As environmental, social, and governance (ESG) issues take center stage in the global economy, winning the support of stakeholders at local, national, and global levels will be as important as winning contracts. This will be true for operators in capital-intensive sectors such as mining, oil and gas, and agribusiness, as well as in areas that will fuel the global green transition such as hydropower and wind. The future of a company may depend on its social license to operate.

Today, ESG metrics have become benchmarks for corporate credibility, meaning social license is serious business for companies whose activities impact the environment and economy of local communities, particularly in unstable areas. Whether called sustainable development, ethical investment, or social license to operate, these functions represent a strategic and tactical investment that drives financial performance and shareholder value. From India to Turkey, Ecuador to Ethiopia, activism against mining, energy, and agribusiness operations has disrupted production, damaged capital equipment, and, in some cases, shut down operations. France and Norway are among the countries that have seen community activism affecting the renewables sector, with protests against wind farm investments. As Europe implements its Green Transition plan, such protests are only likely to grow as the impact of new renewables investments on local communities becomes more evident. Regardless of the extent of the disruption, these incidents generate negative press, damage corporate reputation globally, and have the potential to undermine a company's ESG ratings and shareholder confidence.

What is social license and how can a comprehensive strategy help prevent, or at least minimize, local, national, or global opposition to a company and its projects?

There is no simple formula to guarantee a local community will support a new capital investment in its midst or that a national or international activist community will either. That is because social license deals with people and their opinions, beliefs, and agendas - which will be different in each context and can change rapidly in line with circumstances on the ground. However, there are steps a company can take to create nuanced strategies that engage stakeholders and aim toward gaining a social license to operate. Strategies are likely to be different for each investment project, but there are a few commonalities.

Stakeholders

It is essential to identify formal and informal power structures and the people associated with them. Companies must understand who is important, why they are important, and how their influence was earned or assigned.

Agendas

Competing priorities, as well as economic and social pressures, will impact opinions, behaviors, and decisions within each community. These agendas and pressures can lead to decisions that seem counter-intuitive from the outside. For example, it may seem reasonable to assume that increasing access to electricity would be viewed positively, especially if leaders expressed it as a priority. But, there may be other factors that come into play to derail this support.

Scenario Planning

Companies need to understand how social and political change in the wider context of a country and region may impact stakeholders and their agendas. Scenario analysis can help by testing how things might change in the cases of low- and high-probability events.

Warning Flags

Based on the analysis, we can identify pathways and early warning signs that suggest scenarios that may become more likely. Careful monitoring of these signs can help companies stay ahead of the curve and proactively tackle change, for example, by engaging early with new stakeholders.

Speed of response is critical to head off confrontations that could damage a corporate reputation or, worse, shut down operations. To be effective, a social license strategy must be part of the evaluation and planning phase of a country-entry plan before any digging or construction takes place. If it's an afterthought, the damage will likely already be done. The cost of response can be high - and recovery challenging.

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Posted 05 October 2021 by Anna Boyd, Associate Director, Economics & Country Risk, S&P Global Market Intelligence