the ethical corp's study on extractive industries

www.ethicalcorp.com

Published September 2014Part of Ethical Corporation’s Briefing Series

Briefing: Extractives 2 Human rights 9 ESG investment criteria14 Water conservation19 Managing social risks26 CEO interview: Vedanta

http://www.ethicalcorp.com

2

Ethical Corporation | August 2014??? Ethical Corporation | September 2014Human rights

CRED

IT N

EEDE

D

Continues from p2

FPIC seeks to give indigenous peoples the right to choose whether their land is used for mining

Regulation and reform

Human rights in extractivesBy Giles CrosseThe long struggle for binding, enforceable rules to protect human rights in the extractives sector continues

On 27 June, the United Nations Human Rights Council adopted a resolu-tion to “establish an open-ended intergovernmental working group with

the mandate to elaborate an international legally binding instrument on trans-national corporations and other business enterprises with respect to human rights”. The resolution, a step towards international law on human rights and extractives, came about because policy makers and civil society believe a host of voluntary efforts are failing to tackle rights abuses.

Indigenous rightsMany voluntary measures, such as ensuring free prior and informed consent (FPIC), currently exist. FPIC seeks to give indigenous peoples the right to choose whether their land is used for mining, and is embedded in the United Nations Declaration on the Rights of Indigenous Peoples. The declaration is not legally binding, but seeks to eliminate human rights violations by defining commitments member states should make.

Before the UNHRC resolution, the UN General Assembly met on 3 June, addressing the need for FPIC to be given from host communities, in areas where extractive firms plan to work. This need for better community relations should become part of the outcome document to stem from this September’s World Conference on Indigenous Peoples. The conference will bring together

MARIO TAMA

3


representatives of indigenous peoples, giving them a voice in a final paper which, along with the Rights Council’s resolution, will serve to guide new laws on human rights. Together, the developments signal a policy shift at international level, to move rights from the periphery into central, legally defined territory.

Problems galoreThe Extractives Industry Transparency Initiative (EITI) is a global coalition of governments, companies and civil society, which uses its standard to encourage accountability on how firms pay governments for oil, gas or gold. Compa-nies working in EITI compliant countries should report on their payments to regimes, which likewise disclose cash received from firms. Some 29 countries are presently compliant, with overall govern-ment revenues covered by EITI work estimated at $1.3 trillion.

EITI demonstrates how multiple, well-intentioned drivers towards equality exist in the extractive space. But these voluntary efforts are consist-ently failing to deliver overall required change.

“One of the big challenges in the sector is engaging the explorers and the companies,” says Luke Wilde, Director at Twentyfifty, a sustainability-focused consultancy. “Another is the increasing strength and global operations of state-owned companies which are not beholden to the markets, or easily influenced by stakeholder concerns.” This is especially dangerous when poor, corrupt states have little interest in the rights of their people, commonplace in Africa, Asia and South America. Often third party partnerships between extractives firms and resource-rich governments are created in the form of a new company, which receives special, opaque leasing terms from government, and whose books are full of holes.

Wilde expects “a period of policy experimentation as governments and other organisations such as the OECD try a range of interventions and begin to identify what works” to fix transparency issues and rights violations. He points to

Massive projects with big social impactsNA

TTAN

AN76

http://eiti.org


4

Human rights in the real worldToday, most multinational extractive firms set out human rights policies and actions in yearly sustainability reports, to guide what they do on the ground. Shell’s 2013 report highlights four key drivers: labour conditions, communities, supply chains and security.

Community feedback mechanisms are an important part of Shell’s measures. The firm describes its work with the Iñupiaq people in Alaska, striving to ensure their subsistence way of life is uninterrupted by Shell operations.

This responsibility extends to indigenous peoples’ resettlement. Shell says it seeks to avoid this in projects and operations, but that if physical or economic resettlement is unavoid-able, action and livelihood restoration plans are developed.

Less clear is how Shell and other firms’ criteria for defining “unavoidable”, and “livelihood restoration” work are created, and what they mean in real life. For example, in Madagascar, Rio Tinto has promised to restore much of the forest damaged by its extraction work. But doing so takes years. Locals simply leave, as the forest providing many of their resources becomes unavailable for use in the meantime. Rio Tinto built a school for locals affected by its operations, but there are no teachers in the area, or money to pay them. It is into such real world impacts that legislation may be able to extend its influence.

No forest, no people

PIER

IVB

5


‘Protect, Respect, Redress Framework’The Protect, Respect, Redress Frame-work, originally created by John Ruggie when he was the UN Secre-tary-General’s Special Representative for Business and Human Rights, clar-ifies how governments should deliver rules and expectations on human rights to businesses working in their territories, how companies “know and show” respect for human rights, and seeks accountability and judicial redress for harmed local peoples.

landmark cases, including the experiences of Shell in Nigeria, BP in Colombia, Anglo Gold Ashanti in the DRC and Freeport in Indonesia, which have shaped our understanding of the challenges involved. Today’s challenging schemes include Rio Tinto’s Madagascar ilmenite extractive work, previously reported in Ethical Corporation, and Cambodia’s Bokum Sakor National Park’s 99-year lease, worth an estimated $4bn to Chinese Union Development Group, which may prove to be a way in to mine the park, under the auspices of tourism development.

