NRC

All extraction companies should follow best practice in contracting, operations and payments.

Many extractive companies operating across borders recognize that a failure of the host government to deliver benefits from extraction to the people can have significant adverse effects on the company’s profitability, security of investment and ability to continue to operate. If grievances build up, there may be conflict, government demands for re-negotiation of terms of extraction or even out-right nationalization. Missteps by the company itself with regard to social and environmental protections can lead to unrest in producing areas that interferes with production and puts employees at risk. Company reputation risk is also heightened under these circumstances. Given the large up-front investments required for many extractive projects, and the captive nature of the asset, the costs for a company of such developments can very high. The risks may particularly acute in so called “fragile states” where the ability of the government to negotiate effectively and to monitor or enforce laws may be weakest and the opportunities for companies to exploit those weaknesses are the greatest.

A growing number of companies see it in their own interest to enhance their “social license to operate” and to take steps that go beyond the minimum legal requirements of their home or host governments. Major oil and mining companies have embraced EITI and work proactively to promote it. A number of extractive companies unilaterally disclose details of the physical and financial operations country by country, and provide social services to the communities where they operate. Some companies voluntarily seek to procure products and services locally.

Perhaps the broadest effort is that of the International Council on Mining & Metals (ICMM), an organization of the largest mining and metal companies including Anglo American, Anglo Gold Ashanti, Mitsubishi, Newmont, Rio Tinto and Vale. ICMM has created a Sustainable Development Framework defining best practices covering the full range of mining activities, from the decision to extract, to local content, to revenue transparency and mine closure and clean up. According to the ICMM, the Sustainable Mining Framework was developed through a multi-stakeholder process and followes closely the recommendations of the World Bank’s Extractive Industries Review chaired by Dr. Emil Salim.

The ICMM has undertaken a series of studies to identify policies and practices that can increase the economic benefits that accrue from mining at the local and national levels. The ICMM recognizes that extractive companies are not passive actors but can influence governance and economic outcomes beyond the extractive process. “The poor socio-economic performance of many resource-rich countries gives reasons to believe that extractive industry activities can have a non-trivial and sometimes negative+ impact on governments’ and communities’ incentives. This is particularly the case if the size of this industry is large relative to the overall size of the national economy.” After wide-ranging consultations with stakeholder groups and a review of relevant international conventions, the ICMM has agreed a far-reaching set of binding principles for its members, which includes of the largest mining and metals companies. These principles are broadly consistent with and supportive of the Charter. Unfortunately, nothing comparable has been done by the petroleum industry.

There is an evolving body of law and practice that suggests that corporate responsibility goes beyond a legal license to operate and maximizing profits. There are the beginnings of internationally accepted norms for broader corporate responsibility. Many OECD countries encourage corporate responsibility, variously defined. Danish law requires large companies to report on their CSR policies. The UK Companies Act requires boards of directors to “have regard” for “the impact of the company’s operations on the community and the environment.” The community of socially responsible investors is growing rapidly, with some very large funds like the Norwegian Pension Fund barring investment in companies that do not observe international codes and standards or follow industry best practice. There is no inherent conflict between best practice and maximizing profitability over time.

Extractive activities intersect with many UN and other international conventions, including for the protection of the environment, human rights, labor. The United Nations is developing a set of principles for business and human rights, in collaboration with the business community. The UN’s definition of human rights includes economic rights and the “right to development.” The conceptual framework presented by the Special Representative of the Secretary-General has been endorsed unanimously by the UN’s Human Rights Council and by leading business organizations including the International Chamber of Commerce and the ICMM. Special Representative John Ruggie describes the responsibility to respect human rights as a near-universal norm that exists “independently of State duties and variations in national law.”

Through the interaction of many formal and informal stakeholder processes, a body of international norms and industry best practice for the extractive industry is being built up. This includes the Extractive Industries Transparency Initiative, the transparency and environmental standards adopted by international financial institutions for their engagement in commercial extraction projects, guidelines for investors and extractive firms like the project risk assessment of the social license to operate developed by Critical Resource.

Industry organizations like the ICMM are developing industry guidelines for responsible extraction. If the principles and policies recommended by this Charter are to be successful, extraction companies that can have such a large and long-lasting impact on the economic, environmental and social life of the host country must play a broad and actively supportive role. The accompanying technical paper (Level 3) for Precept 12 elaborates specific steps companies can take to support the Charter, drawing on the evolving international norms, standards and best practices.