The evolution of social licence

The ‘social licence to operate’ term first came about in reference to mining companies, but now almost any company must be seen to be operating responsibly.

The term ‘social licence’ has been around for about half a century, but its present usage as ‘social licence to operate’ is generally accepted to be associated originally with the resources industry in the early 2000s.

The term emerged as a recognition that companies, especially those involved in resource extraction like mining, needed more than just legal permits to operate successfully. It highlighted the importance of earning and maintaining the trust and acceptance of local communities, stakeholders and the broader public.

In more recent times, the concept has evolved beyond its initial association with mining companies and has become a crucial consideration for businesses across various other industries. Today, virtually any company, regardless of its sector, is expected to demonstrate a commitment to responsible and ethical practices. This includes not only complying with legal requirements but also engaging in activities that contribute positively to society, the environment and the wellbeing of employees.

It should be remembered that the concept of social licence actually reflects, not a legal requirement, but an unwritten agreement between business and society. Some might argue that the burden of proof seems to lie with stakeholders to show what companies are doing wrong, not with companies to prove what they are doing right, while the absence of community protest may be interpreted as consent.

If companies do not break the law, repercussions are limited to reputational and financial effects, but in today’s digitally connected world, company reputation has become increasingly important. We only have to reflect on the number of television advertisements we see championing the responsible work of mining and gas companies — to a television audience that is not their direct customer — to see that these companies are taking their social image more seriously than ever.

On the flip side, there is much discussion in the news media about increasing scepticism in the community towards major corporate entities, after a number of high-profile incidents where companies have failed to meet community expectations in relation to treatment of their workforce, or in protecting personal data. Similarly, in the mining industry, Rio Tinto faced substantial backlash after it dynamited the ancient Indigenous site at Juukan Gorge.

In most cases in the examples above, no law was broken, but the reputational ramifications are still playing out.

The focus on ‘ESG’

The main areas in which organisations measure their social licence today is through what has become known as Environmental, Social and Governance measures (ESG).

According to the Harvard Law School¹, “the three categories of ESG are increasingly integrated into investment analysis, processes and decision-making” when it comes to corporate investment.

‘Environmental’ captures general environmental sustainability, including energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, climate change and pollution mitigation, waste management and water usage.

‘Social’ covers labour standards, wages and benefits, workplace and board diversity and inclusion, pay equity, human rights, community relations, privacy and data protection, health and safety, and other human capital and social justice issues.

‘Governance’ covers how the environmental and social factors are managed, corporate board composition and structure, strategic sustainability oversight and compliance, executive compensation, political contributions and lobbying, and bribery and corruption.

Environmental sustainability

The largest aspect of the current concept of social licence to operate involves environmental responsibility. Companies are increasingly under scrutiny for their impact on the environment, and stakeholders expect them to go beyond mere compliance with regulations. Businesses are now required to proactively manage their energy and water usage, minimise their ecological footprint, and engage in sustainable practices that promote environmental conservation.

Although the energy and mining sectors are the ones feeling the most pressure to act — being responsible for 56% of Australia’s greenhouse emissions — there is pressure across all industries and coming from many angles. Regulators are imposing stricter emissions limits, such as the Safeguard Mechanism for businesses in Australia, as well as increasing pressure on companies to provide greater transparency in emissions reporting. The federal government has committed the country to reducing greenhouse gas emissions by 43% below 2005 levels by 2030, and to net zero by 2050.

In the commercial arena, banks will no longer finance certain projects and will tighten lending to those not meeting their sustainability plans, and shareholders, including superannuation funds, are demanding a clear path to decarbonisation.

On a more public level, customers are taking their business to sustainable brands, individual companies are expecting more sustainable outcomes from their suppliers, and in some cases, employees are demanding climate action from their employers.

Energy and water

Efficient management of energy and water resources is essential not only for minimising environmental impact but also for ensuring long-term operational sustainability. This involves adopting technologies and practices that enhance energy efficiency, reduce water consumption and minimise waste generation. Companies that prioritise environmental stewardship not only contribute to global sustainability goals but also enhance their reputation and credibility among environmentally conscious consumers and investors.

Recycling

Resource recovery is another critical aspect of the modern social licence to operate. Companies are encouraged to implement strategies for recycling and reusing materials, reducing waste, and minimising the depletion of finite resources. This not only aligns with the principles of a circular economy but also demonstrates a commitment to responsible resource management.

