The financial costs of mitigating social risks: costs and effectiveness of risk mitigation strategies for emerging market investors

This report assesses the costs and effectiveness of responsible investment practices in emerging market contexts. Its results make the business case for investments in social risk mitigation and avoidance practices.

Such practices include community engagement efforts, impact assessments and the establishment of grievance resolution mechanisms. Implemented correctly, responsible investment practices engender confidence and trust between investors and local communities, which secures social buy-in and mitigates the financial risks associated with disputes.

Key findings

Analysis of 137 development finance institution investments in Africa and Asia reveals a strong business case for investing in actions that mitigate social risk. The costs of these actions are typically 2% of overall project expenditure. Average costs were approximately $10 million across the projects analysed.
These costs compare to potential financial losses of, conservatively, $25–40 million (24–37% of average net present value) from physical risks mitigated and avoided by these actions. Specifically, these actions help to avoid delays caused by disputes between investors and local communities (‘tenure risk’).
Qualitative evidence from interviews and a business perceptions survey of 85 investors operating in sub-Saharan Africa suggests that social dialogue processes are the most effective risk mitigation strategy. Over 90% of investors considered social dialogue to be a highly effective way of identifying community needs, targeting them and achieving social licence to operate.
There is room for improving the effectiveness and reducing the costs of social risk mitigation. Some complex and rigid procedures, such as those used in social impact assessments and grievance mechanisms, were perceived as cost-inefficient and ineffective by 12–15% of investors.

ODI

Trending:

Trending

Our Programmes

ODI

Browse

More

Search

Newsletter

Follow ODI

Authors

Joseph Feyertag

Ben Bowie