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Tim Gerrard, Portfolio Manager in Janus Henderson Investors’ Global Natural Resources Team, outlines BHP’s shift to ‘Social Value’ and the possible implications for the company amid growing demand for ESG leadership.
There are so many reasons why it makes commercial sense for resource companies to be leaders in environmental, social, and governance (ESG) factors, so BHP’s ‘Social Value’ needn’t be dismissed as an exercise in public relations.
In early October, BHP held its first ‘Social Value’ briefing, where BHP’s Chief External Affairs Officer, Geoff Healy, argued for BHP’s belief that its move from ‘Social Licence’ to ‘Social Value’ underpins the company’s strategy and performance outlook.
It was evident from the briefing that the world’s largest mining company recognises the challenges associated with bringing about much needed (and rapid) change to the way it delivers its ESG strategy. Rather than describe the why and how in detail, most of this article outlines the possible implications of BHP undertaking such a venture.
But first, what is ‘Social Value’? In essence, it is BHP’s recognition that, for the sake of its shareholders, it must build deep relationships to maintain access to capital markets and gain goodwill among communities and host governments in the countries in which it operates.
Despite paying US$70 billion in tax and spending some US$1.7 billion on social initiatives over the past decade, a 2017 survey in Australia found only 37% of respondents viewed BHP favourably. With around 80% of BHP’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) sourced from The Pilbara, Queensland’s coking coal basin and Chile’s Atacama Desert, good relationships in those regions are obviously critical.
More broadly, a lack of deep relationships with communities and society at large isn’t sustainable given BHP’s challenges – competing for talent, increased tax, climate change, timing of development and access to resources. BHP realises it must change – and quickly – to lead the sector, maintain the strength of its existing business and attract new opportunities.
I think internal rate of return measures will no longer be maximised, but optimised to allow for the cost of Social Value initiatives. BHP will start recognising the benefits that come from working more closely with communities by addressing their concerns quickly and effectively.
In each region, the general manager of operations will be making key decisions based on their understanding of local conditions and expectations. They are tasked with building and deepening relationships. Plans will be drawn up and implemented on an asset by asset basis.
BHP is in a race to demonstrate true ESG leadership and gain the associated competitive advantages when seeking capital, along with local and national approval for projects.
Arguably, a simplified BHP, with a flatter structure and newly embedded processes, is well placed to collaborate with all its stakeholders, adding and protecting value for shareholders.
ESG: Environmental, social and governance are three key criteria used to evaluate a company’s ethical impact and sustainable practices.