Social Cost And Material Loss: The Dakota Access Pipeline

For 25 years shareholders have been raising concerns over corporate infringement on Indigenous Peoples’ Rights. Indigenous Peoples have helped to raise international awareness about how pipelines such as the Dakota Access, Keystone, and Trans Mountain projects harm local communities. Companies often minimize the social cost of public protests, even as investors contend that grassroots opposition can impose significant financial and brand risks. 

The First Peoples Investment Engagement Program (FPIEP) recently published an innovative case study to qualitatively identify and to quantitatively assess the social risks that became material losses during the Dakota Access Pipeline (DAPL) controversy.  

A new case study published by the First Peoples Investment Engagement Program highlights the need for companies to disclose social risks so that #investors have a clear understanding of the total risks of a development project. @CUBoulder #ProxyPreview

The DAPL controversy showcases for a generation the consequences of failing to account for the social risks of development on and near indigenous lands, including a failure to respect human rights. The failure stemmed, in part, from a lack of due diligence analysis at the outset of the project. While companies completed the bare minimum standards of due diligence within the domestic legal and regulatory regime, the scope of the process was too narrow to assess the nature of the opposition, including the social, environmental and cultural impacts of development on and near the Standing Rock Sioux Tribe’s territories. Thus, disclosures did not give an accurate picture of the total risks of the investment. The case study used several methodologies to assess how social impacts affected financial performance, as summarized below. 

Carla Fredericks

The stock price for Energy Transfer Partners (ETP), DAPL’s parent company, significantly underperformed market expectations during the event study period, and it experienced a long-term decline in value that persisted after the project was completed. From August 2016 to September 2018, ETP’s stock declined in value by almost 20 percent, while the S&P 500 increased by nearly 35 percent. The case study does not assert that this underperformance came exclusively from social pressure, but both the magnitude of media attention generated by the controversy and the magnitude of financial losses suggest social pressure is a likely contributor.

Similarly, the case study estimates that the costs incurred by ETP and other firms with ownership stakes in DAPL for the entire project are not less than $7.5 billion. The banks that financed DAPL incurred an additional $4.4 billion in costs. Further, at least $38 million was incurred by taxpayers and other local stakeholders. 

The data points to several conclusions: 

  1. All entities must conduct thorough due diligence on social risks related to human rights prior to any business transaction, especially those with impacts to indigenous peoples. 

  2. Companies must create disclosures inclusive of social risks so that investors have a clear understanding of the total risks of a development project.

  3. Social costs accumulate not only to investors but also to local communities, to states, to taxpayers and to tribal governments. 

  4. The social movement around DAPL did not occur in a vacuum. Rather, the #NoDAPL movement galvanized worldwide support from indigenous peoples and allies because of the resonance of consistent issues—lack of consultation, minimal adherence to government policies as to consent from indigenous peoples, and lack of due diligence by companies regarding the social and cultural impacts of development on and near indigenous territories. 

Carla Fredericks

Carla Fredericks
Director, First Peoples Investment Engagement Program, University of Colorado