Creating Shared Value in the Extractive Industries

It is broadly accepted that Corporate Social Responsibility (CSR) is a necessary part of a company’s approach to business and contributes to long-term value for companies that continue to treat their employees well and “give back” to their neighbors. Yet, critics complain that, despite strongly voiced arguments to look through a “CSR lens,” the CSR community has failed to come up with a structured framework that helps managers to link non-core activities to financial performance in everyday decisions. Creating Shared Value, a concept popularized by Harvard’s Michael Porter and Mark Kramer, addresses this criticism head on. CSV expands on the idea of CSR to recognize that broader contributions to social and environmental welfare can also enhance corporate welfare. Porter and Kramer define shared value as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.”

The idea of creating shared value hinges on the notion that the responsibility for and the benefit from actions or activities that create value for society are shared among multiple stakeholders, from companies to governments to communities to NGOs. While CSR focuses solely on the role of business; with CSV corporations are considered just one of several players in the overall development picture.

According to Assheton Carter, EO’s Vice President for Global Engagement, the challenge for companies is that traditionally they have taken a risk-based approach, always looking “inside the fence” and focusing on whether they have complied with certain regulations and done what they need to do to protect shareholder value by following a narrow set of parameters for business performance. But, “if you want to sustain your business, you need to look instead at value-creation, to turn around and look outside the fence” at the opportunities for creating value for different stakeholders and, by extension, for yourself, Carter adds.

Promoting policies or practices that create social or environmental benefits can also create significant long-term value for the company, because it is the path to earning a social license to operate. Conversely, ignoring these opportunities can increase costs for business, by creating an adversarial situation that might lead to delays or disruption in production resulting from conflict with government agencies or local communities. CSV is the flip side of creating greater risk.

For example, if a company is establishing an oil operation in a remote location, it would, as a matter of business as usual, create some sort of medical facility for its staff. From a shared value perspective, the company could also make that clinic available to the local community. This would create social value for the local people, who have access to improved medical care, but it would also create business value for the company, because the local people would be less likely to look unfavorably on the operation and create conflicts that could delay or disrupt operations. In addition, such a scenario would open the door to public-private partnerships with donor agencies or government departments that often welcome the opportunity to share some of the costs of providing medical care to underserved populations.

Other examples of corporate actions by oil and gas companies that can create shared value for both the company and local communities and governments include building access roads that also give access to villages, making sure that power used at a facility is also available to remote community in the area, or educating people about their rights in relation to development.

A decade ago, companies might have looked at actions like these and said that they were not their responsibility, that governments or NGOs should be responsible for creating this social value. But today, it is recognized that social value and corporate value are not mutually exclusive. It is in a company’s interest to work within an educated community of people who understand their rights and the opportunities that development can bring. By managing local risk and ensuring a social license to operate, and protecting its brand reputation that facilitates continued access to resources, a company is protecting its long-term asset value.

At Equitable Origin, the idea of shared value is integral to our overall approach and is reflected in the design of our EO100™ Standard, both in the specific metrics for measuring performance and in the performance targets for companies to meet. Our performance targets are organized at three levels – meets international standards, exceeds international standards and leads international standards. The higher levels of these standards, which include many references to community development and partnerships, reflect a movement toward creating more shared value.

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