Socially Responsible Real Estate Development (Part II)

In my preceding blog post, I argued that socially-responsible real estate development can not be achieved merely by making philanthropic donations or branding efforts.  Direct engagement with a wide range of stakeholders, using the tools of Environmental and Social Impact Assessment, is required. And, the point of such interactions is not merely to minimize the adverse effects of what the developer wants to build; rather, the goal should be to meet as many of the interests of as many of the stakeholders (including the developer!) as possible.  In my new MIT MOOC,  the proper ways to use EIA and SIA are described. The MOOC is a five week, online course that will be offered for the first time in the summer of 2017. More information about enrollment can be found at the Samuel Tak Lee Real Estate Entrepreneurship Program at MIT (stl.mit.edu).

While the United States and Europe have a long history of requiring EIA and SIA, they are mostly used to justify design and development decisions that have already been made, rather than as a means of engaging stakeholders with conflicting interests in joint problem-solving. Many developers view EIA and SIA regulations as nothing more than a nuisance.  They decide what they want to build, hire consultants to make sure all regulatory requirements are met, do their best to market a positive view of their project and (in the United States especially) go to court to fend off legal challenges from opponents. This completely misses the opportunity to discover low-cost ways in which a developer can simultaneously meet local needs and solve long-standing problems while earning public support for their project and even permission to adopt innovative practices that might otherwise be prohibited. EIA and SIA can be used to meet BOTH the interests of the developer and the people most likely to be affected by whatever new project is being planned.

In the MOOC we present a case study of one of the largest mixed use mega-projects currently being built in Asia. The goal is to construct housing for more than 700,000 people on reclaimed land just off the edge of a developed area. By some estimates, the project will cost more than $60 billion over a twenty year period. The developer sought at the outset to skirt long-standing EIA requirements. While land use decisions in this particular country are usually the exclusive domain of state and local governments, the federal government was forced to get involved in this instance because the neighboring country was worried that the project would adversely affect them. The project was put on  hold until the developer completed a detailed EIA.  The cost of halting development was substantial.  In the end, the project had to be scaled back by more than 20% and new plans had to be prepared.  Nearby fishing communities, adversely affected by the early work on the project, had to be compensated for their losses. Had the developer engaged the relevant stakeholders in an EIA and SIA before starting construction (and before locking in on a version of the project that showed little or no concern for the interests of others), they would have saved an enormous amount of time and money. Also, their reputation would not have taken the international hit that it did.

In the MOOC, in which anyone can enroll at no cost, participants will have a chance to (1) read carefully selected excerpts from relevant books and articles (with short commentaries explaining how and why EIA and SIA work); (2) view mini-lectures summarizing best practices around the world; (3) try to respond to challenging scenarios (to see whether they can apply what they have learned); (4) watch edited conversations with enrollees who have already taken the course at MIT and completed the scenario assignments;  (5) listen to short interviews with experienced real estate developers describing what they have learned about socially-responsible real estate development; and (6) test their knowledge by taking a short multiple choice quiz before and after the course.  In addition, there are short animations that summarize the most important points in each module.  All told, each of the five modules in the MOOC takes about 3 - 5 hours to complete (depending on your ability to read and write in English). Certificates of completion are provided by MIT.

In making the MOOC, we talked with a number of very experienced real estate developers who have undertaken projects all over the world.  We also made our way through most of the published work on EIA, SIA and what is called Collaborative Adaptive Management. I tried to incorporate some of the ideas contained in my earlier book (with Patrick Field) called Dealing with an Angry Public (Free Press, 2010). What struck me most is the maxim that developers "need to go slow to go fast." That is, many developers believe that speed is of the essence. They rush to get things built,  sell their product as quickly as possible and generate a positive cash flow to satisfy their investors.  Short-cuts at the beginning, however, including efforts to sidestep direct involvement of stakeholders in meaningful EIAs and SIAs, actually add to the time and cost involved in completing a project. Even more important, efforts to push through a pre-conceived version of a project miss the chance to "create more value" for both the developer and the community.  It turns out, socially-responsible real estate development is the most profitable kind of real estate development -- in both the short-term and the long-term.

