Boston | Geneva | San Francisco | Seattle | Washington FSG.ORG

Extracting with Purpose

October 3, 2014

Creating Shared Value in the Oil and Gas

and Mining Sectors’ Companies and Communities

2

FSG.ORG

© 2012 FSG

About FSG

• Nonprofit consulting firm specializing in strategy,

evaluation and research, founded in 2000 as Foundation

Strategy Group and celebrating over a decade of global

social impact

• Partner with foundations, corporations, nonprofits, and

governments to develop more effective solutions to the

world’s most challenging issues

• Recognized thought leader in philanthropy and corporate

social responsibility with multiple articles published in HBR,

SSIR, Chronicle of Philanthropy, and the American Journal of

Evaluation

• Staff of 140 full-time professionals with offices in Boston,

Seattle, San Francisco, Washington, DC, and Geneva

3

FSG.ORG

© 2012 FSG

Mining and Oil and Gas Are Critical Sectors in the Global Economy

Without the wealth these sectors generate, many countries

have no other option for development

• Generated $3.5 trillion in annual gross revenues (5 % of global GDP in 2012)

• 3 of the world’s 10 biggest companies are in the sector

• 3.7 million people are employed by the mining sector alone

• Alberta can expect $350B in royalties and $122B in tax revenue from oil sands

projects over the next 25 years

• Operations increasingly are located in poor or developing countries

• Extractives are key to economic development in emerging, resource-rich

countries

4

FSG.ORG

© 2012 FSG

Despite the Potential, Many Countries Have Failed to Capitalize on

the Resources Extracted from Their Soils

The 10 countries most dependent on extractives and their ranking in the

United Nations Human Development Index (HDI) of 187 nations

Angola

148

Iraq

131 Algeria

93

Brunei

30

Libya

64

Equatorial

Guinea

136

Sudan

171

Nigeria

153

Azerbaijan

82

Chad

171

Of the 25 countries that most depend on the extractives sectors, only two

are among the top 50 countries in the HDI rankings

5

FSG.ORG

© 2012 FSG

From a Business Perspective, Community Strife Creates Real Business

Costs – and Conflicts Are on the Rise

Reported Conflicts between

Companies and Communities

0

20

40

60

80

100

2008 2009 2010 2011 2012

Costs of Conflicts

• Pascua Lama, Barrick

Gold: Barrick Gold’s stock

price fell by almost 30% over

two months, in part due to

the suspension of the project

because of protests over

environmental concerns

• Yanacocha, Newmont:

Local protests paralyzed a

$5B project

• Cerro Matoso, BHP

Billiton: The indigenous

group Zenu’s protests

against the project twice

stopped the project; the

group is asking for $700M in

reparations

Number of Conflicts Future Expectations

Survey of mining executives in

agreement with the statement,

“community y strife will

discourage project investment”

Strongly disagree

Disagree

Neither agree or

disagree

Agree

Strongly agree

0%

20%

40%

60%

80%

100%

6

FSG.ORG

© 2012 FSG

Addressing the Underlying Root Causes of Community Concerns

Is the Only Real Solution

“Non-Technical Risk”

• Protests

• Permit delays

• Community disruptions

• Refusal to grant access to land

• Moratoriums

• Increased community demands

Visible Causes

• Political agendas

• Demands from local influencers

• Mismatched expectations

• Activist opposition to operations

• Negative media coverage

Underlying Causes

• Lack of economic opportunity

• Poor community health

• Civil strife

• Political instability

• Environmental issues

Opportunities to Create Business

Value

• Reduced costs of FIFO workforce

• Cost savings through local

suppliers

• Better trained local workforce

• More efficient local business

environment

7

FSG.ORG

© 2012 FSG

Shared Value Is a Business Strategy Through Which Companies

Address Social Needs and Improve Their Competitiveness

“Creating Shared Value” means building competitive advantage by solving

social problems

Business

Opportunities

& Challenges

Social

Needs

Corporate

Assets and

Expertise

Shared Value is:

Policies and practices that

enhance the competitiveness of a

company while simultaneously

advancing the economic and

social conditions in the

communities in which it operates

Shared Value is NOT:

• Sharing the value already

created (philanthropy)

