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Risks and challenges in the mining and energy sectors: failure to obtain a ‘social licence to operate’ can threaten a project’s viability

October 2019  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

October 2019 Issue


Multinational companies with long histories of worldwide commerce are finding that the global rulebook has changed and that the smallest group of stakeholders can halt a project, even after the usual due diligence is performed and major investments have been made. Nowhere can this be seen so clearly as in the mining and energy sectors, where the cost of development is massive and return on investment (ROI) is often measured in decades.

Whether the project is in California, Bolivia or Armenia, a multinational mining or energy company now needs to approach each new project with the understanding that – in addition to the legal licensing required to engage in large-scale development – a social licence to operate (SLO) is required as well.

This is not news to multinational companies. In EY’s ‘Top risks facing mining and metals in 2019-20’, licence to operate is listed as the number one risk, up from number seven the year before. But exactly how to achieve an SLO is still misunderstood and many companies do not know where to start.

What is an SLO?

An SLO can be summed up by ‘doing the right thing’ for all stakeholders in a mining project – local communities indigenous groups, governments and regulators, shareholders and company employees – including the sustainable needs of future generations. An effective SLO allows companies to develop profitable projects that work for all stakeholders, and to pursue day-to-day operations with confidence.

Companies that fail to achieve an SLO run the risk of dealing with unexpected (an often ongoing) conflicts that can drain company resources, including talent, capital and goodwill.

The SLO diagnosis

A qualified team of experts can make an effective SLO diagnosis fairly quickly and cost effectively. The team will: (i) identify and assess what actual and potential risks and challenges exist in seeking to obtain a local community’s acceptance and trust; and (ii) propose concrete action items that will minimise or manage those risks and challenges.

An effective team will be comprised of experienced individuals who understand the industry, as well as the specific company’s objectives and operations. They will be able to conduct business in the language of the project’s jurisdiction, and have working knowledge of its legal system and cultural nuances. It can prove to be advantageous for the team to be headed by one or more attorneys so that the process and its results will be covered by attorney-client privilege, which is recognised in some form in most countries.

Preparation

The SLO diagnosis team will meet with the company’s senior management to learn about the company’s goals and concerns, gain an understanding of the project’s history and review relevant documentation. To be effective, the team will need unrestricted access to review the company’s documents, policies and procedures, and to interview company personnel. The team and the company will agree to an overall game plan that includes expected deliverables, deadlines and costs.

The diagnosis team will identify all external stakeholders that may be affected by the proposed project, including local communities, governmental regulatory agencies, global non-government organisations (NGOs), international financial institutions and industry associations. The team will ascertain the identities of key community leaders, and hire respected, well-connected and trusted facilitators to arrange interactive and informational onsite meetings.

The team will research relevant legislation and customs in the project’s jurisdiction that relate to land access and acquisition, and cultural heritage. If the project is located on or near lands of indigenous people, it may be necessary to obtain free, prior and informed consent (FPIC), a potentially time-consuming process.

In final preparation, the team will develop a procedure to provide consistent information to landowners and land users in order to obtain permission to conduct exploration and other preliminary onsite activities.

Onsite investigative work

At the proposed location of the project, the SLO diagnosis team will meet with the hired facilitator to identify all stakeholders, obtain insights concerning the local community’s attitudes towards the project and the company, and hold interactive community meetings where interested stakeholders are able to learn about the company’s plans, exchange ideas and express their opinions.

The diagnosis team will verify the existence of any and all documents and agreements signed among community members, government officials, NGOs or other companies. The team will also verify and memorialise the existence of any verbal agreements or understandings. Where permission is granted, the team will obtain copies of documents, take as many pictures and video recordings as possible, and record the names of those who participate. Team members will meticulously document all activities.

An experienced team will avoid making promises or commitments so as to not raise expectations of stakeholders. Failure to fulfil commitments can complicate and very possibly terminate a project.

Based on this investigative work, the team will prepare an initial community profile for the company, which provides enough information to initiate engagement and to begin mapping the risks or impacts that the local community and other stakeholders may face as a result of the development of the project.

The SLO diagnosis report

The SLO diagnosis report presented to the company’s executives will include a description of the scope and methodology of the onsite investigative work and the onsite investigative work findings and conclusions, along with supporting documentation. The report will include concrete recommendations for addressing potential obstacles to the project’s development.

The report will also alert the company to possible litigation risks, and other areas of concern that are uncovered during the investigation, such as problems with the corporate structure and ownership, the legality and enforceability of mining, development, building and other administrative licences and permits, supplier agreements, key employment contracts and other contractual matters, and anti-corruption and anti-bribery issues.

The diagnosis team will present an advance copy of the SLO diagnosis report to the company’s executives and then meet with them to discuss the key findings, possible mitigation strategies and recommended action plans. Together, the SLO diagnosis team and company executives will review the actual and potential risks and challenges that exist in seeking to obtain the local community’s acceptance and trust so that the project can move forward with the best chance for success.

Implementation

Implementing recommendations made in the SLO diagnosis is the final and most critical step in achieving an effective social licence to operate. The company’s executive team will have to decide what concrete action items to take that will minimise and manage the most immediate risks and challenges to their project, and what procedures to put in place to ensure ongoing success. They will need to establish a budget, a task force and a timeframe for implementation.

As stated in the EY report, “a narrow, legacy focus on license to operate may be the strategy that puts you out of business”.

On the other hand, companies that commit resources to gain a social licence to operate will be those that continue to thrive, operating confidently in multiple jurisdictions, and positioning themselves as industry leaders and responsible managers of the planet’s mineral and energy resources.

 

Jordi Ventura is a lawyer at Jeffer Mangels Butler & Mitchell LLP. He can be contacted on +1 (415) 984 9689 or by email: jventura@jmbm.com.

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