Introducing a new risk: community

As energy and gold prices continue to reach record heights, the appeal to allocate more money to resource funds is strong. A new executive brief from the Ethical Funds Company highlights resource extraction companies’ increasingly finding their bottom line subject to community risk.

Globally, communities have begun to deny corporations access to resources, fearing adverse environmental impacts and negative economic consequences, according to the brief, entitled Winning the Social License to Operate.

Exploration companies can spend tens, if not hundreds, of millions of dollars on exploring and setting up a single new site, only to abandon it in the face of local opposition. Global resource giants like Royal Dutch Shell and Alcan have lost millions after pulling out of projects in developing nations. Even in Canada, the brief outlines examples over the last year of resource companies that have clashed with the rights of indigenous communities.

A uranium mining project proposed by UR Energy in the Northwest Territories was turned down after a recommendation by the Mackenzie Valley Environmental Impact Review Board in May 2007, which cited “the unique cultural and ecological significance of the project area to the Dene First Nations and the lack of a regional land use plan” as major concerns.

In September 2007, a federal–provincial joint review panel determined that the proposed Kemess copper–gold mine in Northern British Columbia was not in the public interest due to the risk of significant adverse environmental, social and cultural effects to the First Nations communities in the region.

“Recent history has given us many cases of major resource companies’ seeing their multibillion dollar projects evaporate, their reputations dragged through the mud and their share prices tumble, because they have not taken the time or made the effort to fully inform and consult with indigenous communities,” says Robert Walker, vice-president of sustainability at Ethical Funds.

The issue is as much a financial concern as it is a social one. The failure of a resource company to limit the impact of “community risk” on its share price affects the performance of many companies in the extraction industry.

“These kinds of companies are certainly present in our funds. Energy and basic materials make up more than half of our stock. Resource companies have long had a major presence in most SRI portfolios in Canada,” Walker says. “These sectors represent our stock market and our economy and our history. Our preference has been to engage companies in those sectors in active dialogue about what they need to do to improve their environmental and social performance.”

Walker says Ethical is advocating that resource companies start securing the free, prior and informed consent (FPIC) of communities affected by their operations. FPIC is defined as “the right of communities to be informed about exploration, development and closure activities on a full and timely basis, and to approve operations prior to their commencement.”

In other words, Ethical Funds wants the resource companies it holds to engage in constant dialogue with indigenous communities. In return, the companies receive ongoing consent for each stage of their operation. Because the process is ongoing and means the community could revoke its consent at any time, some companies have been hesitant to commit to this process. Walker says consensus building with indigenous communities is nevertheless gaining wider acceptance among Canadian companies.

“FPIC does need to proceed through the life of a project, including closure and reclamation. Obviously, if you’ve got a mining pit established nearby your community, it’s difficult to pull out at that time,” he says. “It’s about establishing positive relationships from the exploration phase throughout the life of the projects. These relationships are often defined in the form of impact and benefit agreements, which is pretty standard practice in Canada right now. I think many First Nations communities would say that’s been working for them fairly well.”

Walker says that in its dialogue with the business leaders of resource extraction companies, Ethical Funds can find some that will publicly adopt the standard — although, for now, that’s not a precursor to being included in its SRI portfolios.

“We have had a couple of companies say to us they will proceed with a project without some form of consent. Nobody has come publicly to say [FPIC] is the standard they have adopted. That is one of the things that we are considering to ask for — ‘Would you come out with a public statement in support of this standard?’ So far, no one has taken that step,” he says.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com