Cracking the vault

Financial advisors count social performance

By Carol Odell and Zoe Mullard

You already know the markets have cooled off for most natural resource organizations and that means it is getting harder to find funding – but do you know what you can do about it? Improving an organization’s social performance is increasingly part of the key to finding funding.

How to find and use increasingly popular non-traditional alternatives to the debt and equity project financing was the buzz last week steps away from the Empire State building at a major conference targeted at miners but of interest to all natural resource organizations.

Presenters discussed the benefits and challenges of funding projects with private equity, sovereign wealth funds, stream financing¹, equipment financing and joint ventures between senior and junior companies. They weren’t just interested in a project’s economic potential, either – without exception they included understanding and managing social risks in their project-financing evaluation. Although non-traditional funding sources often do not explicitly require formal assessment against social performance frameworks, investors accepted that the risks of a project could be judged by strength of community perceptions and social acceptance, not just in the backrooms of a bank.

The conference, the Society for Mining, Metallurgy and Exploration (SME) “Current Trends in Mining Finance,” brought together senior mining executives, bankers, risk analysts and investors to explore investment decision-making, funding streams and other financial issues facing the mining industry. The conference marked the second time that the SME convened a meeting in New York with a focus on mine finance, and much has changed since the first one more than 30 years ago. Monkey Forest staffers were there to help drive the discussions related to social risk management.

MFC’s Carol Odell and Zoe Mullard talked about the role of the International Finance Corporation (IFC) standards in assessing a social performance management system’s ability to enable effective management of the project’s social risk setting when evaluating finance decisions and on the importance of relationships with various stakeholder groups to manage the pre- and initial phases of a crisis situation. In typical fashion, both started off by drawing the distinction between social performance management and corporate social responsibility (CSR).

Both sessions were well-attended and led to lively discussion in the plenary and, more informally, in the hallways and at social functions. With thin wallets on the mind, the natural question asked was: “How much does social management cost?”

Panel participants responded that it is impossible and imprudent to try to estimate generic ‘dollar-and-cents’ values for social performance management because the costs are highly dependent on regulatory requirements, the social setting, project type and phase, etc. As well, the amount of money spent is not necessarily a reliable measure of the quality of social programs. Instead, the costs of achieving adequate social performance management at a project site need to be compared with the potential costs of unmanaged social risk and impacts.

Failure to address misinformation circulating in a community, poor management of opportunism surrounding a resettlement project or an inadequate understanding of evolving regulatory change can lead to costly permitting delays, protests and reputational damage. In the worst cases projects can become either economically or socially unviable. On the other hand, a proactive approach to social performance management that includes strategic social investment, welcomes local content and reinforces relationships with impacted communities and other key stakeholders can generate value and a positive return on investment. In many cases, well-designed programs don’t need to be costly.

Although there was much discussion on the best vehicle for financing, one thing was clear: conference participants said that in many settings the strength of a project’s social performance increasingly has an impact on capital investment decisions. That said, with no accurate index for investors to use to measure social performance, companies will need to find systematic ways to demonstrate their community engagement and community acceptance.