From the Cover: Conflict translates environmental and social risk into business costs

Sustainability science has grown as a field of inquiry, but has said little about the role of large-scale private sector actors in socio-ecological systems change. However, the shaping of global trends and transitions depends greatly on the private sector and its development impact. Market-based and command-and-control policy instruments have, along with corporate citizenship, been the predominant means for bringing sustainable development priorities into private sector decision-making. This research identifies conflict as a further means through which environmental and social risks are translated into business costs and decision making. Through in-depth interviews with finance, legal, and sustainability professionals in the extractive industries, and empirical case analysis of 50 projects worldwide, this research reports on the financial value at stake when conflict erupts with local communities. Over the past decade, high commodity prices have fueled the expansion of mining and hydrocarbon extraction. These developments profoundly transform environments, communities, and economies, and frequently generate social conflict. Our analysis shows that mining and hydrocarbon companies fail to factor in the full scale of the costs of conflict. For example, as a result of conflict, a major, world-class mining project with capital expenditure of between US$3 and US$5 billion was reported to suffer roughly US$20 million per week of delayed production in net present value terms. Clear analysis of the costs of conflict provides sustainability professionals with a strengthened basis to influence corporate decision making, particularly when linked to corporate values. Perverse outcomes of overemphasizing a cost analysis are also discussed.Large-scale natural resource extraction projects (including exploration and processing activities) profoundly transform environments, communities, and economies, and often generate social conflict (2, 3). Previous studies of resource extraction and conflict have highlighted the relationship between mining and hydrocarbon resources and broader civil conflict (4, 5) and individual cases of project level conflict (6, 7). In this study, we investigate the importance of company–community conflict in the context of regulation of the sustainability performance of mining and hydrocarbon companies. We estimate the cost of social conflict to companies, determine how companies interpret this conflict, and explain how they respond to conflict. Costs were understood broadly as the negative impacts of company–community conflict on a company’s tangible and intangible assets, including value erosion. Conflict is defined as the coexistence of aspirations, interests, and world views that cannot be met simultaneously, or that actors do not perceive as being subject to simultaneous satisfaction, and is viewed in this assessment as ranging from low-level tension to escalated situations involving a complete relationship breakdown or violence (8).There is growing appreciation that unmitigated environmental and social risks have the potential to negatively influence the financial success of large-scale developments in the extractive industries. A 2008 study of 190 projects operated by the major international oil companies showed that the time taken for projects to come on-line nearly doubled in the preceding decade, causing significant increases in costs (9), although this increase reflects project remoteness, scale, technical difficulty, and input price, as well as social conflict. A follow-up of a subset of those projects found that nontechnical risks accounted for nearly one-half of the total risks faced by these companies, and that risks related to company relationships with other social actors constituted the single largest category (10). A separate empirical study of 19 publicly traded junior gold-mining companies found two-thirds of the market capitalization of these firms was a function of the firm’s stakeholder engagement practices, whereas only one-third was a function of the value of gold in the ground (11).In its analysis of socio-ecological systems (SESs), the sustainability science literature has said little about the large-scale private sector as an important actor within, and regulator of, SES behavior. A review of the 450 sustainability science articles published in PNAS, for example, finds just 23 referring to “corporate,” “industry,” “private sector,” or “company” in their texts. An extensive word cloud produced by a historical review of 20,000 papers related to sustainability science (12) notes just five terms implying a focus on the private sector (“corporate social,” “corporate sustainability,” “social responsibility,” “industrial ecology,” and “supply chain”), with none of these terms invoking core company decision making, culture, or calculations. However, large-scale corporate actors are obviously of central importance to the “major questions” for research in sustainability science (13), and perhaps especially the questions: “What shapes the long-term trends and transitions that provide the major directions for this century?” and “What determines the adaptability, vulnerability, and resilience of human–environment systems?” (13).The relevance of private sector actors is particularly clear in the extractive industries where, given the evolution of technology and industrial structure in these sectors, large enterprises have become highly influential actors in SES dynamics. Dramatic events and disasters, such as the Deepwater Horizon in the Gulf of Mexico, make this clear. Such enterprises can also be critical actors in slower processes of SES change, such as those mediating the relationships among water, agriculture, livelihoods, mining, and climate change (14, 15). Companies in the extractive industries have, to greater or lesser extent, developed policies for sustainable development and used sustainability professionals to respond to the changes induced by their activities on SESs. It is therefore important to understand the drivers of company behavior to build adequate models of socio-ecological change.This study addresses one potential driver of company behavior: conflicts motivated by the social and environmental risks created by, and the impacts of, corporate activities. More specifically, the study understands social conflict as a means through which populations communicate perceptions of risk and which generate costs for companies. The study refers to risk from the perspective of the entity experiencing the risk (i.e., environmental risks are risks to the environment; social risks are risks to society, social groups, or individuals; and business risks are the risks to the business). We ask about the significance of the costs associated with community conflict to companies, how far companies are prepared to respond to these costs by seeking strategies to reduce the environmental and social risk that they generate within SESs, and the conditions that can induce regulatory and strategic change within the corporate sector itself such that it reduces any negative environmental and social impacts.Although the report addresses just one dimension of large-scale private sector activity, the purpose is to suggest the importance of paying far more attention to corporate behavior in studies of socio-ecological dynamics. Emerging research on large-scale land acquisitions, or “land grabs” (16), and the implications for land-change science (17) suggests the same need to attend to corporate actors in sustainability science. In addressing this theme, our primary purpose is to map out, explore, and identify (rather than test) particular relationships between large-scale business and SES dynamics. The intent of the research is to build SES theory in ways that treat corporate behavior as endogenous to these systems.Through in-depth confidential interviews with corporate finance, legal, and sustainability professionals, and empirical case analysis, we investigate the extent to which recognition of the costs of conflict has the potential to change the ways in which companies address the environmental and social risks of mining and hydrocarbon development. Case studies combined desk-based analysis of secondary materials with key informant interviews to confirm or supplement the analysis. Case studies were used to characterize the types of company–community conflicts affecting mining projects, the point at which conflict took effect within the project cycle, and the types of effects that conflict appeared to have on projects. Key informant interviews were used to address how large-scale mining and hydrocarbon companies interpret these conflicts, how they respond to them, the factors determining different types of company response, and the extent to which calculations of the financial costs of conflict change the ways in which companies respond.