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50 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 51Reputation amongst State actors may also be extremely important for companiesin the mining and extractives industries. As well as their regulatoryroles, States may often be project partners for large mining and extractivesoperations, and so maintaining relationships of trust with them can becentral to a company’s business prospects. These relationships must oftenbe maintained across several political regimes or administrations, whichcan present particular difficulties and complexities. Reputation is alsocentral to investor confidence and a range of other business relationships.Companies need to ensure and demonstrate strong and progressive managementof environmental and social issues to secure the confidence ofthese key actors in their business.However, as we will see below in Chapter 4, shareholders and investorsshould be wary of superficial PR and issue avoidance, or any course ofaction which does not create a fundamental culture of corporate transparency,openness and accountability.3.1.2 Social licence to operate“Social licence is the acceptance and belief by society, and specificallyour local communities, in the value creation of [company]activities, such as [they] are allowed to access and extract mineralresources…You don’t get your social licence by going to a government ministryand making an application or simply paying a fee. It is not a simplecase of throwing money at a problem and hoping that it goesaway.” 146– Pierre Lassonde, former President,Newmont Mining Corporation“In the extractive sectors, communities are the linchpins for accessto raw materials, without which companies’ operations wouldcease.” 147– Allen L. White, Co-founder and former CEO,Global Reporting InitiativeSocial licence to operate is essentially the extent to which society acceptsor tolerates company activities. This is most relevant to company successin relation to individuals or groups in key positions who might complicateor obstruct company operations in the short, medium or long term. Sociallicence is particularly important to mining and extractives operations,which can be particularly highly affected by the willing consent of localpeople (as apart from any formal consent licence as granted by government).Such a licence has been broadly recognised as a critical success factorin mine development, 148 with companies such as Rio Tinto recognisingits vital importance to project development. 149 Respect for the needs anddemands of local communities, and meaningful community participationin decision-making, are key.Factors involved for the mining and extractive industries in earninga social licence to operate with local communities include (but are notlimited to): level of meaningful community consultation and participationin decision-making that affects them; level of local content employment,training and procurement; level of corporate transparency andcommunication with communities; avoidance of involvement with localindividuals or groups that may be divisive in local communities, includingmost importantly the avoidance of divisive relationships with militarisedgroups or aggressive security forces; efforts to build business partnershipswith communities; efforts to seek community support and capacity building;level of collaboration with communities to help meet their infrastructureneeds; and degree of understanding of local culture, language andhistory. 150Company reputation also interacts with social licence to operate. Companieswith poor reputations may be less readily trusted by local people,and thus gaining social licence may be more difficult and more expensivefor companies with a bad reputation, and the costs of its absence may begreater. Likewise poor relations with or treatment of people in specificcircumstances may have broad impacts on company reputation.The risk posed to a company’s social licence to operate by company activitiesthat negatively affect local communities and environment is almostself-evident. Operational disruption caused by a lack of social acceptancecan have very significant implications for a company’s business. This is aparticularly central concern for mining and extractives companies, whichcan be illustrated with reference to case study examples.Newmont in Peru: the opportunity loss of lacking sociallicence to operateIn 2004, Minera Yanacocha (a subsidiary of Newmont Mining Corp.) withdrewfrom its explorations at Cerro Quilish, following massive community
52 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 53protests. This, despite the fact that the company had expended substantialamounts of capital on exploration, and that the mine contained goldreserves reportedly worth an estimated $2 billion. 151Newmont stated, as published in a number of Peruvian newspapers, that ithad not always listened to the valid claims and concerns expressed by theCajamarca community in the past, and that community opposition was apart of their decision to withdraw. 152 Minera Yanacocha’s operations manager,Guy Lansdown, was quoted as reflecting: “We thought we could goahead and explore Cerro Quilish… obviously the community did not thinkthat, so we pulled back. We’ve got to sharpen our pencils and get out andcommunicate with them and work with them.” 153In particularly extreme scenarios, the implications of failing to obtain ormaintain a social licence to operate may be volatile, extreme and disastrousfor companies.Shell in Nigeria: lacking a social licence?Shell has been exploring in Nigeria since the 1930s, and first successfullydrilled in the Niger Delta in 1956, 154 where it has been operating since.Many reports have suggested that its practices have faced opposition fromlocal communities in areas of operation. 155 It has been reported that Shellis perceived by Nigerian communities as having been ‘on side’ with corruptand repressive military regimes 156 , and that many communities do not feelthat they have benefitted from oil production, seeing only ill effects. 157Militant rebel groups, such as the Movement for the Emancipation of theNiger Delta, have proliferated in recent years and disrupted Shell operationsin increasingly severe ways, reportedly with the support of many membersof local communities: 158 insurrection, bombings, hostage-takings and otherviolent attacks on oil facilities are now common occurrences in the Delta. 159In early 2006, violence in the Niger Delta forced Shell to shut down almosthalf of its Nigerian oil production. 160 In 2007, kidnappings and protests hadslashed production by nearly 1 million barrels per day. 161 A single facilityoccupation in 2007 caused cuts of 170,000 barrels per day. 162 In early 2008sources close to the situation were suggesting that Shell’s future in the areawas in severe doubt, 163 and in late 2008 large scale rebel attacks were stillcommonplace and causing severe damage to operations. 164To analyse the situation in terms of their ‘social licence to operate’, it couldbe argued that in the past oil companies in Nigeria have not focused enoughon gaining ‘social licence’ to operate by engaging with the Nigerian people’sneeds, focusing instead on the formal consent of the Nigerian state.As a result, their business is being affected in significant ways. In contrast,Newmont in Peru recognised that the potential for their operations wasbeing severely compromised by their lack of proper engagement with localcommunities – they saw that their social licence to operate was weak, andrecognised the business implications stemming from that.As resources become scarcer, companies will increasingly need to accessresources in environments with greater political and social complexity;the way that companies manage their social licence is only set to becomemore important to the business prospects of mining and extraction companies.If operations in an area are not realistic or likely to be profitable,as a result of such opposition and risk, shareholders should be aware of thefactors involved so as to ensure that capital is not used to pursue flawedoperational strategies, only to see them fall apart at a later stage.3.1.3 Regulatory freedomWhen companies engage in practices which are subject to controversy orwhich have significant local or international opposition, they are exposingthemselves to the risk that a future change in law or other regulation willbe made by the host state government in the future which may significantlyincrease the costs for those operations and reduce the attractivenessof investment.Where company practices are having impacts on local communities orenvironments, and are facing opposition as a result, they are running therisk of inducing such regulatory shifts, and it is in shareholders’ intereststo have access to all relevant information, so as to be aware of the ways inwhich their investment may be being put at risk by company practices.Fuel extraction from the Canadian tar sands: regulatory riskand stranded assets‘Tar sands’ (also commonly known as ‘oil sands’) are bituminous sands;deposits of an extremely dense and viscous form of petroleum called bitumen.They are found in large quantities in a number of places worldwide,including Alberta, Canada. They are very expensive both to extract andupgrade into usable products. 165 However, rocketing global oil prices madethe tar sands an economically viable option, and major extraction companiespiled in with capital investment. 166
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