Policy Innovations Digital Magazine (2006-2016): Commentary: Corporate Social License and Community Consent

Nov 21, 2008

"Social license to operate" is an intriguing new phrase that has entered corporate parlance in recent years. Its meaning is not well defined, but corporations usually use it to refer to some kind of approval they must obtain from local communities in areas where they operate (as compared to the legal license they must obtain from governments). The concept has emerged in particular with regard to the extractive industries, which often directly impact local communities by taking their land, water, and other resources. These industries have been the focus recently of widespread community anger and protest in developing countries.

Although social license has a positive ring to it, and seems consistent with new corporate social responsibility standards, when pressed, corporations are rarely willing to equate it with community consent—that is, not operating in places where communities are opposed to their presence. This may be because doing so would mean accepting loss of access to areas that would otherwise be highly favorable from an economic perspective. Accepting that idea is still "a bridge too far" for some companies, particularly in the natural resources sector, where areas of operation are dictated by geology.

The distinction between social license and consent is critical because accepting community consent as a basic operating standard sets a higher bar. If a community's actual consent is required before operations begin, companies must treat the community as more of a partner in project development, rather than as an obstacle to overcome. It also implies that a company must engage more holistically with a community, providing them access to critical information and allowing them adequate time to assess their needs and interests before making a decision about whether to accept a company's presence. The more vaguely defined social license does not necessarily imply these things.

From a company's perspective, accepting a clear standard of community consent can help it to avoid operating in areas where there is opposition. Locating projects in such areas often leads to cost overruns as companies are forced to invest extra time and money responding to community protests. In some cases, company operations may actually be shut down, which has a direct impact on earnings and profitability.

Peru provides an example of how these issues are playing out in real time. The country is in the midst of a mining boom, driven by record-high prices for gold, copper, and other minerals that are among the country's leading exports. A record number of new mining projects have been initiated in the past ten years. This boom was facilitated by liberalization and privatization of the mining sector that began in the 1990s.

This new wave of mining investment has generated widespread conflict as mining companies have entered communities in rural Peru that have had limited contact with foreigners and are concerned by the horrible environmental legacy of Peru's previously state-owned mining industry. In a number of situations, foreign companies with little experience operating in this kind of context have mishandled their community relationships.

In September 2004, 10,000 protesters took to the streets of the northern Peruvian city of Cajamarca, near South America's largest gold mine, to protest the mine's plans to expand to a mountain that residents believe is a key source of water for the surrounding communities. After weeks of sometimes violent protests, the mining company, a subsidiary of U.S.-based Newmont, finally withdrew from the mountain and issued an unprecedented public statement acknowledging that it had not fully understood the concerns of the local communities.

Due to the protest, the mine was forced to scale back operations and the company's stock price fell 7 percent, a loss of $1 billion in shareholder value. And by losing access to the gold deposit, the company relinquished an estimated $1.7 billion in company earnings. If the company had sought consent from local communities from the outset, it could have understood sooner the degree of community opposition and might have more effectively addressed the community's concerns.

Peru is not the only country where we see this correlation between a community's consent and a company's financial performance. In a more positive example, a recent study by the World Resources Institute found that by working to obtain community consent at a project in the Philippines, Shell may have saved as much as $72 million in project delays, which amounted to a 1,200 percent return on its community consent efforts.

As mentioned above, many companies resist the principle of consent because they fear losing access to areas of operation. They also worry about extending a veto over their operations to a small group of individuals. This is an unfounded fear. As stated by institutions like the World Bank and the International Labour Organization, and community rights experts and leading nongovernmental organizations, the interpretation of the consent principle (which is an established right under international law for indigenous peoples) is not intended to give one person a veto, but to provide a basis by which the broad views of a community can have a meaningful impact on project decisions.

Without a sense that their views have any real weight with a company, communities are less likely to want to engage in dialogue, thus making it difficult for companies to get an accurate read on new situations.

The experience of the past twenty-five years has taught us that the globalization process can work both ways. It can facilitate the flow of capital and investments across borders and provide corporations with new opportunities for growth and profit. But it can also increase the exposure of companies to risks posed by operating in new areas for which they, and the people impacted by their operations, are not prepared. Moving beyond social license to respecting the principle of community consent in policy and in practice can be an effective way to control those risks and to create mutual benefits for companies and communities.

Keith Slack is Extractive Industries Program Manager at Oxfam America. The views expressed above do not necessarily reflect those of Oxfam America.

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