Rio Tinto shows us why ESG cannot be ignored

Oct 01, 2020

Mining giant Rio Tinto has been at the receiving end of blistering public criticism this year. It has been accused of environmental and human rights violations in a complaint filed with the Australian government that says an abandoned mine is leaking waste and poisoning rivers on the island of Bougainville.

The above news pales in comparison to the publicity it received for the disastrous destruction of the caves at Juukan Gorge on May 24, a 46,000-year-old sacred Aboriginal site, in Australia’s mineral rich Pilbara region.

Was it legal? Yes.

Was it irreversible? Yes.

Was it tragic? Yes.

Was it traumatic? Yes.

This move has ethical and spiritual reverberations on a community deeply wounded by the lack of respect and honour to its heritage. In a furious submission to Australian parliament, the Puutu Kunti Kurrama and Pinikura people stated that the “Juukan Gorge disaster tells us that Rio Tinto’s operational mindset has been driven by compliance to minimum standards of the law and maximisation of profit”.

Keren Adams, legal director at the Human Rights Law Centre, commented on both incidents: "As we saw at Juukan Gorge in Australia and we see here in Bougainville, there is a total disconnect between Rio Tinto's rhetoric and the reality experienced by Indigenous communities".

The above two incidents are clear-cut examples of why governance matters, and why shareholders need to take a more active role in holding companies in which they have invested accountable.

(Incidentally, following the public outcry, mining giant BHP halted plans to expand a mine in Western Australia. It was granted approval to work on up to 40 sites in the remote Pilbara region, but decided to do have prior extensive consultation with Aboriginal groups; the Banjima people.)

Ruth Saldanha from Morningstar Canada digs deeper into Juukan Gorge incident and points to various ESG issues that need to be addressed.

The company received permission to demolish the site in 2013 but refused to change its plan when its archaeological importance became clear. Australian media firm ABC reported that, “Rio Tinto obtained permission to mine in the area in 2013, a right which was not affected by the discovery of ancient artifacts such as stone relics, faunal remains, and human hair in one of the Juukan caves a year later.”

Worse still, the company admitted that it had options for blasting Juukan Gorge which did not involve the destruction of highly significant ancient rock shelters. But were quick to note that they were made aware after tonnes of explosives were already laid in the area and were unable to be removed.

In response, there have been forced departures at the firm, but they will still walk away with millions of dollars in exit packages.

Rio Tinto chairman Simon Thompson said in a statement that, “What happened at Juukan was wrong, and we are determined to ensure that the destruction of a heritage site of such exceptional archaeological and cultural significance never occurs again at a Rio Tinto operation. We are also determined to regain the trust of the [traditional owners of the caves] Puutu Kunti Kurrama and Pinikura people.”

But what is done is done. And in the light of the BBC report that the company knew what it was doing--and did it anyway, that sounds like nothing more than a public relations spiel: “In the days running up to the caves' destruction in May, Rio Tinto hired lawyers in case opponents tried to seek injunctions to stop them".

The repercussions have many dimensions - Jackie Cook, Morningstar’s director of sustainability stewardship research

  • Damage to Rio Tinto's social license to operate. A company’s social license to operate refers to whether a company’s business, operating practices, and procedures are acceptable to all its stakeholders, including employees, investors, the communities it serves, and the public. It is a kind of trust that the company builds over time with all stakeholders, including the community in which it operates and the community it serves.
  • Cost to shareholders. This erosion of trust will cost the company--and any other company that fails to act--in the long run.
  • The importance of strong senior leadership, including board leadership, for navigating ESG risks. Shareholders aren’t particularly proactive when it comes to controversy. Both shareholders and the company ignored stakeholder concerns, failing to be reactive at critical moments.
  • Growing awareness of racial injustice and how this is relevant to resource extraction around the world.

The cost to shareholders - Alberto Serna Martin, Sustainalytics’ associate director of ESG research

Rio Tinto was widely known for its public commitments on responsible mining, and specifically Aboriginal land rights, and for holding itself to high standards of conduct, over and above minimum legal requirements. This incident shows a significant gap between Rio Tinto’s stated commitments and their consistent application in practice, which is difficult to reconcile.

As a result of this incident, Rio Tinto has suffered considerable damage to its reputation, trust, and social licence to operate.

Rio Tinto has other projects ongoing in Australia, Africa and Canada. It needs community and stakeholder approval for these projects. Now, negotiations will be tougher and will take longer. This will end up costing more.

The board and management needs to up its game - Bonnie Lyn de Bartok, founder and CEO of The S Factor

It's hard to believe that the company thought it could get away with this without public outcry and shareholder revolt. Clearly, senior management is not in touch with how the world would view this. Perhaps they anticipate that the anger and outrage will blow over as public attention shifts to the next thing.

The company could have gone with three options that caused no harm to the sites, but instead, chose to go with the fourth – the only one that harmed the site.

Firing the executives, but leaving long term bonuses partly intact, seems like a salve, not a remedy. The steps that the board has taken against these executives are not enough.

Shareholders have a responsibility - Andrew Hoffman, portfolio manager at Leith Wheeler Investment Counsel

While there is always a risk of bad actors in any food chain, that does not seem to be the issue here. But Indigenous rights were clearly violated and given the extensive work that’s been done in Australia to address historic wrongs with respect to its Indigenous population, it is particularly surprising. Also, there has been little mention of the Board’s responsibility, especially as it pertains to the setting of executive compensation.

When you also consider the underlying dispute was not new, one should wonder just how vocal shareholders were. It’s easy for a pension plan to come out now and point fingers at the company but what does their (proxy voting) track record look like and/or engagement with the company? Investors can sometimes forget ownership comes with responsibility and that their voice matters.

Do read why Morningstar’s equity analyst maintains the Standard Stewardship rating.

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