Towards dynamic financial valuation of social licence to operate under uncertainty

Abstract

The concept of a Social Licence to Operate (SLO), first introduced in the minerals industry, has significantly evolved over the last decade and is currently viewed as a broad, ongoing approval and acceptance of business activities by society and stakeholders. It is gaining prominence outside the minerals industry, in the energy and manufacturing sectors. SLO is broadly recognized as crucial for profitable and sustainable mineral resource extraction operations. Recent research shows that the reduction in project value due to the lack of the SLO can be as high as 70%. This motivates a strong interest from industry to assess the financial value of SLO to the company, in order to prioritise the SLO investments alongside other operational investments and to connect SLO with the project value, business risk and decision-making. However, there are still no accepted methodologies available to achieve this. The consensus emerging in the literature is that the quality of company engagements with stakeholders/communities is among the most important factors influencing the SLO outcome. However, there are other factors affecting SLO outcome, such as existing and future economic, environmental and political conditions in the region; environmental and social impacts generated by mining operations; the company's ability to anticipate future risks and their proactivity in engagements with stakeholders and communities. The long timeframes for mining operation (>30 years) also mean that technological innovation can drive significant change in the value of economic, environmental and social assets over the life of a mine. Capturing this requires systematic quantitative work with deep qualitative grounding in context. Combining quantitative and qualitative analysis is a major challenge in SLO research. In this paper, we discuss the possibility of quantitative modeling of SLO and propose several quantitative approaches and a novel integrated conceptual framework for dynamic financial valuation of SLO that accounts for such important SLO features as: - Complex and non-linear interactions between industrial operations, communities and stakeholders responses, business decision making and company's value; - Dynamic nature of SLO and its evolution over the lifecycle of mineral operations; - Multiple uncertainties surrounding mining operations and SLO outcomes; - Importance of flexibility and timing of business decisions in SLO management; - Importance of anticipating future risks and proactive engagements with stakeholders/community; - Unknown response to managerial actions from community and stakeholders. The proposed framework is based on the integrated real options, adaptive management and risk analysis approaches. This paper lays the foundation for development of decision support tools in which economic, social and environmental challenges are addressed simultaneously during the lifecycle of the minerals extraction operations, to achieve sustainable operations with robust SLO.