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Establishing a License to Operate

Sustainability Is Key for Resource-Intensive Industries
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    In This Article
    • Resource-intensive companies can maintain a “license to operate” by successfully managing their social and environmental footprint.

    • As competition for resources intensifies, a license to operate is becoming as important to these companies as advanced technologies and engineering equipment.

    • Sustainability-driven actions can lead to a range of business benefits, including competitive advantage and operational innovations.

     

    Resource-intensive industries such as mining and oil and gas (O&G) are embracing sustainability with a far greater sense of urgency than many other industries, according to a series of collaborative studies on approaches to sustainability conducted by The Boston Consulting Group and MIT Sloan Management Review. (See Exhibit 1.) Companies in these industries are finding that when they successfully manage their social and environmental footprint, they are able to maintain a “license to operate.” In the context of sustainability, this is not a formal agreement but the implicit consent of government and society to allow companies to carry out their commercial activities with a minimum of regulatory interference or opposition from local communities.

    exhibit

    As oil, gas, and other minerals grow increasingly scarce and as competition for access to resources intensifies, a license to operate is becoming as important to companies in resource-intensive industries as advanced technologies and engineering equipment. This is partly because of the need to manage their reputations, for in a Web-enabled world, news of human rights abuses or toxic spills can spread around the globe in minutes. Moreover, a company that successfully manages its social and environmental footprint can gain a competitive edge, helping it secure contracts, become a preferred partner, and build long-term relationships with the communities and governments on whose favor it depends. Savvy companies in the mining and O&G industries recognize that sustainability is not just about doing the right thing. It is critical to their very survival.

    Ahead of the Game

    Especially compelling evidence that resource-intensive industries are leading the charge toward sustainability emerges from this year’s study. More than 80 percent of companies in the mining sector reported that concerns about sustainability were changing their business model, and 55 percent of those in the O&G sector agreed (compared with an average of 40 percent for companies in all industries, including mining and O&G). Similarly, 89 percent of mining industry respondents saw sustainability as necessary to competitiveness, compared with an average of 67 percent of companies overall. Almost all companies in the mining sector (96 percent) and 81 percent of O&G companies said that sustainability was a permanent topic on their organization’s management agenda (compared with 70 percent on average for companies overall).

    Most striking were the responses when our study participants were asked to identify the sustainability considerations that have led to changes in their business model. While the number one reason for these changes was “legislative/political pressure,” a close second was “maintaining a license to operate,” with 71 percent of mining companies and 52 percent of O&G companies saying that this was a key sustainability consideration (compared with an average of just 16 percent for companies overall). (See Exhibit 2.) As Tom Albanese, CEO of Rio Tinto, told us in an earlier study, “For us, this is a key part of the business driver behind sustainable development.” For Klaus Kleinfeld, CEO of Alcoa, integrating sustainability as a core value is a critical part of “earning our license to operate.”

    exhibit

    And these companies are putting their money where their mouth is. In the O&G sector, 72 percent of respondents said they had increased their management and investment commitments to sustainability over the past year. A larger proportion of mining companies (86 percent) said they had done the same (compared with an average of 68 percent of companies overall).

    Several factors have prompted mining and O&G companies to recognize the importance of gaining a license to operate.

    First and foremost, their social and environmental footprint is simply far larger than that of businesses in other industries. Covering vast areas, their operations leave profound environmental marks on the surrounding terrain, generating waste and byproducts, many of which are toxic. Furthermore, their presence affects communities, both existing ones and those that grow up around local mines. During their lifetime, mines become social and economic engines. Whole towns often become completely dependent on them, so companies must ensure that these communities can thrive after extractive operations have ceased.

    Second, companies in extractive industries often operate in the face of severe structural, economic, and political challenges. Failure of inefficient, underfunded, or corrupt governments to provide essential services or environmental protections tends to leave the corporate sector filling the gaps. Exacerbating the difficulty for mining and O&G companies, governments often require them to supply infrastructure and services normally provided by the public sector in exchange for access to natural resources. However, providing health care or education services to local communities is not a core competency of these companies, so they must establish partnerships with nongovernmental organizations (NGOs) to meet these needs. And if they build or fund schools and hospitals in the immediate area of their operations, hostility can develop in neighboring areas that lack access to those facilities. Companies therefore need to define the extent of their responsibility.

    Security is an additional concern. Given their vast operations, mining and O&G companies often become proxies for national governments and, as such, are vulnerable to attack from political opponents. Disgruntled communities can disrupt commercial operations—for example, by blocking rail access, causing losses of millions of dollars for the company concerned. Yet providing security around mines or pipelines in unstable parts of the world has proved controversial, with some companies being accused of using brutal military forces.

    For companies in these industries, issues such as human rights abuses, economic exclusion, and environmental degradation are not distant concepts—they are at the heart of day-to-day operations. Sustainability investments—whether to provide essential services or to foster economic inclusion—have therefore become part of risk management, with the goal of engaging communities in a company’s operations rather than alienating them. When we asked our study participants about the benefits of addressing sustainability, 39 percent of mining companies and 17 percent of O&G companies selected “reduce risk” (compared with just 10 percent of companies overall).

    Operating Models That Foster Sustainability

    How have the companies that are embracing sustainability changed the way they operate? Looking closely, we identified a series of adjustments to their operating models.

    Looking Beyond Safety and Efficiency. Safety of operations and technical capabilities are no longer the only criteria considered when governments select corporate partners. It is increasingly important for companies to demonstrate the ability to foster healthy, economically viable communities—for example, by purchasing services and products locally rather than turning to multinational suppliers, as many companies did in the past.