Socially-Responsible Real Estate Development (part I)

I am trying to build a MOOC (an open course on line) that will help anyone engaged in real estate development, or any aspect of city redevelopment, think hard about their social responsibilities.  To date, most discussion of social responsibility focuses on what is called Corporate Social Responsibility (CSR).  That is, what do  corporations need to do to meet their social responsibilities?  CSR is basically a form of “corporate self-regulation” or “active compliance” with the “spirit of the law,” “ethical standards” and “national or international norms”.  By now, after several decades of discussion (and some serious scholarship), CSR advocates are prepared to make the case that corporate actors will have an easier time attracting the workers they want, enhancing their reputations and differentiating their brand, reducing regulatory scrutiny and improving relationships with their suppliers if they take environmental sustainability seriously, get involved in the communities where they operate (often through charitable giving) and avoid false advertising (and engage is what is known as ethical marketing).  So, if corporations do “the right thing,” engage in corporate philanthropy and behave ethically they can count themselves as socially-responsible.

I have a different view.  Imagine a large real estate investor who is thinking of building a mega-project outside his own country; say, in a developing country. With the help of local partners, he finds a site for a large, gated, mixed-use development that will take a decade or more to complete and cost billions of dollars.  If he succeeds, he will make a lot of money.  He hires consultants (some local, some from his home country) and prepares a marketing brochure that includes images of the amazing project he has in mind. He initiates preliminary conversations (behind closed doors) with key political figures in the region to win their support.  And, based on these conversations, he takes on local equity partners.  He is assured by these partners that they will have smooth sailing when it comes to getting the regulatory approvals they need. He begins to make highly visible donations to local business organizations and seeks as much media attention as he can get.  In the formal submissions he makes to whatever agency has final review power, he highlights his commitment to “green” building and promises to set aside a share of construction jobs for local workers.   Most CSR-types would say that he is acting in a socially-responsible way.

As he begins to market his project, it is clear to everyone (from the images on the giant posters on the site and the materials handed out in the showroom) that the project is aiming to attract a class of international investors and residents who look nothing like the vast majority of people in the region or in the communities near the site.  His media consultants succeed in planting newspaper stories highlighting the tax revenues his project will generate for the local and state government.  These stories also refer to the substantial grants that the national government has offered the developer and the local community to underwrite the infrastructure required within the gated community.  The developer argues that his mega-project will be almost self-sufficient in terms of its energy production, waste disposal, and provision of social services. In the process of filling wetlands and assembling the land for the proposed project, however, environmental interest groups begin to complain that the project will be diverting too much water away from existing settlements.  And, they are concerned that the gated community will not be full integrated into (or managed by) the local and metropolitan agencies and service systems that already exist. Some international environmental organizations express worries as well.   They are concerned that internationally protected environmental areas will be sacrificed. Some local political groups ask why there has not been a more careful study of the potential environmental and social impacts the proposed project might have.  The developer points to (1) the extensive studies he has done that led to the “green” design he is pursuing; (2) the “approvals” he has already gotten from local and state officials; (3) the charitable contributions he has made and will make to local organizations because he intends to be a good neighbor; and (4) his record (in his own country) as someone who takes his corporate social responsibilities seriously. He claims to have met all prevailing regulatory requirements.

It is easy to see why corporate philanthropic contributions do not necessarily equal socially-responsible development.  Merely generating some “social good” beyond the interests of the developer is not enough. Reaching informal agreements (or winning political support from a few key officials in the region or the country) is not the same as ensuring that the concerns of local stakeholders (i.e. the people most likely to be adversely affected by a mega-project now and in the future) are met.  Obeying the law, to the extent that regulatory requirements are spelled out and enforced, is not enough.  Claiming that you “always” take account of your “triple bottom line” (i.e. seeking to have a net neutral environmental impact, a positive social impact and, of course, achieve financial profitability), and that you adhere to ISO 26000 norms (the best practices prescribed by the International Standards Organization) do not guarantee socially-responsible real estate development.

