Over the last 6 months, FSG has been researching opportunities for companies in the extractives sectors – those in the oil and gas or mining and metal industries – to create shared value. Our initial hypothesis, as outlined here, was that to unlock social and business value, extractives companies will need to think about societal issues in a fundamentally different way and that several companies in the sector are beginning to move in this direction.
Shared value in extractives
Opportunities to build local workforce, address community health issues and increase local sourcing of products and services are abundant in the extractives sectors. We have learned that the shared value model provides great potential to realize these opportunities. However, through our research, we’ve also found that the relative importance of community risk adds an important nuance to shared value in the extractives sector. From a business perspective, extractives companies lose billions – at the asset, country and company level – to community strife. We have found that companies often take a reputation-driven approach to risk management, which is typically not an effective long-term risk mitigation strategy. A shared value approach can help companies shift from a reputation management to addressing the root causes that create risk in communities in the first place.
While we have found examples of extractives companies engaging in shared value activities across the three levels of shared value (i.e. reconceiving needs, products and customers; redefining productivity in the value chain and improving local business environment) we have also found that companies encounter similar challenges when attempting to shift toward a shared value approach to social engagement.
We have identified the following 5 challenges commonly faced by companies in the extractive sector:
- Organizational challenge: Organizational structures, reporting lines, incentives and compensation, and measurement systems typically do not incorporate societal issues. Organizations are therefore not set up to integrate societal issues into the core of the business. Commitment from leadership and aligning incentives to improved societal outcomes will be critical to overcoming this challenge.
- Materiality challenge: The net present value calculations for projects typically do not account for the full costs and benefits of the social engagement and thus understate their potential impact on the business. As a result, companies are less incentivized to invest in shared value strategies that could deliver impactful business and social results. The IFC’s Financial Valuation Tool, already used by Newmont and Rio Tinto, among others, can help managers estimate the full costs and benefits of social engagement.
- Collaboration challenge: Collaboration with others outside company walls is a critical component to creating shared value given the complex nature of societal issues companies in the extractives sectors take on. While some successful examples of collaborations exist, companies are often reluctant to engage in them. Some reasons for this include company prioritization of reputational benefits from social investment activity, perceived difficulty in aligning goals across organizations, and limited alignment of time horizons across organizations.
- Government challenge: Companies are often inhibited from investing in shared value opportunities due to regulatory or tax disincentives. Governments have the potential to encourage or accelerate shared value, but often do not leverage their position to align investment in large scale projects with potential for large scale social impact. Government policies, investments, and behaviors that provide incentives and support creation of an enabling environment promote shared value strategies more than those with prescriptive behaviors.
- Replicability challenge: Even when companies are able to overcome these challenges and create shared value in one location, there is no guarantee that the strategy can be replicated elsewhere. Examples that work in one context do not necessarily work in others. Companies find it difficult to identify elements of successful initiatives that can be replicated in other geographies or in different contexts. Companies have told us that replicating a strong process for identifying appropriate solutions rather than the successful project itself can help overcome this challenge.
Coming up next, our research will focus on providing actionable solutions to these challenges and examples of companies that have overcome them. For those readers with relevant experience, we’d love to hear from you. Have you faced these challenges? Do you have examples to share of companies overcoming them?
Our research is being done in partnership with Harvard Business School Professor Michael E. Porter, Harvard Kennedy School Professor Jane Nelson, the International Finance Corporation (IFC), Chevron, Goldfields, Hess, Mercy Corps, Newmont, Pacific Rubiales, Rio Tinto, and Royal Dutch Shell.