Quantifying the Price of Overlooking the “S” in ESG
There’s a more direct connection to the challenges related to environmental and governance underperformance and their associated project costs compared to those related to social issues. Social underperformance, which involves a company's (in)ability to manage relationships with communities, Indigenous groups, consumers, employees, suppliers, and more, is less understood and more ambiguous without an obvious direct line to cost.
It’s all ‘fluffy’ right? Wrong.
The late John Ruggie of Harvard University accurately identified "above-ground issues" – those of stakeholder resistance – as the primary cause of project delays and significant cost increases. In fact, 73 percent of all project schedule delays are caused by stakeholder versus technical issues (which technical often receives more attention as a project progresses). He noted that a one-week operational delay for a mature mining operation could cost up to $20-30 million depending on its size and the commodity involved, and that over the past decade, the time to bring oil and gas projects online have doubled.
Social challenges are starting to garner more attention with compounding project examples of delays, cancellations, community grievances, and protests. The best opportunity to address these risks lies at the very front-end conceptual design phase.
Here are some insights that will make any project manager think twice about adding ‘social risk, mitigation and implementation’ as a critical step in project delivery.
Social consciousness is making its way through the value chain: Previously, the connection to social consciousness and consumer behavior was tied to a customer’s decision to purchase a product based on an alignment to their values. That purchasing power is growing along the value chain. The genesis of materials for products are getting greater attention – including metals in electronics and vehicles, and plastics production. This is already being felt by raw material producers as their customers are heeding the advice from end-product users. This was evident in the Congolese case against Google, Tesla, and others for human rights infractions in child labour from their cobalt supplier.
Multiple ways to assess social costs on projects: Although it may not seem obvious, there are several ways to assess social costs in projects. This is particularly important during project budget and planning phases. This can include projections on deteriorated investor confidence and stock price decline, increased operating costs, lost revenue from a missed production date, remobilization costs in the event of a halt, deviations from construction schedules, among others. In the example of the Dakota Access Pipeline, the outset cost of the project was $3.8B which escalated to $7.5B due mainly to the Stop DAPL protests associated with Standing Rock. This translated into $1.8B in additional operating costs, $.3B to settle protests, and $1.6B in lost market cap.
Social unrest escalates costs for taxpayers, too: When conducting our budget and planning cycles, we are often focused on the costs to the company. However, there are externalities to taxpayers for not taking social considerations seriously and mitigating present risks. In incidents of social unrest, taxpayers may cover the costs of additional regulatory stringency and oversight, clean-up, or defraying of protestors with police force.
Overlooking social considerations can lead to profound financial consequences. Thus, prioritizing social risk management is essential for the long-term viability and profitability of any project.