“Sustainability” is more than a buzzword for growing Colombian energy company, Pacific Rubiales Energy – it’s the cornerstone of the firm’s exponential growth story
If you haven’t yet heard of Pacific Rubiales Energy, it’s only a matter of time before you do. Colombia’s largest independent oil and gas exploration and production company is emerging from under the radar as a poignant example of how a robust sustainability strategy is linked to growth. Moreover, the firm’s ability to embed sustainability as ‘business-as-usual’ is making it a case study for how companies in emerging markets are leading the way in sustainability best practice globally.
Listed on the Toronto, Colombian and Brazilian stock exchanges, Pacific Rubiales operates a diversified portfolio of development and exploration activities in Colombia, Peru and Guatemala. It is the second-largest and fastest-growing oil producer in Colombia and holds the country’s second-largest exploration portfolio. The company’s EBITA (earnings before interest, taxes, depreciation and amortisation) doubled between 2010 and 2011, reaching $1,947m. In March this year, the firm signed a natural gas agreement with Belgium-based Exmar NV (Exmar) to support its journey toward making Colombia a reliable LNG supplier for Central America and the Caribbean.
Pacific Rubiales attributes its rapid growth trajectory to a strong underlying framework of corporate sustainability, focused on unearthing triple-bottom line value. “In the extractive sector, as in many sectors, the generation of economic, social and environmental benefit has become key to success,” explains José Francisco Arata, Pacific Rubiales Co-founder and its President and Executive Director. “Currently, under the framework of triple-bottom-line value, performance takes a three-dimensional view in which social and environmental factors take on equal importance to economic ones.
“Both clients and investors tend to look more and more at actions and initiatives with companies focused on these factors.” He’s right on the money. Recent studies show that global citizenship is the leading factor in shaping company impression, above business fundamentals and product quality (Millenium Poll 2011). Corporate sustainability is now a ‘global phenomenon’, according to a recent OECD report that cites it as common among emerging market companies. For the 12.9 percent of companies listed in high-income countries that make it onto the Dow Jones Sustainability Index (DJSI), emerging market companies are hot on their heels at 7.8 percent – a smaller gap than may be expected.
Becoming a role model
Arata understands that for some investors, while emerging markets offer an attractive opportunity, they also involve multifaceted risks at the country level. Delicate public governance structures in many emerging markets can affect the level of law enforcement and may lead to corruption and a difficult business environment. “Whatever economic growth and development that Colombia has experienced in recent years, Pacific Rubiales still faces conflict, poor governance and corruption in some remote areas of the country,” explains Arata.
Yet fragile public governance can also create a point of differentiation for companies focussed on bridging the gap themselves. According to a recent study by the Global Corporate Governance Forum: “For companies with high-quality governance in weak legal regimes, the comparatively few companies with good governance are likely to be valued more highly.” Says Arata: “This [operating environment] has forced us to develop our business in the framework of policies that generate shared value in areas where we operate.”
Last year, Pacific Rubiales participated in a UN pilot programme to implement the guide, ‘Responsible Business in High Risk Zones’. The guide helps companies to implement responsible business practices in conflict-affected areas in line with the UN Global Compact Ten Principles. “This gave us a common reference point for constructive dialogue between companies and investors on what good business practice looks like in different environments,” explains Arata.
What makes Pacific Rubiales’ approach to sustainability unique is that it is characterised by voluntary participation and a strong ‘think global, act local’ ethos. In the absence of a well-developed local regulatory framework for corporate sustainability, Pacific Rubiales has sought out innovative and culturally appropriate ways to close the gap. “Our sustainability goals have been developed largely in the context of developing countries, where we have encountered economic, social and environmental challenges,” says Arata. “Therefore, we contribute to the sustainable development of communities where we own the ability to generate economic development and contribute to improving the social fabric.”
Caring for the community
Arata says that companies operating in developed markets can learn sustainability strategies from those in emerging markets, especially with regard to conflict management.
