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Social conflict incurs financial cost for extractive industry - study

Source: Thomson Reuters Foundation - Mon, 12 May 2014 19:00 GMT
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Members of the Dongria Kondh tribe gather on top of the Niyamgiri mountain, which they worship as their living god, to protest against plans by Vedanta Resources to mine bauxite from that mountain near Lanjigarh in India's Orissa state, Feb. 21, 2010. REUTERS/Reinhard Krause
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LONDON (Thomson Reuters Foundation) - The financial cost of social conflict is an important reason why companies in the mining, oil and gas industries should make more effort to ensure their projects do not provoke tensions with local communities, researchers said on Monday.

A study published in the Proceedings of the National Academy of Sciences found that delays caused by these conflicts can incur costs of around $20 million per week for mining projects valued at between $3 and $5 billion. It noted "growing appreciation" among sustainability experts of the potential financial damage unmitigated environmental and social risks can inflict on large-scale extractive ventures.

“There is a popular misconception that local communities are powerless in the face of large corporations and governments,” said Daniel Franks, deputy director of the Centre for Social Responsibility in Mining at the University of Queensland and one of the study's authors. “Our findings show that community mobilisation can be very effective at raising the costs to companies.”

Examples include Vedanta Resources’ Lanjigarh bauxite project in India's Orissa state, which was definitively halted in January after a campaign by the Dongria Kondh indigenous people, jeopardising billions of dollars of investment in existing refineries.

In 2013, the $8.5 billion Pascua-Lama gold, copper and silver open-pit mine in Chile was shelved during construction, partly in response to a decade of protests over its anticipated impacts on water and glaciers.

In one case cited in the study, which analysed 50 projects worldwide, an unnamed company attributed over $6 billion in costs to non-technical risks over a two-year period, representing a double-digit percentage of its annual operating profits.

Both citizens and corporations have come to present disputes over access to resources as challenges to social and ecological sustainability "because they increasingly view the issues at stake as being of critical importance to their own survival", the researchers wrote.

COST SAVINGS

In 45 in-depth interviews, mining, oil and gas professionals indicated that quantifying costs related to conflict made it more likely that senior management and financial teams would consider changing corporate behaviour and project design to avoid tensions. But this has yet to occur systematically.

“The cost-cutting currently underway in the mining, oil and gas industries seems to be missing the potential opportunities for cost savings that can come from investing in improved relationships with communities,” Franks said.

Several interviewees said they strongly believed the triggers and causes of company-community conflict - and its costs - are predictable, and that approaches, procedures and standards are available to develop more constructive relationships with local people.

That is why leading companies are implementing the U.N. Guiding Principles on Business and Human Rights, allowing them to manage their rights risks more effectively, according to study author Rachel Davis, a fellow at the Harvard Kennedy School's Corporate Social Responsibility Initiative.

“It is much harder for a company to repair its relationship with a local community after it has broken down; relationships cannot be ‘retro-fitted’,” said Davis, who is also managing director of Shift, a non-profit business and human rights organisation.

Financial services firms are beginning to factor the prospect of conflict-linked delays into valuations of projects, the study said. But corporate interviewees also stressed that values and ethics - not just costs - should be motivating reasons for businesses to engage with local communities.

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