At what point did society decide that smoking on airplanes was unacceptable? At what point did dog owners become afraid to go on dog walks without little plastic bags? When do societies decide to stop tolerating the social costs of environmental pollution?
The Forest Or The Trees?
Assessing environmental risk in fixed income is not a straightforward calculation of the likelihood and cost of possible environmental accidents, with a quick run through a list of fossil fuel reserves, carbon emissions, other greenhouse gas emissions and environmental fines paid. Everybody sees those trees, there is a forest too. Seeing the forest is a key to identifying environmental risk.
In developing a framework for assessing environmental risk, investors can consider two different types. There is the straightforward environmental risk associated with accidents, and there is the environmental risk associated with a change in society’s tolerance for, and recognition of, pollution.
To control and limit the risk of accidents, many societies have imposed regulations, limitations and prohibitions on businesses. In accepting these constraints, businesses have acquired a “social license to operate.” As societies debate whether or not these constraints are appropriate, the definition of what society is willing to accept may change.
Case Study: Freeport McMoRan
The copper mining firm Freeport-McMoRan’s social license to operate has, over the past 20 years, become more uncertain in a rapidly changing Indonesia.
The populist government of Indonesia has been pushing Freeport-McMoRan for years on environmental waste issues. The basic argument boils down to who exactly owns the copper in the ground, and a more practical battle over the value of the mining project.
Also, the rise of social media had given megaphones to many of those outside the traditional pillars of power or the traditional voices of authority.
Freeport-McMoRan’s CEO, Richard Adkerson, has pushed back against likely changes in the company’s legal and social licenses.