The Social License to Operate: Examining the Importance of Community Relationships in ESG

By Dr. Ana Nacvalovaite

ESG framework has gained recognition as a means to assess a company’s sustainability, and ethical practices “E” and “G” factors have received significant attention, but the “S” factor, representing social considerations, is has taken its time to become a fundamental pillar of ESG.  Yet, without a strong “S”, “E” and “G” cannot exist. Everything in business depends on the human factor. The concept of the social license to operate and its significance in the ESG landscape is about the importance of fostering positive community relationships. 

The social license to operate is the acceptance and approval granted by the local community for company’s operations. It goes beyond legal compliance and encompasses the much broader social expectations and responsibilities of businesses. The concept of the social license came from the recognition that businesses operate within a social context and need legitimacy from the communities they impact. Over time, the social license has evolved to encompass various dimensions such as trust, reputation, and social impact, including considerations such as environmental stewardship, labour practices, and community development.

Linkages between the social license and ESG objectives are vast. The “S” factor in ESG reinforces the idea that businesses need to go beyond financial performance and consider their social impact. The social license aligns closely with the social dimension of ESG, emphasizing the importance of responsible and ethical conduct. By integrating the social license into their ESG strategies, companies can enhance their overall sustainability and long-term success.

Communities everywhere play a vital role as stakeholders and strong community bonds are crucial When a business demonstrates a commitment to ESG and actively engages with communities, it enhances its image as a responsible corporation. Engaging with communities allows businesses to understand local concerns. Such proactive measures can help companies avoid costly legal disputes, regulatory hurdles, and operational disruptions in the future.

Building and maintaining a social license requires adopting strategies which highlight effective stakeholder engagement and inclusive decision-making. Engaging in transparent and open dialogue with stakeholders builds trust, fosters mutual understanding, and addresses community concerns. Trust is built on transparency and accountability, therefore regular reporting on ESG performance and progress demonstrates a company’s commitment to accountability and allows stakeholders to assess a company’s social impact.

Building and maintaining a social license requires adopting strategies which highlight effective stakeholder engagement and inclusive decision-making.

Successful approaches to obtaining and maintaining a social license highlight the importance of long-term relationship-building, collaborative partnerships, and meaningful community involvement in decision-making processes. Obtaining and maintaining a social license to operate contributes to improved employee morale and productivity. Employees are more likely to be engaged and committed to a company that values social responsibility and community engagement. In a world where many decisions by potential employees are driven by the ethics of the companies, a strong social license can attract and retain top talent, fostering a positive work culture and driving innovation and performance.

However, just like anything else, obtaining a social license is not without its challenges. Some institutions may face barriers, such as differing stakeholder expectations, conflicting interests, or limited resources for community engagement. Therefore, successfully managing stakeholder expectations requires open communication, active listening, and finding common ground to address shared concerns. Balancing the interests of multiple stakeholders in complex environments can also be a delicate task. Companies must navigate the diverse needs and perspectives of communities, government bodies, investors, and other stakeholders. This requires careful stakeholder mapping, effective communication strategies, and collaboration to find mutually beneficial solutions going forward.

For those companies seeking to go a better job in integrating the “S” factor effectively into ESG strategies, a proactive approach is recommended. They must become the drivers and changemakers in the industry and community. Through developing a clear understanding of stakeholder expectations and engaging stakeholders throughout the decision-making process to ensure their voices are too, heard and considered. 

Aligning business values with community needs should become second nature to organisations seeking a social license. By identifying the areas where business operations can contribute positively to the well-being of local communities they can demonstrate a genuine commitment to the social dimension of ESG. Implementation of transparent reporting and disclosure practices in key. Such transparency builds trust and demonstrates accountability. As trust is build many partnerships with local communities, non-governmental organizations, and relevant stakeholders to address social challenges collectively can be formed. Collaborative initiatives leverage diverse expertise and resources to achieve sustainable social impact and foster long-term community development. Investing in employee training and development allows to empower employees to become ambassadors of positive social change and encourage their active involvement in community initiatives. Companies also should collaborate with industry peers and share best practices to influence policy development in favour of sustainable and responsible business practices.

By embracing the social dimension of sustainability, we can foster long-term success while making a positive impact on the communities’ businesses operate in. We have to understand that the social license to operate is essential for businesses striving to incorporate the “S” factor in ESG.

About the Author

Ana NacvalovaiteDr. Ana Nacvalovaite is a highly accomplished researcher specializing in international human rights law and sovereign wealth funds. Currently, Ana is involved in a three-year research project in collaboration with Professor Jonathan Michie at Kellogg’s Centre for Mutual & Co-owned Business.

As an advocate for ethical business and investment practices, and serves as an expert advisor to the British Standards Institution on the Committee of Experts on Sustainable Finance, where she contributes to the development of the ‘Sustainable Finance Framework’.

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