4.2 Business case quantification

There is little doubt that it is easier and less stressful for companies to operate in a context in which the social environment is harmonious and therefore conducive to greater business success. The costs associated with good community relations are notoriously difficult to quantify because, just as the social licence is easier to define in its absence, it is hard to calculate the financial benefits of good business as usual—that is, with no community relations problems. Even the side-effects of poor community relations are difficult to quantify with any degree of accuracy, unless the relationship has broken down completely in which case the costs of a non-functioning project can rapidly mount up in an extremely tangible manner Those costs may include production delays, salaries for workers unable to work or stood down, the cost of replacing damaged infrastructure, and damage to corporate reputation. Most mining projects manage to avoid reaching such a state of relationship breakdown with their host communities, even if they experience frequent low-level problems. By contrast, if they devoted more time and effort to nurturing healthy community relations, most projects could attain a more efficient and smooth operating environment, thereby preventing the diversion of management time to resolving a series of small but time-consuming community relations issues.

Evidence of the business benefits of good stakeholder engagement was provided in a study of mining companies by a team from the Wharton School at the University of Pennsylvania. The researchers followed the market valuation of 26 goldmines owned by 19 publicly traded firms listed on the Toronto Stock Exchange between 1993 and 2008, using an index of the degree of stakeholder cooperation or conflict for those mines. They concluded that:

[T]he social license to operate is more than rhetoric. It is operationalizable, empirically testable and strategically relevant. For these mining firms, pursuing cooperation from and minimizing conflict with stakeholders is not just corporate social responsibility but enlightened self-interest. (Henisz et al 2011:29).

The results of the study showed that two-thirds of the market capitalisation of the firms could be credited to their stakeholder engagement practices, whereas only one-third of the market capitalisation was due to the value of the ore body

In response to corporate complaints about the challenge of quantifying the potential benefits that can accrue from investing in socially responsible programs, the International Finance Corporation (IFC), the private sector arm of the World Bank, developed a tool called financial valuation. The tool incorporates both value creation (cash savings, productivity gains) and value protection (the value of avoiding risks) aspects of social responsibility investment. It tests a thousand probable outcomes of risk scenarios in a Monte Carlo simulation to arrive at an estimate of potential impacts on a project's net present value (NPV). Several examples are used by the IFC to demonstrate the value of the financial valuation process: they can be found on its website, along with other supporting information

The IFC also cites the Newmont Ahafo mine project in Ghana, which was able to start construction six months earlier than expected because it invested in building community trust early in land access negotiations by embedding community specialists in the project team to work alongside the technical experts. This constituted a substantial saving to the business. Newmont Ghana Gold's Group Executive Environmental and Social Responsibility commented that quantifying the NPV of sustainability initiatives at the mine had finally allowed the company to get 'beyond NPV:

While practitioners had long sensed the business justification for corporate citizenship and community goodwill, the process unleashed by quantifying its value was an important step in aligning core business objectives and sustainability initiatives. (Wharton School 2012: B5)

Use the IFC financial valuation tool is labour intensive, at least in the first instance while databases are set up, and can therefore be costly. Nonetheless, the Newmont executive quoted above found it worthwhile and it made a major difference to the way the broader management team understood the benefits of community investments. Recent research has determined that the finance and technical management leaders of projects are often unable to fully comprehend the importance of community engagement, with the result that they tend to exclude community relations practitioners from management processes unless and until there is a major crisis: 'the ingrained politics of exclusion was one of the most significant barriers to improved social performance for the company' (Kemp and Owen 2013:529). Thus, a company may decide that it is worth investing in a cost-benefit exercise such as that enabled by the IFC financial valuation tool in order to bridge this gap and improve social performance by demonstrating the financial benefits of good community engagement. Footnote 11

Footnotes

Footnote 11
Suite of IFC financial valuation tools and guidance available at http://www.fvtool.com/.

Return to footnote 11 referrer

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