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Social Investment in Mining

Edited By Lulama Afrika

Rohitesh Dhawan suggests, in the report “Getting more out of social investment in the mining sector”, that mining companies are finding it difficult to quantify their mandated social investments. Vast sums of money are being put into infrastructure, education and training, healthcare, sports and recreation, but the mining companies are struggling to demon- strate the effectiveness of their expenditure. Social investment plans are integral to being granted mining rights, but are they achieving what they set out to? Quantity over quality could be to blame. With 52 different types of investment programmes available to the mining industry, there could be a lack of focus on priority sectors.

A recent KPMG survey suggests that many organisations struggle to demonstrate the effectiveness of their social investment expenditure. In 2013, the 10 metals, mining and engineering companies in the study had combined social investments of 1.2-billion US dollars. Although they all quantified the inputs and outputs, these were primarily in terms of volume, namely the financial contri- butions made and the number of participants in a programme. But only one of the 10 reported any quantified outcomes, suggest- ing a lack of debate over the true impact of programmes, both internally and with the communities they are serving.

The strategy in social investment

Despite growing pressure for better reporting, few mining companies publish a detailed social investment strategy. In South Africa, businesses must have a Social and Ethics Board sub-committee to govern their social investments.

For operational managers, the task of choosing a programme can be daunting. Mines are incredibly complex operations, spread across wide geographical areas. Unless a detailed business plan is in place, their money is at risk of disappearing into the black hole of “charitable donations” under the broad categories of health and safety, social welfare, education and sustainability. These investments are valuable, but rarely take into account the specific needs of the community and so it can be difficult to quantify what is actually being achieved by the investment.

Mining companies need to find a balance between the glamour events, such as school, hospital and road openings, and the practical options, such as teacher training or safe sex education. Cutting ribbons can make a big impression on the community, but doesn’t always bring the best return on capital. Training and education can potentially have a greater, long term, positive effect, but are a less obvious boost to the company’s short-term reputation than an event.

Those responsible for allocating social investment budgets need to exert a stronger influence over the organisations involved in prioritising programmes, by engaging earlier with local economic development forums and other groups, and resisting demands for vanity projects. This closer working relationship will also ensure that authorities are aware of the value being added by the social investments of the business, without them having to create awareness around this through active PR activities.

According to Dhawan, once programmes have begun, they tend to suffer from a lack of professional performance management, with ill-defined outcomes and measure- ments, and inadequate data reporting. The personnel assigned to run the initiatives may not always have the technical skills and capacity to carry out the required level of financial and operational analysis and moni- toring commensurate with a major project. With rewards often linked to activity rather than outcomes, project teams lose sight of the true project goals.

Unlocking value

Beginning at board level, the social investment strategy has to be aligned
with local development plans as well as wider business goals, and designed to produce the maximum benefit to the target groups and the mining organisation.

Considerable research and discussions are required to uncover the optimum choices for social investment. For example, investment in local farm sourcing can cut the cost of food, resulting in a healthier, more energetic workforce, while education and counselling on alcohol and drug abuse could reduce absenteeism. It is equally important to play

a long game, avoiding quick wins in favour of deeper partnerships with the community, local businesses, non-governmental organisations (NGOs) and government.

But how do you measure something
like employee self-esteem? Sophisticated tools are available to quantify and monitor the economic and business value of social, behavioural, health, environmental and infrastructure improvements. Sometimes it comes down to a manager’s assessment
of an employee on a scale of one to 10. Patience is also needed, as some benefits can take years to materialise. An early years’ education programme will not lead to over- night change. Over time it could produce an increase in literacy, which in turn generates a long-term increase in employment rates and reduced poverty. This is why it is so important to manage the expectations of
all stakeholders, including local authorities, effectively, in order to create a realistic idea of timeframes and outcomes.

Finally, it is important to communicate the concept and the results of shared value
to the board, investors and stakeholders, including project partners, using a combination of quantitative and qualitative information to tell the story. At a macro level, all parties will want to see how any achievements are improving the local economy and environment. By treating social investment like any other commercial initiative, companies can demonstrate the return for every rand spent, identify under-performing programmes and reinforce relationships with community stakeholders and partner organisations.

For mining and other industries, creating value for society must be a top strategic priority—whether it is seen as simply a cost of doing business or by looking at it as an opportunity for growth. Simply investing more money, or outsourcing it to someone else, is not the answer. Leaders need to be personally invested in seeing the business create value for communities and apply the same rigour to these investments as one would to “mainstream” investments.