You could imagine how a massive real estate project could displace long-time poor residents of an area, claim a disproportionate share of scarce natural resources, radically alter culturally significant patterns of everyday life and leave a number of groups worse off, even as the developer demonstrates that his project will have a positive impact, he will behave ethically, and he will make philanthropic contributions to the area.  The balancing of competing stakeholder interests, now and over time, is the issue. Values and conflicting interests need to be reconciled in a transparent way, and not all can be easily factored into a comprehensive benefit-cost analysis.  The problem for all the parties is how to meet their conflicting interests in an effective and efficient fashion. I don’t think we can rely on standard government agency reviews to achieve such balance.

Well then, how can such balance be achieved?

My new MOOC (Socially-Responsible Real Estate Development: Using Environmental and Social Impact Assessment to Reconcile Conflicting Interests) -- that will be offered in 2017 by the Sam Tak Lee Laboratory for Real Estate Entrepreneurship at MIT  -- will teach how conflicting interests can be balanced. My focus is on the process of social and environmental impact assessment. This is the only way to guarantee the direct engagement of all relevant stakeholders; and, the ONLY way to achieve socially-responsible real estate development on a case-by-case basis.  The good intentions of the developer are not enough.  The physical design of the project is not in-and-of-itself a measure of socially-responsible real estate development.  It is only by engaging representatives of ad hoc stakeholder groups, with the assistance of a professional (neutral) facilitator, in a joint problem-solving process, that socially-responsible real estate development can be achieved.  The problem-solving I am talking about needs to focus on how the developer, in conjunction with local stakeholders, regulators, independent technical advisors, and non-governmental advocacy groups can ensure that conflicting interests are resolved fairly,  in ways that take account of the culture and values of the existing area.  The tools for doing this are well developed:  environmental impact assessment (EIA), social impact assessment (SIA), and collaborative adaptive management (CAM).  I also argue that these tools should be used regardless of the extent to which they are legally required.  My measure of whether socially-responsible real estate development has been achieved is the extent to which good-faith efforts have been made to meet the conflicting interests of the relevant stakeholders, taking account of technically-sophisticated forecasts and assessments produced by analysts working for all the stakeholders.

In the MOOC  I  review exactly what ought to be done at each step in such a collaborative review process. And, I think I can make this case (although slightly differently) even in countries that have less of a democratic tradition of public engagement. I review and illustrate the practical aspects of getting this work done in a reasonable amount of time at the lowest possible cost.   And, I emphasize the important role that only a neutral facilitator can play once a large number of stakeholders agree to participate in face-to-face problem-solving.  Of course, the interactions I am describing do not substitute for or pre-empt government decision-making.  They precede it.

In my next blog post, I will review in more detail the ways in which EIA, SIA and CAM have been used (and abused) over the past several decades in the United States, Europe and elsewhere.  In this first post, my goal was to reframe the definition of social-responsibility – moving away from the focus on corporate philanthropy. I want to make the case that creating “shared value” from the standpoint of all the parties involved is a more appropriate way to define social responsibility.  Most of all, I want to challenge the assumption that traditional entrepreneurial models (i.e. doing well by doing good) can achieve socially-responsible real estate development.  More is required, particularly a commitment to direct stakeholder engagement.

Corporate Social Engagement and Mineral Extraction in Colombia

Corporate Stakeholder Engagement and Mineral Extraction in Colombia

I want to make four simple points regarding corporate stakeholder engagement and mineral extraction in Colombia. I presented these ideas several weeks ago at a Harvard Law School seminar sponsored by the Colombian government. We had senior officials present along with a great many Colombian graduate students studying at Boston-area schools. I think these prescriptions apply globally, but they are especially relevant in Latin America.

Corporate Stakeholder Engagement (CSE) provides a new point of entry for those concerned about the social and environmental impacts of mineral extraction.

