Dinka Sabalic, IE Business School runner-up in the CoBS 2020 CSR article competition, explores the rise in stakeholder pressure for extractables to adopt cleaner operations – not only to benefit people and planet, but also profit.
Completely ban extractive companies or recognize them as a generator of wealth for the economies. The debate about the extractive industry is black-or-white – or is it? Voices of activists arguing the detrimental effect extractive companies have on the environment, health and communities, have never been louder than now, with non-governmental organizations supporting governments in creating sustainable initiatives and frameworks to reduce the harmful consequences of the extraction activities (Arond, Bebbington, Dammer, 2019). Sustainable extractive companies.
Extractive companies conduct “the extensive extraction of natural resources without provision for their renewal” (Lexico.com). Metal extraction or coal quarrying comes first to my mind as a typical example of extractive companies, and the visible change of the landscape caused by extractive activities is the reason why they are the most obvious to be criticized. Sustainable extractive companies
The word “sustainability” and its various applications
It’s surprisingly hard to imagine an extractive company ever to be environmentally acceptable. Many extractive companies already deploy different technologies and activities to make their operations sustainable. But how do we determine what sustainable means? Different actors will have differing definitions of a sustainable extractive company.
The Oxford Dictionary defines sustainability as “conserving an ecological balance by avoiding depletion of natural resources” (Lexico.com). While this definition might serve the environmental activists, it does not include the socio-economic side important for governments or an opportunity for companies’ advancement. Sustainable extractive companies.
The shift in public opinion has fostered the demand for sustainable and ethical acceptable products introducing the reuse-reduce-recycle principle that has put pressure on the extractive companies to change and adapt their business practice to the new trend (Winston, 2018). The difficulty arising from this principle is the extensive utilization of extracted materials and their different attributes. Some metals, like copper, are recyclable while other materials, like coal, are not. It seems this has created a reputation for each extracted resource (Denchak, 2018).
Furthermore, it appears that “dirty” coal will most likely lose popularity against hard-to-recycle metals, like platinum, essential in mobile device production. For example, in the United States, the use of coal for power generation is falling year-to-year, as are their related greenhouse gas emissions. As such, the increase in regulation for coal utilization raises the costs associated with the use of coal as a fuel (McKinsey, 2015; Wang, 2020).
Many extractive companies voluntarily introduced Corporate Social Responsibility (CSR) as their answer to the allegations of unethical behavior and the public sentiment towards the industry, CSR being a set of strategies and actions that include environmental and social factors in the business operations and which address the company’s non-market challenges (UNIDO). Examples of CSR actions include building infrastructure for local communities, reducing water consumption or transparent data publishing. Especially for the extractive industries, who are under scrutiny, CSR is a first defense against criticism. Sustainable extractive companies.
There is an increasing number of social, environmental and sustainability reports used by extractive companies to demonstrate their ethical behavior (Frederiksen, 2018), but despite these voluntary measures, there are still cases of environmental and social damage related to extractive companies. The reason could partially lie in the theory that resource-rich countries perceive raw material extraction as a possibility to generate wealth, thereby disregarding the potential negative effects (Mabey, McNally, 1999; NRGI, 2015). But should not companies want to support a community that provides them with resources?
The violation of human rights and environmental degradation led to the dispute and the divestment of the world’s largest mines in the Grasberg Minerals Region in Indonesia (Sulaiman, 2018), the example supporting the opinion that focusing only on short-term financial targets will not be viable long-term. Except sustaining the community is not always as simple as it sounds. Companies operate in a complex environment with many actors having different perceptions of what is a priority to sustain.
The role of the law
We can point at the government’s ineffectiveness to protect communities and to intervene on their behalf, but many governments perceive extractive companies as an opportunity to generate wealth. The regulation of extractive companies varies from country to country, and it appears that one of the reasons for it is the fear that extensive legislation will be a barrier for investments (NRGI, 2015; TAD/TC/WP, 2017). Extractive companies contribute to the world economy, and they create socio-economic benefits for host countries, developing countries’ GDP being especially dependent on them (NRGI, 2015; TAD/TC/WP, 2017).