“We have had to be very rigorous in meeting the expectations of vulnerable populations in policy formulation and in the implementation of programmes without replacing the role and duty of the state”, says Arata. “We focus on preventing conflict situations through ongoing dialogue with local representatives, as well as carrying out risk analyses to identify potential violations of these rights.”
According to the International Monetary Fund (IMF), a truly integrated sustainability programme facilitates local community development and targets socially excluded groups such as rural populations, indigenous people and women. Pacific Rubiales recognises this and in its most recent Corporate Social Responsibility (CSR) report actively seeks a leadership role in the process of consultation with native communities, pursuing ‘relations based on inclusion, respect, transparency and compliance’. “Our approach to indigenous communities is based on strengthening the local culture, respect and support for education, and the generation of life plans and community capital,” says Arata.
Since 2010, Pacific Rubiales has trained 125 community leaders, 45 indigenous leaders and 90 workers in community rights and social control courses. The company offers a diploma course on human rights for community representatives who reside in areas the firm operates in and has educated over 6,000 children and parents through its innovative Ludoteca Movil (Mobile Playground) programme. To ensure community investment is targeted, Pacific Rubiales utilises a Social Investment Framework to guide the investment process. The framework is based on the eight UN Millennium Development Goals (MDGs), departmental and municipal development plans and the desired needs of the community.
Meeting global expectations
Education is central to the strategy. “Within this framework is our axis of education, which aims to contribute to the development of all members of the community by providing them with the essential tools to develop personally and professionally,” explains Arata. “We promote education for work, improve the infrastructure for education, and invest in research, development and connectivity. The key concept is creating ‘shared value’ to contribute to the progress of society as a whole.”
While tailoring its sustainability strategy to the local operating environment, the firm simultaneously pursues global certification to ensure best practice. Pacific Rubiales bases its reporting methodology on the Global Reporting Initiative (GRI) standards, which measures environmental, social and governance elements of performance. In 2011 it signed the UN Global Compact, which provides the company with a process to ensure basic human standards are met.
“We work to ensure the absence of child and forced labour of any kind in our operations and promote the same behaviour from our suppliers and contractors,” explains Arata. “We require an explicit commitment to human rights from our suppliers and contractors who must sign our code of ethics. We have also incorporated the principles of the covenant into our audit processes,” he says. “For example, we include the verification of labour standards in relation to the principles and have held meetings to sensitise our suppliers of the importance of decent work, good working conditions and labour obligations.
“In addition, we have our anti-corruption policy by which we execute procedures to mitigate risks associated with money laundering, terrorist financing and corruption.”
Aligning its reporting measures to globally recognised standards is strategic power play by the firm. It provides foreign investors with insight into its local operations and a way to benchmark its performance relative to companies globally.
Covered means covered
Along with its focus on community development, environmental sustainability also rates high on Pacific Rubiales’ agenda. “We place environmental sustainability as a cornerstone to the way we operate and work,” says Arata. “Our operation is governed by the development of strategies related to energy issues, emissions, water management, solid waste, biodiversity and the prevention and remediation of spills.” If it sounds ambitious, that’s because it is.
The company has helped to reduce its carbon footprint through the Chivor-Rubiales field electric-line interconnection project. The project includes initiatives such as providing for the reforestation of 3.9 square kilometres and planting of over 86,000 trees and installing a bio-digester for treatment of organic wastes generated in the Rubiales and Quifa fields.
Pacific Rubiales measures its carbon footprint in its fields of operation with the specialised firm ONF Andina. “We believe this initiative is of great importance because it allows us to determine the impact of our activities and to formulate clear guidelines and necessary actions to compensate for our omissions to the environment,” says Arata. Simultaneously, the firm is committed to reporting back to the Carbon Disclosure Project (CDP).
Importantly, and perhaps fundamentally, all of the company’s reserves and resources are independently certified.