Corporations around the world are being pressed by their shareholders to do a better job of taking local concerns into account when they initiate mineral extraction projects. Indeed, both stakeholders and risk managers are demanding this. Many companies are now systematically assessing the concerns of a wide range of stakeholders and seeking to demonstrate (in annual reports to their shareholders) that they are taking their responsibilities seriously.  A great many mineral extraction disputes occur because multinational and national companies purchase concessions or apply for mining permits, but make little or no contact with relevant local governments, civil society or community groups before they begin work.  Development impacts surprise and upset local interests. More up-front interaction with these groups -- and a genuine effort to understand and respond to their concerns -- could minimize much of the damage that triggers demonstrations and concerted campaigns against mineral extraction projects in Latin America.  

Many countries (and international law) now require “Free, Prior Informed Consent (FPIC) by indigenous communities likely to be affected by proposed activities on their lands. Leading mining, oil and gas companies (and their investors) now recognize that their  responsibilities for community engagement – including FPIC -- must be taken seriously. That recognition now provides greater traction for local groups who are usually put in a position of having to oppose whatever is happening (without their consent) because they are were not given a chance to make constructive suggestions or stipulate their concerns beforehand.

Global (and stockholder) pressure on major companies to take their responsibilities for stakeholder engagement seriously can provide a new source of leverage for governments and communities. Both should be able to engage mining project developers and investors in a dialogue before concessions are granted and infrastructure investment decisions are made.  Governments can insist on seeing evidence of genuine offers to collaborate with local interests before allowing concessions or licenses to be activated. Certainly, multilateral lending institutions ought to demand evidence of such efforts before funding mineral extraction projects. National governments should support the involvement of professional mediators to help facilitate such local conversations in an even-handed way.  They can cover the cost out of the substantial royalties that mining companies are required to pay for permission to mine or drill. 

All sides benefit when joint fact-finding and Community Benefit Agreements are put in place.

There is great value to both companies and communities from conducting joint fact-finding on social and environmental impacts, both before projects have begun and after they are underway. Such joint assessments should be seen as  value-creating moves. That is, they should be used to define in measurable ways what the impacts of development are likely to be, to decide how adverse effects will be minimized and mitigated, and to establish benchmarks that both the company and local stakeholders can use to gauge the performance of the mining companies involved.  

Being explicit in this way will help companies clarify the baseline against which their operations should be assessed, and reduce the risk that local stakeholders will see mining operations as the source of all the problems in the region.  Joint fact-finding can also provide a basis for national and regional governments to insist that companies take appropriate action to hold the impacts of their mining operations to an absolute minimum. Regardless of how many jobs are created or how much tax revenue is generated, there should be a “cap” on the social and environmental impacts that mining or mineral extraction projects are allowed to have.  Contingent obligations to mitigate and compensate,  if caps are exceeded, should be spelled out before hand.

Social and Environmental Impact Assessments (SEIAs) are required in most countries in Latin America. The preparation of SEIAs can provide a context for the kind of joint fact finding I am talking about. 

Beyond joint fact finding, mining companies can and should offer to work with representative local, regional and national stakeholder groups, with the assistance of a neutral mediator, to negotiate what might be called “Community Benefit Agreements."  These should take the form of contracts that commit the company to meet pre-specified impact mitigation and compensation requirements (based on agreed upon data and forecasts generated jointly with federal, regional and local officials and the heads of civil society groups). They should also protect the reputations and limit the liabilities of companies that meet regulatory standards and live up to their commitments to the community.

Right now, most company-community consultation processes produce nothing more than justifications for what industry already has in mind.  There are ways, though,  in which both government permitting processes and community stakeholder engagement can be used to inform site-specific community benefit agreements that governments could then enforce.

The missing ingredient in too many mining disputes is trust.

It is important for mining companies to build trust with local governments and communities before they begin work.  If  good working relationships are developed and maintained, whatever problems emerge can be handled expeditiously. In the absence of trust, however, it is quite common for all sides to assume the worst about everyone.  This causes conflict to escalate.  When there is no trust, even reasonable offers to make amends or put things right are likely to be rejected.

