Strategies for competitiveness and shared value in oil, gas and mining

Doug Bannerman, senior consultant with Two Tomorrows (North America), reports on the IFC 2010 Corporate Responsibility Forum and flags up two examples of good practice in the extractives sector

I recently attended the International Finance Corporation (IFC) 2010 Corporate Responsibility Forum in Washington, D.C. – a two-and-a-half-day event primarily for CR practitioners who work in the extractives sector and those of us who provide technical assistance to oil, gas and mining companies on the IFC’s Performance Standards. While IFC clients are required to achieve the Performance Standards as a condition of funding, the Performance Standards have emerged as a de facto standard for other companies as well.

The theme of the forum, Strategies for Competitiveness and Shared Value, certainly resonated with me. Two Tomorrows firmly believes that sustainability performance is a driver of shared value, and we even have a tool – the Tomorrows Value Rating – to assess it, among our other tools and service offerings.

Sustainable development (also called community investment or community engagement) is not new to companies in the extractives sector.

Social investments are often a condition of IFC financing or a contractual obligation of host governments. There may be a considerable lag before new extractives projects generate taxes or royalties that governments can spend on social and economic development, especially with green-field projects. Further, today’s in situ oil, gas and mining operations are highly technical and mechanized, creating fewer prospects for employment beyond the construction phase. Together these factors have an enormous influence on stakeholder expectations and extractives companies’ abilities to acquire and retain their ‘social license to operate’.

As poll data has indicated over the past two years, and was reiterated in comments by Sheila Bonini of McKinsey & Company in her remarks on day one of the conference, trust in companies remains at an all-time low thanks to the global financial crisis. Yet at the same time, stakeholders expect the private sector to find innovative solutions to our most critical sustainability challenges. The bar has therefore been raised for companies in demonstrating the value they create through resource extraction.

Two of the sub-themes of the conference, Beyond Philanthropy: Strategic Community Investment and Measuring the Returns on Sustainability Investment spoke to this reality. Over the course of the conference, there were a number of great presentations on current and emerging best practices in designing social investment budgets appropriate to the scale of social need; ensuring stakeholder participation in the identification, design and implementation of interventions; and in measuring the shared value for companies and stakeholders.

There were two I found particularly useful.

Chevron in Nigeria

Dennis Flemming of Chevron talked about the Niger Delta Partnership Initiative – a significant tack his company took in its community investment efforts in the region after previous, more traditional approaches proved less than successful.

In 2005, the company adopted a new approach to encourage participatory stakeholder engagement in the process of identifying community needs in the areas where it operates. This model was formalized in a Global Memorandum of Understanding (GMOU), which gives stakeholders a more direct role in community development through newly created Regional Development Councils (RDCs). Chevron Nigeria signed GMOUs with eight RDCs in the Niger Delta.

Together, the GMOUs reach more than 400 communities, villages and chiefdoms and involve some 600,000 community members. Chevron provides financial support to cover governance, administration, and project and partner costs.

While this approach may appear bureaucratic and overly focused on governance, nonetheless it appears to have been embraced by participants and thus legitimized. Moreover, Chevron notes that the RDCs are often able to develop and implement community-based projects more cost-effectively than the company would. And since there is greater sense of ownership of the projects at the community level, the projects are not associated with Chevron and are less likely to be sabotaged.

The GMOU model has subsequently been adopted by Shell, and other extractive companies that operate in the Niger Delta have expressed interest in it.

Rio Tinto Alcan’s Planning and Financial Valuation Model

Claude Perras of Rio Tinto Alcan, along with representatives from Deloitte & Touche and IFC’s CommDev, talked about the Planning and Financial Valuation Model developed collaboratively and piloted at the project level by Rio Tinto, Newmont and Cairn.

When it came to putting an actual dollar value on the risks mitigated through its social investments, Rio Tinto found that existing cost-benefit analyses lacked the rigor of other, more traditional investments. This made the numbers it did come up with a hard sell to engineers and accountants and meant that sustainability investments were not considered germane to the project planning process and unrelated to the achievement of core business objectives.

The group has developed a financial model that calculates a range for the Net Present Value (NPV) of a portfolio of sustainability investments, including both the direct value creation and the indirect value protection of these investments. Since NPV compares the value of a dollar today to the value of that same dollar in the future, the tool helps to highlight the relative value of specific investments and inform critical spending decisions that may be in the millions of dollars.

UN Global Compact Leaders Summit

The IFC conference was followed last week by the UN Global Compact Leaders Summit in New York. The UN Summit echoed a similar theme of creating “an era where environmental, social and governance issues are deeply integrated into business based on both material and ethical rationales.” While developed economy government spending on development assistance dwarfs that of the private sector, private investment is often the most significant and long-lasting generator of social and economic growth and is a critical part of the equation.

With only five years left for the private, public and civil society sectors to achieve the Millennium Development Goals, it’s now more important than ever for companies to demonstrate how their business objectives are aligned with broader social purposes and societal expectations – and how this truly does create shared value.