Of course, no sustainability programme would be complete without considering the biggest asset a company has: its people. According to the IMF a comprehensive sustainability programme takes into account labour relations and may focus on supply chain analysis, worker-management relations and assistance in improving health and safety. It certainly makes good business sense; the IMF reports that firms “pursuing better ways of approaching employee concerns, such as progressive labour relations, have been shown to enhance productivity and reduce costs associated with recruitment and turnover”.
For Arata, employees are an important element of Pacific Rubiales’ success. “We understand labour relations as a key to stakeholder management,” he says. The company places a strong emphasis on education, training its personnel in behaviour-based security and implementing strategies that promote coverage across all occupational health prevention activities. Its sustainability measures also extend down the full value-chain of operations, meaning that the performance of contractors and partners is counted and measured. “Our suppliers and contractors are strategic to our business which is why one of our major commitments refers to ‘strengthening the sustainability of the value chain’,” explains Arata.
As clear as crystal
Pacific Rubiales trains its suppliers, contractors and buyers on its code of conduct and integrates the code in the selection, evaluation and interaction processes with suppliers and contractors. More broadly, the company is working to embed a culture of sustainability in the business by using Key Performance Indicators (KPIs) to track performance of processes throughout the value chain. Pacific Rubiales is also focussed on integrating sustainability criteria into its internal audit system; a key goal for 2012 is to prepare for certification of the SA8000 standard for labour practices.
Promoting transparency across the full remit of business activities certainly pays off; studies show that firms with greater transparency often experience less liquidity volatility, particularly during market downturns. Researchers at the University of North Carolina used a diverse sample to demonstrate that: “firms with greater transparency, as measured by the quality of accounting standards, quality of auditor, level of earnings management, analyst following and analyst forecast accuracy, are characterised by less volatility in liquidity, as well as lower correlations between firm level liquidity and stock returns.”
Pacific Rubiales also aligns sustainability strategy to the broader organisational structure to ensure sustainability is integrated across its different divisions. “We recognise that sustainability cuts across the entire company,” explains Arata, “so we created a sustainability committee made up of people from different areas across the company.”
Creating the space for discussion around how to conduct business that is economically, socially and environmentally responsible was important. The committee also provides a forum to monitor the needs and expectations of stakeholders, prioritise strategies and ensure transparency in decision-making.
“We seek to exploit synergies between business areas… to make the best use of our capabilities,” says Arata. “This, coupled with the ongoing strengthening of corporate policies and processes, allows the growth of our business in a transparent manner.”
Business objectives are strategically aligned to the company’s governance policies, not the other way around. “Our strategy is sustainable growth from an economic, social and environmental perspective,” Arata explains. “Our goals to increase our production, exploration and portfolio and market share need to be pursued under the highest standards of health and safety and be focussed on providing the best service to our customers.”
Connecting the dots
Pacific Rubiales’ ability to anchor its business objectives to positive labour relations, community-driven investment and environmental stewardship provides the company with a foundation for long-term, inclusive growth.
Now more than ever, corporations are ‘facing new demands to be accountable, not only to direct shareholders, but also to stakeholders such as employees, consumers, suppliers, local communities, policy makers and society-at-large’, according to the Corporate Social Responsibility Initiative of the Harvard Kennedy School of Government.
The firm’s pioneering sustainability best-practice provides a compelling business case for investors. In particular, emerging market companies like Pacific Rubiales are potential investment hotbeds, considering developing markets are playing an increasingly important role globally on account of their high economic growth potential. The IMF reports that emerging markets account for nearly 40 percent of global GDP already – and this figure is steadily rising. Given sustainability is generally linked to better performance at the firm-level, the emerging market companies that have strong corporate responsibility programmes are likely to become more attractive as investment destinations in the near future.
Similarly, as emerging economies like Colombia continue down the path of economic liberalisation, improving public infrastructure will enhance the effectiveness of firm-level initiatives. The companies that take a proactive approach to sustainability now will be well placed as regulatory quality improves. Pacific Rubiales, for one, is a firm that has been quick to connect the dots and ride the trend; recognising that sustainability and growth go hand in hand.