There are two keys to building trust.  The first is to "say what you mean.” If you have bad news to deliver, don't try to sugar-coat it. If there are organizational, legal, financial or other limits on what a company can offer, it should make those clear. The company’s representatives must begin this practice from the first day they come into contact with community stakeholders, and must maintain consistency throughout the process of exploration, development and operations. Each and every miscommunication will cost the company dearly in lost trust and damaged relationships. The second key is to “mean what you say.” Whenever anyone, whether motivated by a desire to "help" or not, makes promises they can't keep, that undermines trust.  Once it becomes clear the a promise was not genuine, trust is lost. It is extremely difficult to reestablish trust once it has been lost. 

Companies make things worse when they do not ensure alignment between what their community engagement team in the field is saying and what corporate headquarters is ultimately willing to do. Often, companies will hire locals to represent them. These new staff members are likely to be sympathetic to the neighbors with whom they now have to deal in a new role.  When they promise to make best effort to get headquarters to be responsive, however, and then fail, local attitudes toward both the community engagement team and the parent company are likely to sour immediately. Companies must make sure that all staff representing them in the field understand exactly what they can and can't commit.

Grievance-handling mechanisms, while important inside most major companies, are often poorly linked to the company’s broader strategy and practice of stakeholder engagement. Before any and all mineral extraction projects begin, local grievance-handling mechanisms should be in place.  Ideally, these should be part of an overall community engagement plan, spelling out who the point of contact is, what the company's promises are with regard to minimizing social and environmental impacts and maximizing benefits, and what penalties they are prepared to have enforced if they violate the terms of their agreements.  These should be signed off on by government officials who are empowered to make sure they are enforced.

Collaborative adaptive management is now Best Practice.

Wherever possible, joint implementation of mineral extraction projects (however large or small) should be the goal. All mining operations are likely to have unintended effects.  Close monitoring of social and environmental impacts, by joint teams of company staff, public officials and non-governmental representatives should be par for the course. This will allow adjustments in scheduling, operations and mitigation in response to timely and trusted information.  Small scale experiments are also desirable. When stakeholders are not really sure what the full effects of a certain mining procedure will be, a small scale (controlled) experiment, monitored jointly, can be extremely valuable. 

Collaborative adaptive management requires neutral assistance.  That is, all the relevant parties should help to choose someone to facilitate the kinds of joint monitoring and adjustment efforts I have described.  Management by non-partisan professionals makes it easier to build and maintain trust. 

Conflicts surrounding mineral extraction in Colombia are substantial and growing, especially as project scale increases.  For the foreseeable future, oil, gas, coal and other mining activities will constitute a substantial portion of the national economy.  That does not mean, though, that better ways cannot be found of making site specific decisions about particular mining operations.  New international norms for corporate stakeholder engagement provide a foothold for the national government, indigenous communities and environmental advocates to hold extraction companies accountable.  

Joint fact finding requirements, overlaid on top of existing laws regarding the allocation of mining rights and responsibilities could help to build trust and engage local governments and other affected communities in conversations before mining operations begin.  These could lead to the negotiation of formal Community Benefit Agreements with clear caps on allowable levels of impact along with contingent mitigation and compensation requirements if negotiated caps are violated. Trust building will be enhanced if companies commit to collaborative adaptive management, or CAM. CAM assumes that project impacts will change over time in unexpected ways. And, unexpected interactions with other land management, economic development and conservation efforts will need to be addressed.  Putting monitoring and dispute handling arrangements in place beforehand is the best way to proceed.  

Nothing that I have suggested requires laws to be changed or new laws to be enacted.  Companies and communities can proceed in the ways I have described on a voluntary basis, with explicit links between their agreements and governmental permitting and regulatory requirements. Even in cases where governments are not willing or capable to enforce company-community agreements, the company’s recognition that its social license to operate depends on effective stakeholder engagement, and the community’ recognition that there is potential for mutual gains through good faith negotiation and partnership, can generate strong commitments to follow through on both sides.  

In short, in Colombia and around the world, taking a mutual gains approach to stakeholder engagement can help both companies and communities minimize impacts and maximize benefits from mining operations.