Source: Green Economy Journal 


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Facilitating Value Creation

By Lloyd Macfarlane

UNDERSTANDING THE CONCEPT OF FINANCIAL CAPITAL FOR CORPORATE REPORTING

Traditional accounting practices place large emphasis on the extent to which good financial capital man- agement is responsible for the economic success of the business – traditionally the main issue of concern for shareholders and investors. However, companies are increasingly required to take a more holistic approach to the many forms of capital in the business, and to do so with key stakeholders in mind. The corporate sustainability agenda is changing the way that companies contemplate and report on financial capital, so what is financial capital in the context of value creation and sustainability?

Financial capital is used by people, organizations, corporations, and governments, to build and maintain their livelihoods. This includes all financial assets, instruments, and resources (including loans, bonds, stock, expenses, assets, equity, and cash flows) used throughout the organisation’s activities. It could be said that financial capital reflects the productive power of all other types of capital in the business, although technically there may be exceptions to this Financial capital plays an important role in our economy, enabling the other types of capital to be owned or traded. Proper management of financial capital is crucial to maintaining effectiveness, efficiency and economic sustainability in the organisation.

Generally speaking financial capital has no value of its own (except if the company’s business is a holding Screen Shot 2015-01-29 at 8.58.03 AMcompany or a bank). It is not productive, for instance, in the sense that a manufactured product produces value. Instead, the value of financial capital lies in the facilitation of economic production. Financial capital controls ownership of physical capital and is a representation of the value of the other four capitals. In other words, money has to go out before more can be brought in.

Companies may have access to many forms of financial capital but little can happen without expendable cash as a resource (particularly in terms of operations). Financial capital can be obtained through earnings, banks (in the form of short or long term loans), private equity (and venture capital transactions) and grants.

The integration and management of all types of capital is essential if a company
is to target sustainability, and so any discussion about financial capital should reference this integration. The IIRC’s Integrated Reporting Framework <IR> tackles the concept of integrated thinking and sustainability performance by focusing on the ‘six capitals’: financial, manufactured, human, intellectual, natural and social.

There is mounting evidence that companies with strong sustainability performance deliver improved long-term financial returns. For example, a July 2013 Harvard Business School study found that “High Sustainability” companies significantly outperform their peers over the long-term,
in both stock market and accounting terms (Eccles, Ioannou and Serafeim, 2013).

Whilst there is still some discussion about what in fact causes this performance, these companies are generally managing risk more effectively and positioning themselves advantageously in their respective value chains – objectives that are ultimately linked to the corporate sustainability agenda.

If the primary objective of business is value creation then financial capital is the tool with which this takes place. Sustainable businesses create value for all key stakeholder groups and not just shareholders – this is where the direction of financial capital is becoming increasingly important. The returns on investments in employees or local communities for example can be difficult to quantify, however the risks of ignoring these investments can be meaningful and even critical for the business.

Although the way an organisation applies other forms of capital may be in stark contrast to the way it deals with financial capital, all these components are often connected to expenditure – investing in “any other form of capital usually requires good management of financial capital.

THIS MEANS THAT AN INVESTMENT IN RELATIONSHIPS WITH THE COMMUNITY OR OTHERS MAY BE GOOD FOR REPUTATION AND IMPROVED SALES, BUT ONLY UP TO A CERTAIN LEVEL, says Pieter Conradie,

Programme Director for Integrated Reporting at the Albert Luthuli Centre for Responsible Leadership (University of Pretoria). There is risk in expending too much financial capital in order to fund corporate social investment projects for example.

“This is of course a very pragmatic or instrumental way to look at investments, but in my mind this is also the way that most executives look at things, because proving a positive ROI from investments in social projects can be very tenuous because of all the extraneous variables at play,” says Conradie.

All of the <IR> capitals are connected to financial capital in some way. Conradie suggests that “the obvious challenge is to determine the causality between the other capitals and financial capital, especially in determining how an investment in other capitals may lead to returns in financial cap- ital.” This is the holistic aspect of integrated reporting and the relationship between financial and non-financial information. Everything about a company’s performance is intrinsically linked.

A company’s annual report has traditionally been enough for investors and shareholders who until recently haven’t been that interested in sustainability reporting. This is changing as shareholders realise the extent to which their investments are impacted by the stability and value created by the business for other key stakeholder groups.

Recently appointed Chief Executive of the Global Reporting Initiative (GRI), Michael Meehan says that one of the reasons that organisations report is to understand their commitment to sustainability. “Over the years, for better or worse, GRI has become synonymous with the report. To me, that
is not what’s important.

What’s important is the process by which you understand the information, collect the information and communicate it,” says Meehan Corporate reports have historically been comprehensive but cumbersome and now the integrated reporting process aims to change this, by providing more focus and more relevance in a format that has more application. Even if the report is not written for, or read by other key stakeholder groups, it should at least deal with financial capital in terms of how it relates to the other capitals of the business.