• Personal values

• Balancing stakeholder

interests

• Compliance

8

FSG.ORG

© 2012 FSG

A Shared Value Perspective Views the Social License to Operate as

an Indicator Rather than an Outcome

Co

nven

tio

na

l S

TL

O

Ap

pro

ach

Community

Engagement

Social

Investment #1

Social

Investment #2…

Social License

to Operate

Focusing on societal outcomes rather than the social license to operate will

lead to better long-term business and societal outcomes

+ + =

Sh

are

d V

alu

e

Ap

pro

ach

Community

Engagement + Project that

focuses on

root causes of

community

needs and

benefits the

business

+ Project that

improves

economic

development

of region

Sustainable,

positive change

in host

communities

=

Social License

to Operate

9

FSG.ORG

© 2012 FSG

Shared Value Is Different than Traditional

Corporate Social Responsibility or Philanthropy

Area CSR approach Shared value approach

Infrastructure Set up drinking wells for

local communities

Develop sustainable water

utility leveraging business

processes

Technical

Training

Provide broad-based

skills training with no link

to employment

opportunities

Create training program based

on business and supplier

needs and link it to jobs

Health care Fund construction of

local clinic

Develop program to reduce

disease burden among

population living in mine

catchment area

CSR can be an important component of a company’s societal engagement,

but its motivations are different from shared value

10

FSG.ORG

© 2012 FSG

2 3 1

Companies in the Extractives Sectors Are Experimenting across All

Three Levels of Shared Value Creation

• Develop the local cluster

supporting the extractives

sectors

• Invest in shared

infrastructure and logistics

networks

• Partner with other local

clusters and government in

building community

infrastructure

• Play an active role in broad-

based economic and

community development

• Improve local and national

governance capacity

• Improve local workforce

capabilities

• Strengthen suppliers in the

value chain

• Increase local disaster and

emergency preparedness,

response, and rehabilitation

capabilities

• Improve utilization of water,

energy, and other resources

used in operations

• Build local markets for

intermediate products

created by extractive activity

(e.g., drinking or irrigation

water, electricity)

Redefining

Productivity in

Value Chains

Creating an

Enabling Local

Environment

Reconceiving

Products and Markets

11

FSG.ORG

© 2012 FSG

Anglo American’s Water Reclamation Facility, South Africa

• Local community faces water shortages of 30-40 ML per day

• Anglo American developed water reclamation facility to treat acid mine drainage and

provide drinking quality water at commercial rates

• Facility also used to treat water from BHP Billiton’s closed mine, South Witbank

Colliery

• Idea originated in the business; responsibility now shared with the social investment

team

• Meets 20% of the community’s daily

water requirements

• Generates 16 ML per day and

supplies 80,000 people

• At mine closure, will produce 40-50 ML

per day during peak rain season

• Costs of reclamation facility

operation are offset by 60%

• 15% of operating costs covered by

treatment agreements with BHP

Billiton

Social Value Business Value

Description

Reconceiving Products and Markets

12

FSG.ORG

© 2012 FSG

BHP Billiton’s World-Class Supplier Program, Chile

• BHP Billiton invested USD $50 million over 4 years in a supplier development program

• Collaboration with Government of Chile, NGOs, and non-mining companies

• Goal of creating 250 world-class mining suppliers with export potential by 2020

• Originated within the business and the social investment team jointly

• 36 suppliers engaged with combined

sales of $400 million

• Over 5,000 people employed by

participating companies

• 43 innovation projects focusing on

water, energy, health, HSEC, human

capital, and operational efficiency

• Estimated NPV of $121 million in

cost savings

• Drove Capacity improvements in

energy and water use

Social Value Business Value

Description

Redefining Productivity in Value Chains

13

FSG.ORG

© 2012 FSG

AngloGold Ashanti, Malaria Control Program, Ghana

• Malaria is endemic in Ghana

• High infection rates were affecting worker productivity at AngloGold Ashanti’s mine in

Obuasi, with 7,500 person shifts lost to the illness a month

• The hospital near the mine was treating around 6,800 cases of malaria a month,

including 2,500 AngloGold Ashanti employees

• Reduction in disease burden of 72

percent over two years

• Created savings of $600,000 annually

in treatment costs

• Reduction in lost person shifts from

7,500 a month to 90

• Increases in productivity, decreases in

overtime salaries and turnover

Description

Creating an Enabling Local Environment

Social Value Business Value

14

FSG.ORG

© 2012 FSG

Suncor’s Investment in Social Prosperity Wood Buffalo Builds

the Company’s Broader Enabling Environment

• Suncor historically has invested heavily in communities around its operations

• The return on those investments, however, was unclear: “We had invested more than

$100M on community investments, but it was unclear: given more than $100 million in

community investments, but we weren’t clear on what we had done to move the needle

on social issues.”