They are likewise an essential supplier of raw materials for other industries, such as the technology industry. Consequently, raw material supply dysfunction could lead to broader economic problems. The date indicates that the governance deficit is the highest in resource in rich countries (NRGI, 2015). This questions the government’s capacity to advocate the interest of the community and opens up a discussion about the benefits arising from extractive activities.
Global standards would facilitate the regulation of business practices in the extractive industry. Associations such as the Extractive Industries Transparency Initiative (EITI) implement uniform standards across the globe, but such associations are voluntary, just like CSR (EITI, 2003). Global standards would reduce the uncertainty, difficult to respond to, and they would also present the possibility for companies to adjust the standards in their favor (Belinfanti, T. & Stout, L., 2018).
The government’s primary focus is to create economic and social benefits for the people. The company’s primary focus is to engage in market activities. However, the company’s profits are related to the fairness of the relationship with stakeholders – the affected community (Belinfanti, T. & Stout, L., 2018). This variance in the intentions and goals each actor sets results in different time horizons. This may explain why cooperation may not be rational between all actors in the market. When companies focus only on short-term gains, excess risk-taking often happens, resulting in unethical behavior such as human rights violations or the degradation of the environment (Belinfanti, T. & Stout, L., 2018). However, it seems that the cost of the impact unethical behavior has on the company’s performance is much higher than the company’s gain achieved with excess risk-taking. On the other hand, companies that include environmental and social behaviors in their operations can anticipate attaining financial wins (Lenero, Thompson, 2014; Mining Technology, 2019).
Sustainability as a competitive advantage
Sustainability is a competitive advantage (Lenero, Thompson, 2014) and it seems that investments in sustainability strengthen the connection to customers, making the company more attractive. Moreover, such investments can lower operating costs, a good example being the investment in new technologies and methods that reduce energy and water consumption or increase operational safety. Foremost, extractive companies need to understand their operating environment and develop strategies that respond to the risks arising from their business activities. Globalization has led to more participants in the markets and an increased need for resources, while many cases are demonstrate that the negative impact caused by the unethical behavior of extractive companies have especially damaged their reputation and competitive edge (Eccles, Newquist, Schatz, 2007). Sustainable extractive companies.
The government’s task is to control the extractive industry with a legal framework and regulations. The balance between the overuse and the underuse of natural resources results in the creation of social and economic benefits for the host country. When companies include social, environmental and sustainable initiatives in the planning and execution of their operational activities, they reduce the potential risks that could jeopardize the company. (VML, 2019). That is why many companies already invest a percentage of the shareholder’s return in social, environmental and sustainable initiatives. When a company supports the community, it benefits from a long-term sustainable increase in shareholder returns. In the end, without the resources, the company would not even exist.
Sustainability lies within the company itself
This article has addressed the benefits and challenges extractive companies encounter on their way to sustainability. Despite the diverse meanings “sustainability” has for actors, the term “sustainability” appears to be especially important in the case of extractive companies. Based on many documented events, extractive companies cause a drastic change in the visual landscape and influence surrounding communities. It seems that their reputation as destroyers and polluters has only exacerbated the consumer demand for recycled and reused materials, with public sentiment calling for an end to their harmful influence on the environment. And reputation is king! Sustainable extractive companies.
For many governments, extractive industries are a tool to generate wealth. However, data indicates that good governance and the presence of extractive companies don’t always align. Consequently, many theories argue that extractive companies have to start considering environmental, social and sustainable factors when planning their operations – and many now do. Sustainability in extractive companies lies within the companies themselves, who are now recognizing the importance of such practices as an advantage to be able to survive.
Useful links:
- Link up with Dinka Sabalic via LinkedIn
- Read a related article: Doing good while doing bad: A near impossibility?
- Discover the Global Online MBA at IE Business School
- Download this article and others in Global Voice magazine #14.
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Thanks for sharing such an informative blog