The ‘When’ and ‘What’ of a project Social Investment Strategy

Before you go ahead, think ahead: Does the impacted community approve of the project? What are the community’s expectations? Can you meet those expectations? If not, then what? What is the capability of the industry regulator? What are the expected environmental and social impacts? What is the narrative about the project in the national discourse? What would be the impact of a change in government?

The answers to some of these questions can disrupt your elegant financial models. Larry Fink, the chief executive at BlackRock, the world’s biggest asset manager with US$4.6 trillion under management, knows this—environmental, social, and governance (ESG) issues are core business issues. In a February 2016 letter to CEOs, he writes that ESG issues have real and quantifiable financial impacts.

Newmont, the world’s second biggest gold miner, knows this too. Despite a ruling by Peru’s Constitutional Court paving the way for the development of the Conga mine in that country, the miner had to walk away from the US$5 billion copper and gold project, unable to withstand violent opposition by the community.

So the need for a clear ESG strategy and the competent management of such is, thankfully, accepted wisdom among serious investors—we hope.

But how to do it?  In this piece, we focus on the ‘S’ of ESG and specifically on social investment plans and programmes.

If you begin thinking about stakeholder engagement, social impact management, and social investment issues after approval, you have waited too long. As investors race to help plug Africa’s US$90 billion annual infrastructure gap, and as companies lay the groundwork for a rebound in oil, gas, and mining, we at Kina Advisory see many companies struggle with the issue of the timing of such activities—when to do what. For instance, when to start consulting the community (without creating unrealistic expectations), when to announce a social investment program (before or after an election), and when to start implementing a social investment programme (before or after approval of a plan of development or power purchase agreement).

Tough questions, admittedly, with no easy answers. It’s a context-specific art, but one that must be grounded in information, best practices, and the connections, experience, and skills of specialists. To help investors, Kina Advisory has outlined suggested activities for the five main phases of a project.

Phase 1—Early development. During project identification and feasibility studies, an investor would need enough information to make a go/no-go decision. Here, activities would focus on investigating the ecosystem of the project: physical environment, political environment, economic environment, legal requirements, communities to be impacted, availability of skilled labor, and other critical issues. The information gathered can be used to begin to formulate a vision for social and economic contribution. Many governments now require that vision and related activities are part of project proposals – so social investment plans are becoming a compliance requirement. Even where they are not, any developer is well-served to articulate such in order to get a leg up. Besides, such a company gets a better grasp on managing risks. Conducting community consultations at this stage must be done tactfully so as not to raise expectations. Also, competitors may be conducting similar surveys, thereby overwhelming the community. An experienced advisor can estimate the nature and cost of managing such activities to help the investor make that go/no-go decision.

Phase 2—Advanced Development. Now is the time to begin executing some level of social investment or community investment programmes. It begins with more comprehensive consultation with stakeholders and a deeper understanding of the country’s economic development strategy.  Even where a company is using an external partner to assist in designing and implementing such programmes, developing in-house capacity would be critical. That would involve cultivating an internal mind-set that values partnership and underpins a more considered approach to stakeholder engagement.

Phase 3—Execution/ Construction. The construction stage is the first test of the robustness of the ESG strategy and management systems. It is the time to begin implementing some of the social investments to smooth the way for construction and related activities. Besides, as the project becomes tangible, its visibility increases and issues will come up that must be managed.

Phase 4—Operation. The operational phase should be one with a constant feedback loop, involving execution of the social investment programme, continuously listening for feedback, monitoring and evaluating programs, and correcting course when needed. In Ghana, for instance, years after a company started operating a plantation acquired from the State, local chiefs started making demands on the basis that customary practices had not been followed in the procurement of the land. But of course the only way to sustain any social investment is by maintaining operational excellence of the core business—while managing all the external forces.

Phase 5—Decommissioning. Often overlooked, the decommissioning process is important not only for the extractive industries. For many other industries, there are compliance issues to deal with. Programs may come to a halt, buildings may be abandoned, jobs would be lost, so it is never a frictionless process. Again, this phase begins with consultation with key stakeholders, especially the impacted community, including helping to identify alternative livelihoods. In many cases, partnerships must be forged to carry on with programs.

The array of actors and factors at play throughout the project lifecycle illustrate the need for a robust stakeholder engagement and communications strategy to underpin any social investment – and for that strategy to be adaptable to each stage. It is also critical for that strategy to include explaining to stakeholders the company’s core business and how it ties in with its social investment. This stops the social investment strategy from being seen simply as a ‘social wash’ PR plan.

While every situation is different these guidelines may be useful in helping companies understand their ESG needs at any phase in a project, and thereby avoid the misallocation of resources or opening themselves up to even more risk.

Trina Fahey, Partner

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