Investing in Communities

CommDev has developed this section in partnership with Business for Social Responsibility (BSR).

Executive Summary | Origins & Key Trends in CSR | Business Case for Sustainable Community Development | Achieving Community Development

EXECUTIVE SUMMARY

This section addresses the business case for company investment in sustainable community development. Since the 1990s, companies have confronted rising social expectations regarding their conduct and contributions to society from a variety of stakeholders. Companies also increasingly recognize that their long-term success depends on secure communities, healthy and educated workers, and key environmental services. Together, these trends are reshaping the risks and opportunities of doing business. Community development can contribute to business success by helping companies to obtain a social license to operate, create an enabling business environment, and develop local competitive advantage. Successful community development, however, requires attention to the sustainability of development initiatives; both their contributions to community sustainability and the continuity of the initiatives.

ORIGINS & KEY TRENDS IN CORPORATE SOCIAL RESPONSIBILITY

Since the 1990s, companies have confronted rising social expectations regarding their conduct and contributions to society from a variety of stakeholders. Corporate governance scandals, concern about globalization, and pressing worldwide social and environmental challenges are key factors contributing to this shift in expectations. Companies also increasingly recognize that their long-term success depends on secure communities, healthy and educated workers, and key environmental services. Together, these trends are reshaping the risks and opportunities of doing business. Corporate social responsibility – minimizing the potential negative impacts and maximizing the positive benefits of business for society, the environment – is becoming an increasingly important for risk management and developing new opportunities for companies, communities, and governments. Some companies now measure their success using the “triple bottom line”, which expands the concept of business success to include a 1) company’s impact on people (labor and community) 2) planet and 3) profit.

For the extractives industry, a number of key trends are responsible for making social responsibility a part of successful business strategy:

• Communities expect to see a net positive benefit from extraction projects. Host communities are the most vulnerable to adverse environmental or social impacts caused by extractives projects. At the same time, these communities often have the most to gain, and will want to participate in project planning and benefit from associated development opportunities. Extraction projects are more likely to avoid community opposition when they are able to create direct, tangible local benefits. Other benefits such as the payment of taxes and royalties on a national level are important but not sufficient to secure local acceptance.

• Governments and companies face stakeholder pressure for transparent, responsible investment of revenues in development. Weak governance, lack of local institutional capacity, and corruption are factors that have traditionally impeded effective government spending of revenue generated by extractives’ projects. Multi-stakeholder approaches like the Extractives Industry Transparency Initiative (EITI), demonstrate mutual company and government interest in promoting transparency in both the private sector and public institutions.

• NGOs and activists are using innovative strategies to hold companies responsible for their social and environmental impacts, including their contributions to community development. The growth of the internet and related technologies has led to new forms of activism, making it easier to conduct campaigns, recruit members, and solicit funds. Technology has also played a role in solidifying relationships between local and international NGOs as well as broadly raising awareness of social issues across a wide variety of stakeholder groups. Activists have also become more effective legally, using innovative strategies like the Alien Tort Claims Act (ATCA) to hold US companies accountable for their international conduct. International campaigns, such as “No Dirty Gold” and “Combating Conflict Diamonds” have shifted from direct pressure on companies to targeting consumers, purchasers, and investors to push for change.

• Investors are paying increasing attention to corporate social responsibility as a prerequisite for investment, or an indication of investment quality. Investors of all types are including environmental, social and governance factors into their investment decisions. Examples include the IFC, whose Environmental and Social Performance Standards require evaluation and mitigation of social and environmental risk as a prerequisite to project finance, and many private banks, who have adopted similar standards under the Equator Principals. This trend is likely to accelerate with greater access to information, stakeholder awareness, and the sensitive locations of many extractives projects.

• Governments are using corporate social responsibility to evaluate concession and joint venture applications. In addition to technical capacity and revenue-sharing agreements, governments are using companies’ corporate social responsibility track records to select partners in developing oil, gas, and mineral reserves.

• Peer conduct has widespread industry impacts. In some cases, companies have found that poor environmental or social performance among industry peers results in restricted access to resources or enhanced difficulties in gaining stakeholder trust.

• Extractives industry standards as well voluntary principles for social and environmental performance are becoming increasingly common. Numerous national and international initiatives have developed standards for corporate responsibility in recent years. These include the UN Global Compact, the Global Reporting Initiative (GRI), the Voluntary Principles on Security and Human Rights, the International Petroleum Industry Environmental Conservation Association, ISO 26000, Earthwatch & Oxfam Mine Certification, and the Canadian Roundtables on Responsible Mining. Standards both reflect – and enhance – stakeholder expectations for company contributions to community development and environmental quality. These can have a material impact on business performance.

THE BUSINESS CASE FOR SUSTAINABLE COMMUNITY DEVELOPMENT

Because of the scale and footprint of their operations, investment in community development is a key component of corporate social responsibility and business success for extractives companies. Community development contributes to business success by helping companies to:

• Obtain a social license to operate
• Create an enabling business environment
• Develop local competitive advantage

… all of which can translate into risk reduction and opportunity enhancement.

Company participation in community engagement and development creates goodwill that translates into greater openness, a willingness to work towards constructive solutions to local issues or problems, and strong “social license to operate” that offers reputation benefits. On the other hand, companies or projects that do not secure this social license may face community opposition that can result in restricted access to resources and capital, and project delays or disruption to operations. (See Figure 1 below).

Investing in community development can also create an enabling business environment by fostering positive working relationships with government, increasing the availability of skilled local employees and suppliers (to meet specific project requirements as well as contribute diversity and local insights), and developing staff.

Finally, proactive community development can assist companies in developing a competitive edge by facilitating solutions to key business challenges such as shortages in engineering talent and the expansion of resource development into sensitive or difficult areas (politically, socially, or environmentally).

FIGURE 1: Impacts of Community Opposition

ACHIEVING SUSTAINABLE COMMUNITY DEVELOPMENT

Community development is “the process of increasing the strength and effectiveness of communities, improving people’s quality of life, and enabling people to participate in decision-making to achieve long-term control over their lives” . Community development is fundamentally different from philanthropy, which is limited to the donation of financial and material resources. While corporate philanthropy can help address immediate community needs, it is not a solution for longer term systemic problems.

Community development focuses on enhancing the ability of communities to solve their own issues and problems. Companies, therefore, must balance stakeholders’ expectations for tangible and immediate benefit with programs that offer sustainable benefits.

Sustainability is a critical ingredient of successful community development and can be “framed” in two ways: first in how a development project contributes to the sustainability – social, environmental, economic, and institutional – of a community; and second, how these outcomes would change once the company departs. These two lenses are useful for developing programs that are likely to achieve sustainable outcomes.

Both kinds of sustainability can be achieved by:

• Aligning company development projects with community objectives.
• Building communities’ human and technical capacity to sustain specific development efforts and more broadly, to take charge of meeting their own development needs.
• Connecting communities to other resources for economic and human development beyond the company.
• Building partners’ capacity to contribute to and sustain development efforts (See The Need for Tri-Sector Partnerships)
• Enhancing the financial sustainability of development efforts through multi-year development budgets, endowments, and the attraction of additional financial resources from other actors.
• Designing development projects to enhance rather than detract from the social, environmental, economic, and institutional sustainability of the community.
• Ensuring community economic sustainability beyond the life of the extraction project.