On Monday, China's leadership announced that "social risk reviews" will be required for all major industrial projects. This is a potentially groundbreaking move of which all other nations should take note -- especially the U.S., which is now forecast to be the world's largest oil producer by 2020.
Environmental Impact Assessments (EIAs) emerged as good practice in the 1960s and were signed into U.S. law by President Nixon in 1970 as part of the National Environmental Policy Act. These studies are now required by governments around the world for projects with a substantial physical footprint, such as a mine, railway, factory, or dam.
But EIAs tend to capture only the direct impacts of a project, such as how the air and water quality might change and what flora and fauna might be affected.
Some EIAs include social issues (often called Environmental and Social Impact Assessments, or ESIAs), but these also tend to focus on direct impacts: how many people will be employed by the project, or how many people will be resettled (for example for the Three Gorges Dam in China, or the Second Avenue subway line in Manhattan).
Those calculations tend to miss the true concerns of affected communities, which are often more complex: Will wages and working conditions meet international standards, or the (often inadequate) national minimum? Will locals be employed at all, or will the jobs go to people from elsewhere? Will land and food prices rise? Will the project's security forces increase social tensions? Will revenue from the project benefit us, or end up in the pockets of shady investors, fat cat executives, or corrupt government officials?
Such topics may not be the sole responsibility of the company or consortium developing the project, so it might be tempting not to examine them at all. But these issues have caused work stoppages and protests around the world, from platinum mines in South Africa to Foxconn plants in China -- even to Hostess's Twinkies facilities here in the U.S.
Unrest isn't just inconvenient -- it impacts the bottom line. A recent United Nations paper asserted that social risks such as labor and community problems present the greatest threat to new oil and gas projects -- with one company losing $6.5 billion in value in two years for such reasons.
Companies should not view a social risk review as a regulatory burden, but rather as a tool to aid smart decision-making and business continuity.
When I worked on a liquefied natural gas plant in Indonesia, there were myriad social complexities: isolated indigenous communities, a secessionist movement, endemic corruption, a military with a track record of human rights abuses. This led us to go beyond the government-required ESIA and commission a human rights impact assessment, akin to a social risk review. We brought in experts who spoke with local community leaders, national academics and international development professionals. The recommendations in the final report helped us shape the project in such a way that so far -- knock on wood -- there has been little of the social strife that generally plagues extractive developments.
Even more important than the report itself was the process of engagement. A social risk review should not be viewed as a report to sit on a shelf, but as an opportunity to build relationships that will help ensure the stability of a project in the long run.
When not viewed in this way, the whole effort can backfire. Under pressure from investors, Canadian mining company GoldCorp commissioned a human rights assessment for its Marlin mine in Guatemala. But local communities felt that they weren't included in the exercise, and noted that the mine was already up and running and unlikely to be stopped -- so the assessment itself incurred protests of its own.
As is the case with laws and regulations everywhere, the effectiveness of China's new requirement will depend on how it is implemented. Is the requirement simply to conduct a social risk review, or will the review help determine whether a project proceeds at all? Can the findings of the review be linked to whether a project gets financing? Who will conduct the reviews and how will they be paid? Where potentially problematic issues are identified, how will they be managed and who will be held accountable?
The answers to these questions will determine whether social risk reviews make industrial development work for all, or merely fan the fires of protest. Given the ongoing conflicts over hydraulic fracturing and the Keystone XL Pipeline, the U.S. would do well to closely observe China's experience, since increasing oil production will only bring more controversy. Requiring social risk reviews has the potential to benefit governments, companies, and communities alike.