now well accepted that there is also an informal licence required to operate – generally referred to as the Social Licence to Operate.
It should be noted that unlike ESG policies, each of a company’s operating sites should have a Social Licence to Operate. This licence is very specific to localised community concerns.
The first published use of the phrase was in 1996 when it was invoked by the president of the American Forest and Paper Association. But the most influential usages of the concept arose in the context of extractive industries, especially in developing countries. For example, mining companies were able to secure a legal licence for their operations by negotiating with the central government, but this achievement often came without local communities having a say in that licencing – particularly in the areas of social and environmental impacts. Often these local communities actively resisted the operations and were sometimes able to completely stop the operations.
The underlying principle is that the communities affected by an industry should have a role in determining whether and how that industry’s operations should take place.
The Social Licence to Operate is one of those intriguing concepts that appears easy to use and understand – yet hard to precisely define.
A fairly common definition goes something like:
The Social Licence to Operate refers to the ongoing acceptance and approval of an industry’s operations by local community members and other stakeholders that can affect its profitability.
That is pretty easy to understand, but some of the unanswered questions would be:
- Why this licence tends to be invoked in some contexts and not others.
- Which communities should be involved?
- What happens when community opinion is divided?
- What happens when community sentiment is manifestly uninformed?
The obvious result is that the Social Licence can be highly ambiguous.
To make matters worse, the term Social Licence to Operate, is capable of being employed strategically. This might be done by activists, where the licence invocations are “weaponised” in order to berate industries or expose them to impossible demands. Equally though, the licence can be invoked rhetorically by industries and corporations as part of their public relations and “ethics-washing” campaigns. Indeed, the inherent ambiguity of the licence makes it easy for industries to do exactly this, declaring loudly that they take their Social Licence to Operate seriously while avoiding any genuine reform of their operations or robust engagement with stakeholders.
Here’s another complication: By law, the primary duty a director of a company is to the shareholders of that company. What happens when an operation’s Social Licence activities (not “legally” required) materially impact, negatively, the company’s profitability? At one extreme, the loss of a social licence may shut down the operation, but at the other extreme, it may seriously downgrade profitability. Not an easy position for a director to be in – but probably very common.
Having said that, it is generally expected that at some stage the government will legislate some level of social responsibility.
So, where does that leave us?
Like it or not, there have been countless corporate scandals in recent history – environmental disasters, appalling treatment of First Nations peoples and land, ethical improprieties towards customers and stakeholders alike, etc, etc. Are these events becoming more frequent, or are we just noticing and reporting them more and more? Either way, there is a well-documented erosion of community trust in business and other large institutions.
We’re living in an era in which business (or indeed Capitalism itself) is blamed for many of the world’s problems. Many perceive globalisation to have had a negative impact on their quality of life.
A good start to correcting these types of issues is for all companies to start taking their Social Licence seriously.
The Social Licence to Operate is made up of three components:
- Legitimacy: this is the extent to which an individual or organisation plays by the “rules of the game”. That is, the norms of the community, be they legal, social, cultural, formal or informal in nature.
- Credibility: this is the individual or company’s capacity to provide true and clear information to the community and fulfil any commitments made.
- Trust: this is the willingness to be vulnerable to the actions of another. It is a very high quality of relationship and takes time and effort to create.
Unfortunately, achieving these goals will usually require significant cultural changes:
- On the one hand, the community must understand that the material demands of a growing world population continue to increase the demand for mineral resources, energy and water and, consequently, the environmental footprint of mining and processing operations. We can’t eliminate these operations, but we can make them “user friendly”.
- On the other hand, company management must realise that their traditional goal of using the maximisation of profits as the basis for every action is no longer acceptable. Rather, they have a social responsibility to do what’s best not just for their company, but for people, the planet and society at large.
- Too often, social licence is thought to be something that can be purchased – we see big companies with controversial practices giving out community grants and we see clubs that profit from addictive poker machines providing sports gear for local teams.
- Among other things, remember that, especially with mining, the environmental risks have the potential to last long after operations have ceased.
Unfortunately, there is no simple list of requirements that must be met to be granted a social licence to operate. Robust, sincere, frequent, and ongoing interaction with the local community is the necessary starting point – you can’t get community support without understanding community needs, and you can’t understand the needs without meaningful interaction.
- By utilising Texcel as your independent expert in all things associated with compliance environmental data, you immediately establish legitimacy within your local authorities and the local community;
- The proven data integrity associated with the Texcel instrumentation and communications establishes credibility;
- By having Texcel take responsibility for your compliance environmental data, trust is established.
While these products will not complete your Social Licence, they will certainly put you on the right track.
Let’s get on board with this Social Licence to Operate concept before heavy-handed government legislation is implemented.