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A deep dive into licence to operate

Reflections from the 2015 UN Forum on Business and Human Rights

Home / Hermes EOS Blog / A deep dive into licence to operate

Christine Chow,
25 November 2015
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We were pleased to be one of three responsible investors to speak at the 2015 UN Forum on Business and Human Rights in Geneva, Switzerland. The three-day event provided a platform for multi-stakeholder conversations on issues that concern the social licence to operate for businesses, as well as the challenges and opportunities faced by the UN’s three-pillar Protect, Respect and Remedy framework[1] that addresses labour and human rights.

The discussions helped us understand how the UN principles can be integrated into existing national plans, the current bottlenecks for companies when it comes to complying with them and how we can improve engagement with companies on licence to operate.

We took part in a panel discussion on sustainable development, human rights and the role of private capital with Ebenezer Appeku, deputy permanent representative from Ghana at the UN Office in Geneva, who reiterated our belief that companies should not view human rights as a form of philanthropy but rather see the provision of a living wage, decent working conditions, access to information, healthcare and training and development as fundamental to a sustainable and successful business. At the same time, it is important not to regard all businesses negatively either, in particular because security in emerging and frontier markets is rapidly evolving, despite teething problems.

Mitigating operational risks
A US extractives company we have engaged with, for example, shared its experience of operating in Nigeria. We had visited the company's operations in Lagos to assess its risk management protocols and were assured that the company is doing its best within the limited scope it has to mitigate operational risks. Following our engagement, it adopted a company-wide human rights policy. More recently and guided by the UN Guiding Principles of Business and Human Rights, it also improved its due diligence processes to include a comprehensive multi-stakeholder impact assessment – thus covering existing and potential human rights impacts, the integrating of the findings, the tracking of responses and communications on how the impacts are addressed. The resulting issues and solutions are then incorporated into the company’s overall environmental, social and governance management framework and action plans.

Access to remedies
Companies are expected to step up their efforts on providing access to remedies, the third pillar of the Protect, Respect and Remedy framework. They need to outline the provision of information on remedial rights, appropriate grievance management, an effective whistleblowing system to address unethical behaviour, fair compensation and transparent payment. A legal expert from Zimbabwe shared that in one of the cases he has come across, 80% of the victims claimed that they had been unable to speak to the mining company that had caused problems to their relocation and livelihoods. Some companies therefore find that community-driven operational grievance system particularly useful. Although it is non-judicial and dialogue-based, it acts as a community support system for relocated residents and indigenous peoples. Companies are well-positioned to provide that support and create open, bottom-up, crowd-sourced community solutions to address the issues commonly identified.

Involvement in local politics
As investors, we need to bear in mind that problems can arise when companies have to get involved in local politics. Sharing our experience with representatives from a large pension fund and a French energy company, we agreed that when global businesses enter a new country or territory, they disturb the power balance of the incumbents. Every party involved – the government, local interest groups and residents – has different expectations. Companies are often expected to build roads, construct power stations, improve telecommunications infrastructure and provide education and healthcare. While on many occasions, these are justifiable requests in exchange for access to resources, a fair and thorough assessment needs to be undertaken to review the level of community support. The French company shared its experience in Myanmar, an issue we had engaged on extensively a number of years ago. The company began its impact assessment by focusing on the needs of the community – Does it need housing? What type of housing is appropriate? Does the community need access to healthcare? Is there a functioning education system? What are the gaps in education? What incentives are needed to ensure employment opportunities are taken up? What is the level of mismatch in expectation between the local community and the company as well as between the government and the company? What can different stakeholders do to address the expectation gap?

Expectations
Companies aim to provide certain essentials for the community affected by their operations to enable it to live safely and with dignity. The provision of remedies therefore needs to be fair, transparent and ideally empowering. However, it should not be an excuse for complacency or double standards or be seen as an opportunity to squeeze as many handouts from businesses as possible. We expect companies to behave responsibly and rationally but when the operational risks and demands for resources exceed what companies are able to provide – and which is for governments to address – they will leave, freeing themselves from the problems that come with operations in underdeveloped areas.

[1] 1) The state duty to protect against human rights abuses by third parties
2) Corporate responsibility to respect human rights and
3) Access to effective, judicial and non-judicial remedies by affected communities

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Christine Chow Dr Christine Chow is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has 19 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. She is an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She is a governor of the London School of Economics and a member of the university’s investment committee. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
Read all articles by Christine Chow

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