Source: Green Economy Journal


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Small Business, Big Impact: Environmental Responsibility and the Small Business Sector

By Carla Higgs

One powerful group of stakeholders affecting the environmental performance of corporate enterprises are Small, Medium and Micro-sized Enterprises (SMMEs) who are often the main contractors in industrial supply chains. Though small, SMEs have an enormous impact on social and environmental issues and play an important role in sustainable development, SMMES drive economic development, job creation and skills development opportunities.

Their impact on the environment however, particularly on local ecosystems, can be calamitous. The National Small Business Act1 describes Small, Medium and Micro- sized Enterprises (SMMEs) as separate and distinct business entities of any sector of the economy that are classified as either micro, very small, small or medium by their number of employees, annual turnover and asset value. SMMEs are not restricted to formally registered enterprises, but include informal enterprises, such as survivalist street traders and informal manufacturing, services and home-based enterprises.

SMMEs are commonly recognised as the most important sector of an economy. It is estimated that, in South Africa, 2.8-million SMEs make up approximately 91% of formal enterprises, contribute between 52% and 57% to the national GDP, and constitute 61% of formal employment. Their role in the financial economy and employment creation has heralded SMMEs as key to driving South Africa’s economic growth, equity acceleration and social development. Small business contributes significantly to the provision of productive employment opportunities as the providers of the majority of jobs, and the creators of a large number of new jobs that generate income and ultimately result in the reduction poverty. This, coupled with their role in encouraging entrepreneurship, stimulating local and regional development and creating resilient economic systems, means that SMMEs are important contributors to sustainable development. In contrast to their economic and social contribution, the environmental impact of SMMEs has not been quantified, is poorly understood and is presumed to be substantial.

When compared to their larger counterparts, smaller firms in their individual capacity may have a lesser environmental impact. However, since they represent such a large percentage of economic activity, collectively, the large number of SMMEs means that their environmental impacts are substantial. SMMEs, especially those in developing countries, are characterised by the use of older technologies which are generally less energy efficient and contribute to pollution. Some studies have indicated that SMMEs’ contribution to local pollution levels can be as much as 70%, generating as much as 60% of commercial waste and contributing between 40 and 45% to industrial water and energy consumption. The agricultural, manufacturing and service sectors have been identified as having the largest environmental impacts.

The agricultural sector is a source of water pollution and land contamination. Manufacturing SMMEs consume energy and natural resources, and generate waste and pollution. The service sector, particularly petrol stations and repair shops, pose
a risk of routine pollution or accidental releases. Further, it has been found that environmental management among small business is in its infancy and there is a general problem of non-compliance with environmental legislation. Characterised
by resource constraints, SMMEs lack awareness of environmental responsibility, environmental legislation and their own environmental impacts. In the absence of relations with stakeholders, SMMEs are also less susceptible to reputational risks.

Under the banner of corporate social/ environmental responsibility, many large corporate enterprises are implementing pollution prevention measures, material and energy efficiency initiatives, waste management, and product stewardship (to name a few) in an effort to mitigate their environmental harm and improve their environmental performance. While mitigating one’s own environmental harm is indeed noble, and can result in many positive spin-offs such as reputational benefits and cost savings, it would be erroneous to set operational efficiencies as the boundaries for an enterprise’s environmental responsibility. From a regulatory perspective, The Waste Act2 establishes Extended Producer Responsibility—an important policy approach for environmental protection as a regulatory mechanism to ensure that corporate enterprises focus on whole product systems rather than individual production facilities. This means that the responsibility for the product is broadened to include the management of the product through its entire life cycle, through all downstream levels of its supply chain and to the point of end-of-life management. From a non-regulatory perspective, corporate enterprises, although large and well-resourced, are not autonomous; they rely significantly on outsourcing for numerous products and services.

Corporate enterprises essentially function at a supply-chain level and there is an obligation for enterprises to assume responsibility for the environmental and social performance of their suppliers and partners; both suppliers’ upstream in their product chain and for their products downstream in the supply chain. SMMEs are the main contractors in industrial value chains and, therefore, can help improve or harm environmental performance within the supply chain and, ultimately, the corporate enterprise contracting the SMME. Given that extant research indicates that SMMEs are generally not engaging in environmental responsibility, this has noteworthy implications for corporate enterprises operating in the corporate social/environmental responsibility arena.

Overlooking SMME suppliers and contractors could potentially damage the environmental performance of an enterprise, with further reaching consequences particularly in relation to reputational risks. On the other hand, integrating environmental thinking into supply-chain management can potentially change the corporate social responsibility landscape. Particularly, when considered collectively, their prevalence means that SMMEs could make a significant positive contribution to environmentally sustainable development.

Source: The Green Economy Journal 


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