Sustainability reporting

Mandatory sustainability reporting is becoming a potential future requirement that companies will need to meet. Governments, regulatory bodies and investors are increasingly recognising the importance of transparent reporting on ESG metrics. This reporting provides stakeholders with insights into a company’s sustainability performance, enabling them to make more informed decisions and to hold companies accountable for their impact on society and the environment.

A recent annual survey of the ASX100 by KPMG (the KPMG Australian Sustainability Reporting Survey June 2023)² reflected that “the vast majority of Australia’s top companies now report on sustainability performance” but acknowledged that “areas for potential improvement persist”.

Among ASX100 companies reporting on sustainability, the proportion of companies linking sustainable development goals to aspects of their business has increased from 71% in 2022 to 77% in 2023, according to the report. However, the main area identified for improvement was external assurance, with the report stating that “limited assurance continues to be the most common level of assurance among those organisations (85%), with 9% obtaining a combination of limited and reasonable assurance … Independent verification of reported information would increase confidence in organisations’ sustainability reporting and reduce greenwashing risks”.

Social responsibility

There are many aspects to social responsibility, and according to a review by QUT³, “multiple social licences will exist across multiple scales both internally (project, organisation and industry) and externally (local, regional, national and international)”. These social licences are often at odds with one another: for example, the greater environmental benefit of closing a coal mine is at odds with the social impact on the community that the mine supports in terms of jobs and flow-on business.

Generally, from a social perspective, a social licence to operate cannot be controlled, so companies seek to attempt to manage it through protecting reputation — mainly through PR activities. According to the QUT research, this has traditionally been accomplished either “through a pro-self perspective, where the social licence is a resource ‘bought’ through actions that align with stakeholder expectations, or [through] a pro-social perspective in which the social licence is the result of mutually beneficial relationships with stakeholders”.

The report reflects that while a pro-self perspective can result in a social licence, the transactional nature of this approach means that collaboration with stakeholders is undertaken only usually around a specific project and only on the company’s terms: “Often the stakeholders are chosen by the firm to pre-determine the outcome, engaging only with those likely to already agree with the firm’s actions. These licences are therefore not supported by any lasting relationship and are withdrawn as easily as they are initially acquired.”

With a pro-social perspective, on the other hand, “rather than trying to persuade stakeholders that the firm’s actions will be beneficial, through authentic dialogue and ongoing engagement the desires of the stakeholders are integrated into the firm”.

The latter can result in a social licence that reflects a more genuine alignment of interest and is much more resilient as it is founded on shared values. The former, more common approach, usually results in further conflict and court decisions, as we often see playing out in the approach taken by some industries to the concerns of social groups that may not be in agreement with their actions, such as farmers, environmentalists and Indigenous people.

When a company fails to meet stakeholder expectations the social licence may be damaged or lost altogether. Repairing a social licence means that to be seen as anything other than tokenistic, dialogue must be accompanied with concrete action to demonstrate a genuine desire to repair relationships. Recent events around the Optus response to a major network outage are a case in point.

Social licence cannot be ignored

Today the concept of ‘social licence to operate’ extends across industries, with businesses expected to prioritise responsible practices. Environmental, Social and Governance (ESG) measures, including sustainability reporting and a focus on environmental responsibility, are now key criteria for evaluating companies. The path forward involves authentic stakeholder engagement, integrating their desires into business practices, and a genuine commitment to shared values to build and sustain a resilient social licence.

<sub>1. Bergman MS, Dekelbaum AJ et al 2020, Introduction to ESG, Harvard Law School Forum on Corporate Governance, <<https://corpgov.law.harvard.edu/2020/08/01/introduction-to-esg/>>
2. KPMG 2023, Status of Australian Sustainability Reporting Trends: June 2023 Update, <<https://assets.kpmg.com/content/dam/kpmg/au/pdf/2023/australian-sustainability-reporting-trends-june-2023-update.pdf>>
3. Hurst B 2022, ‘Community engagement and social licence to operate’, QUT Business School research insights, Queensland University of Technology, <<https://research.qut.edu.au/ara-consumer-research/community-engagement-and-social-licence-to-operate/>></sub>

Image credit: iStock.com/Thai Noipho