• The lack of improvement in the local environment created real business costs for

Suncor, such as increased recruiting and reliance on a fly-in / fly-out workforce

• Suncor believes that by improving the community in which they operate, they will reduce

these costs

• By investing in NGOs that address root

cause societal needs in communities in

which they operate, Suncor believes

that it will improve the quality of life in

those communities

• Suncor also believes that

improvements in the quality of life in

communities in which Suncor operates

will reduce its labor costs

Description

Creating an Enabling Local Environment

Social Value Business Value

15

FSG.ORG

© 2012 FSG

Four Challenges Prevent Greater Shared Value Adoption by

Companies in the Sectors

Organizational Structures and Behaviors

Inability to Measure Full Costs and Benefits

Low Motivation for Collaboration

Lack of Alignment with Government

16

FSG.ORG

© 2012 FSG

Companies Can Begin Embedding Shared Value in Their

Organizations through a Series of Reinforcing Steps

Structures

Strategy

Measurement Compensation

Reporting

Perceptions

Create pilot shared value

project, integrating

business and social

functions

Identify groups within the

organization needed to

address a certain issue

Set and track metrics

to evaluate the

strategy’s impact

Use metrics to inform

compensation

Using metrics and

compensation, report

on shared value

results

Report on shared

value performance to

influence perceptions

of its importance

As perceptions shift and

credibility builds, further adjust

organizational structures

1

2

3

4

5

6

7

17

FSG.ORG

© 2012 FSG

Identifying All Direct and Indirect Costs and Benefits of a

Shared Value Strategy Can Help Make the Business Case

Co

st

pe

r c

ub

ic m

ete

r o

f w

ate

r

Veolia Example: Assessing the full cost of a cubic meter of water

$1

$6 $1

$1 $1

$2

$3

$5

$12 $32 Costs

traditionally

associated with

water

Source: 2 Degrees, Veolia Water, “The True Cost of Water,” Webinar: http://www.youtube.com/watch?v=05R3TrWGWYY&feature=c4-overview&list=UUXZKa1LQnuQ32rOdzH2GCBQ

A comprehensive view of all costs and benefits can

make shared value investments more attractive

$0

$5

$10

$15

$20

$25

$30

$35

18

FSG.ORG

© 2012 FSG

Identifying Spaces for Pre-Competitive Collaboration

Can Be a First Step to Forming a Partnership

Pre-

competitive

Collaboration

Competitive

Advantage

from Pre-

competitive

Collaboration

Workforce

Development

• Improve primary /

secondary education in

host communities

• Create skills training

programs / centers

Enterprise

Development

• Fund entrepreneurship

programs

• Establish business

incubators

• Create financing

vehicles for SMEs

Environment

• Jointly develop

technologies that

reduce environmental

impact while reducing

costs

• Create recruiting

pipelines from schools

and training programs

• Develop recruiting and

retention programs to

become employer of

choice

• Identify most promising

opportunities for local

content within company

supply chain and share

with training centers

• Implement the new

environmental

technologies in the

most cost-efficient way

and continue to

innovate

19

FSG.ORG

© 2012 FSG

Governments Can Share Best Practices and Common Challenges

to Improve the Enabling Environment for Shared Value

The World Band and the IMF linked the Mongolian government with their Chilean

counterparts so they could learn from Chile’s successes and challenges

20

FSG.ORG

© 2012 FSG

What Shared Value Opportunities Exist for Your Organization?

• What is the cost of a fly-in / fly-out workforce?

• How will the sector meet the expected gap in qualified workers?

• What extra costs do you face by relying on non-local suppliers?

• Do your byproducts have revenue-generating uses?

• What does your community need to help your business succeed?

Asking questions like these at your organizations can be the first step to

identifying opportunities for creating shared value