    Addressing the Physical Footprint. Extractive-sector companies need to focus on environmental impacts, such as carbon emissions, waste generation, water use, and changes in the quality of local water supplies. These companies have also started to examine the life cycle of their operations. In the O&G sector, this means working to reduce flaring and to repurpose methane emissions for commercial use.

    Managing a Sustainable Departure. Companies also have a responsibility to the communities and natural resources surrounding their operations after they leave. Decommissioning offshore oil platforms is a substantial operation, involving waste handling, water consumption, and carbon emissions as well as restoring the natural environment through measures such as constructing artificial reefs that support marine life. For mining companies, plans go beyond physical dismantling of structures and pit stabilization to every aspect of the extracting and processing chain and its long-term impact on surrounding areas—for example, by working with local authorities and NGOs to create conditions that ensure that the cessation of mining or other extractive activities does not precipitate a regional downturn. And plans for departure must begin even before a project is under way. Companies must make detailed environmental and social assessments, engaging with governments and local stakeholders in the project development phase before deciding where to site mines, oil platforms, or pipelines.

    Working with External Stakeholders. External pressures can also lead to adjustments to the operational business model. Criticism of mining and O&G companies’ environmental and human rights records has prompted these companies to work with external stakeholders ahead of their counterparts in many other industries. In 2000, for example, the U.S. Department of State and the U.K. Foreign and Commonwealth Office brought together leading mining and O&G companies, human rights groups, and governments to develop the Voluntary Principles on Security and Human Rights in an attempt to halt abuses by public or private security forces protecting company operations. Meanwhile, the Kimberley Process, established to ensure that profits from the diamond trade could not be used to fund wars in Africa, created a certification program involving governments, NGOs, and companies.

    While many have questioned the voluntary approach, these cross-sectoral collaborations have prompted greater transparency and accountability regarding the source of natural resources and the equitable distribution of revenues arising from mineral and oil extraction.

    Mining and O&G companies are still working to improve relations with stakeholders. In our 2011 study, 68 percent of companies in the mining industry and 62 percent in the O&G sector said that concerns about sustainability had precipitated increased collaboration with government and policymakers (compared with 37 percent of all companies). Also, 64 percent of mining companies said collaboration with communities affected by operations along their supply chain had increased, as did 48 percent of those in the O&G sector. Only 25 percent of companies in all sectors said this was the case. As Bill O’Rourke, Alcoa’s former vice president of sustainability and environment, health, and safety, told us in a previous study, “Open, transparent dialogue is so necessary. If you’re the big employer in a small town, you want to have a system where you have routine communications, so that when you have a big issue, you already have the forum.”

    Broader Business Benefits

    Beyond securing a license to operate, the sustainability-driven actions of companies in the mining and O&G sectors bring even broader benefits—advantages that many of these companies are starting to measure. In our study, 68 percent of mining industry respondents said that they had company or operational key performance indicators related to sustainability in place, as did 56 percent of those in the O&G sector, compared with 35 percent of companies overall.

    • Competitive Advantage. The new environment presents opportunities for companies to differentiate themselves from competitors and become preferred partners in large-scale projects.

    • Operational Innovations. A sustainability focus can uncover operational innovations that benefit both the company and the environment. In the aluminum industry, for example, the energy required for recycling (by melting scrap) costs just 5 percent as much as the energy used in primary production, making this a very efficient operation, both commercially and environmentally.

      “Recycling: The Price of Virtue,” The Economist, June 7, 2007; “Case History: The Truth About Recycling,” The Economist, June 7, 2007.
    • A Secure Operating Environment. By involving local communities in decision making and investing in social and environmental initiatives, companies can build “co-operative security” or “community security,” creating greater stability for a company’s operations because the people living and working around its facilities benefit from and therefore support its activities.

    • Investor Confidence. Sustainability strategies are winning increasing support from shareholders—and not only shareholders from the sustainable-investment community. Institutional investors and others are becoming increasingly concerned about companies’ response to environmental threats such as global water stress. In our 2011 study, 36 percent of respondents from the mining industry selected “enhanced stakeholder/investor relations” as among the three greatest benefits of addressing sustainability, as did 26 percent of those from the O&G sector (compared with an average of just 17 percent of companies overall). “We are starting to see much more interest from the investment community in sustainability performance and measures,” Roberta Bowman, senior vice president and chief sustainability officer for Duke Energy, told us in a previous study, adding that this trend was not limited to socially responsible investors. “Some of our mainstream investors are looking at sustainability performance as an indicator and a precursor of overall business value.”

    • A Favorable Legislative Landscape. A further opportunity is for companies to use their influence in the public-policy arena to create conditions that support both commercial activities and social and environmental interests. Across all industries—but particularly among companies with a large global footprint—corporate lobbying activities can promote either narrow commercial interests or the broader social and environmental agenda. Often, however, sustainability values and positive corporate strategies are not reflected in political spending and lobbying activities. For many companies, shaping the legislative landscape will be the next stage in their sustainability journey, providing new opportunities to differentiate themselves from competitors by aligning commercial interests with those of society and the planet.



    As sustainability rises up the agenda, strategies that address social and environmental issues are becoming part of business strategy. This is seen clearly in the mining and O&G sectors, where tough realities have prompted early adoption of these strategies. To maximize the business opportunities and access to resources and new markets presented by such adjustments to the operating model, other companies should look to the sustainability strategies adopted by companies in the mining and O&G industries—particularly in their efforts to secure a license to operate.


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