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(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, Sept 15 (Reuters) - Even before Rio Tinto
made its fateful decision to blow up the ancient Aboriginal
rockshelters at Juukan Gorge, this was turning out to be another
terrible year for the mining industry.
In May Russian nickel producer Norilsk spilled 20,000 tonnes
of diesel into the Ambarnaya river in Siberia. The damage to the
Arctic eco-system has been compared by Greenpeace to the
infamous Exxon Valdez oil spill in 1989.
Extraordinarily, Norilsk didn't even notice for a couple of
days before learning from social media that something very bad
had happened.
There have been at least two tailings dam collapses, a small
one at a gold mine in Ecuador and a much bigger one at a
molybdenum mine in China, described by the Chinese environmental
ministry as the country's worst in 20 years.
Last week brought another fatal artisanal mine collapse in
the Congo, following an equally lethal mudslide at a jade mine
in Myanmar in July.
Rio Tinto, one of the biggest and best regarded mining
companies in the world, now joins the hall of mining shame.
But Juukan Gorge may prove to be a watershed moment for the
sector.
WIELDING THE ESG SWORD
Rio's initial reaction to the furore over its destruction of
46,000-year old cultural heritage sites was a carefully-worded
apology and the docking of executive bonuses. This has been the
mining industry's stock response to past failings.
This time, though, it didn't work.
Rio's board seemed sublimely unaware of how its actions
might reverberate in a societal cauldron of ethnic and racial
tension. It was Rio's own shareholders who put them right and
told them they had to live up to their ESG (environmental,
social and governance) promises.
The ESG sword has now claimed the sacrificial heads of Rio's
chief executive Jean-Sébastien Jacques, as well as the heads of
iron ore and corporate relations.
This is the management team that delivered total returns of
183% and 229% to London and Australian shareholders respectively
over Jacques' four-year tenure.
The activist funds that led the attack are clearly
signalling that failing on sustainability metrics is now more
important than winning on the financial ones.
In doing so, they have dispelled any notion that ESG is just
a box-ticking exercise wrapped up in glossy public relations.
Indeed, ESG is now impacting mining corporates down credit
channels as well.
In response to Norilsk's Arctic spill Fitch Ratings raised
its "ecological impacts" assessment, part of an ESG weighting
that feeds into the company's default long-term credit rating.
Fitch is concerned about both the potential for a $2.1
billion damages claim by the Russian authorities and the much
higher costs of protecting structures from a melting Arctic
permafrost.
Credit and shareholders are a powerful combination of ESG
levers on mining companies.
UNDER THE SPOTLIGHT
The ESG tide is washing across every economic sector but the
mining sector has rapidly moved centre stage.
A new generation of metals users, companies such as Apple
and Tesla, are insisting their suppliers must be as ESG
compliant as possible.
Growing consumer awareness of metal supply chains is being
replicated at government level, particularly in Europe where
policy-makers are pushing for "green" metals to supply the
region's green industrial strategy.
The mining industry is still adjusting to this new scrutiny.
There are plenty of positive developments.
Indian aluminium producer Hindalco, for example,
has solved the tailings dam problem by redesigning its alumina
refining process to produce a waste that can be used by the
cement and construction sectors. Three of its four plants now
generate no "red mud" residue.
Major miners operating in the Congo are now moving to
embrace the artisanal mining sector. Glencore's
decision to join the Fair Cobalt Alliance marks, it said, an
evolution in "our approach" as to how artisanal and large-scale
mining "can sustainably co-exist as distinct yet complementary
sectors of a successful mining industry."
Unfortunately, as the Juukan Gorge episode shows, it is the
failures not the successes against which the mining industry
will be judged.
And the failures tend to be truly ugly, witness last year's
catastrophic dam failure at Vale's Brumadinho iron ore mine in
Brazil.
FAILURE IS NOT AN OPTION
Mining companies such as Rio have now been given notice that
shareholders expect a zero-failure operational model similar to
that applying in industries such as nuclear.
Consider the findings of the Rio board review into why an
ancient cultural heritage site was sacrificed for a bit more
iron ore.
"It was the result of a series of decisions, actions and
omissions over an extended period of time, underpinned by flaws
in systems, data sharing, engagement within the company and with
the (indigenous owners) PKKP, and poor decision-making."
How would we feel if Rio were a nuclear plant operator?
Quite evidently, something needs to change at the company.
The Australian media are calling for an Australian as the
next CEO, arguing that a native would have a better intuitive
cultural understanding of sites such as Juukan Gorge.
That may be missing the point. As my colleague Clyde Russell
argues, it's the very composition of the board that is the
problem.
Quant-driven geologists, extractive industry experts and
investment managers are an unlikely group of people to handle
well the soft skills essential to the S part of the ESG.
Moreover, the challenges of putting an industry with as
dirty and dangerous a legacy as mining on an
environmentally-friendly, socially-positive and zero-carbon
footing are myriad and multiplying.
Rio and other major mining companies have global foot-prints
with localised ESG risk of failure.
The sheer complexity of ESG needs a separate operational
function with local roots and direct representation at the head.
A company like Rio needs powerful ESG board representation.
After all, if one bad ESG call can unleash such a fire storm
of social anger and bring about the downfall of three top
executives, why isn't the board including sustainability in
every discussion?
Rio's self-inflicted misery, though, is a wake-up call for
everyone else.
Investors like the long-term mining story, a low-carbon
future of metal-hungry electric cars and renewable energy
generation.
But they are also clear that mining companies need to be
truly green if they are going to be the winners of this green
revolution.
The ESG sword has been wielded with shocking effect. It
remains unsheathed, ready for its next negligent victim.
(Editing by Jane Merriman)