“[Companies] have physical footprints which might necessitate homes being moved, or farmland being given up. They have the potential to pollute lands and waterways and the arrival of builders and miners can bring a range of social ills,” Wilde argues. “The security forces which may be necessary to protect their activities have also at times been responsible for human rights abuses.”

Voluntary principles Other voluntary initiatives are making a worthy attempt to shape the human rights landscape. On 16 June 2011, the UN Human Rights Council endorsed the “Guiding Principles on Business and Human Rights”. The Guiding Princi-ples, in theory, provide a global standard for addressing adverse impacts on human rights linked to business activity. They set out principles as part of a ‘Protect, Respect, Redress Framework’ concerning a state’s duty to protect human rights, the corporate responsibility to respect human rights, and access to remedy for victims of human rights abuse.

Ruggie’s rules clarify expectations

http://www.ethicalcorp.com/stakeholder-engagement/natural-resources-–-mineral-rich-madagascar-open-business

6

Few extractives firms publish human rights impact assessments


Importantly, the Guiding Principles define extractive firms’ human rights responsibilities as “independent” of the behaviour of the ruling regime, in theory preventing firms passing the buck to corrupt governments. The ideas and concepts are helpful, but three years after their creation, firms still appear reluctant to embed the ideas in practice.

“While most extractives have for some time been developing increasingly sophisticated approaches to social performance, the human rights lens which the UN Guiding Principles require will have been more or less new to many,” says Wilde. “Most major extractives will now have a human rights policy and will have or are developing their human rights due diligence processes, but we have seen relatively few publish human rights impact assessments to date.”

Ursula Wynhoven, general counsel and chief of governance and social sustainability at the UN Global Compact, agrees, saying: “There is much more to be done. For instance, the majority of companies at present are still unaware of the existence of the Guiding Principles.”

The business caseJon Samuel, group head of government relations and social affairs at Anglo American, says his company’s practices are already shaped by the UN

Extractives pollution isn’t cheap to clean up

MAR

IO T

AMA

https://www.unglobalcompact.org/issues/human_rights/the_un_srsg_and_the_un_global_compact.html


EVRE

NKAL

INBA

CAK

7

Guiding Principles and International Finance Corporation (IFC) Performance Standards. IFC, part of the World Bank Group, is a development institution that helps the private sector fund solutions to development challenges. IFC standards stipulate that businesses should respect human rights, and address human rights impacts business may cause or contribute to. These standards, Samuel argues, are doing the work new legislation seeks to achieve.

Samuel champions yet more principles, including, established in 2000, the Voluntary Principles on Security and Human Rights. Set up by the US and UK governments, NGOs and extractive firms, they guide companies in maintaining safety and security within an operating framework that encourages respect for human rights. He also praises the work of the ICMM, a group for mining firms and associations, for seeking to improve sustainable development in the mining and metals industry.

“The Voluntary Principles on Security and Human Rights have been widely adopted by major companies, and the ICMM’s endorsement of FPIC for indigenous peoples is an important step forward, and one that surprised many. Add in the work on implementing the Guiding Principles and I think it is fair to say that a lot of progress has been made, even if there are still laggards.”

Samuel adds: “We are still in the early days of implementing the UN Guiding Principles. But a huge amount of work has already been done by governments, multilaterals, industry asso-ciations and companies to align their policies and standards to the Protect, Respect, Redress Framework.”

Anglo American wants to be a welcome partner wherever it operates, regardless of whether law forces its hand, Samuel says. He adds: “We have to be respectful of the rights and aspirations of host communities. Big rights challenges in mining include: land acquisition, environmental and health impacts and labour rights, particularly in our supply chains.

“Sensible companies are taking human rights increasingly seriously. Most business leaders, like their fellow citizens, are supportive of human rights. It is also a reflection of the costs of not getting these issues right, whether through consumer boycotts, community unrest or legal action.” Samuel esti-

The oil and gas sector is slowly addressing human rights

http://www.voluntaryprinciples.org



8


EVRE

NKAL

INBA

CAK

mates failure to understand and manage stakeholder expectations has stalled mining projects worth at least $25bn in recent years.

Wynhoven agrees that the social and economic cost of getting it wrong can be huge. “For a large extractive company, some estimates put the total cost of company-community conflict at $20-30m per week. There will continue to be growing awareness of the Guiding Principles, and more and more busi-nesses taking the necessary actions to follow through on their corporate responsibility to respect human rights,” Wynhoven says. “The extractive sector certainly seems to be making serious efforts, for instance, through its involve-ment with sectoral associations such as ICMM and IPIECA [the global oil and gas industry association for environmental and social issues]. However, many companies in the sector have yet to engage at all.”

She predicts a trend of hardening up “soft law”, through a toughening of guidelines and declarations into more binding rules on companies or govern-ments they address. This is starting to occur in areas such as conflict minerals in companies supply chains. If the pace of corporate action to respect rights does not accelerate, frustration from governments and NGOs may result in additional legislation.

The extractives sector is stepping up, but rules are on the way. Whether they can work to truly engage rogue regimes, and alter their caustic commer-cial partnerships, will be the key to improving human rights, and ultimately profits too. n

Company-community conflict costs dearly

Failure to understand and manage stakeholder expectations has stalled mining projects worth at least $25bn

http://www.ipieca.org

9

ESG

Financing criteria for extractives: a changing dimensionBy Giles Crosse and Matyas HorakEnvironmental, social and governance investment criteria are gradually helping to improve extractive practices on the ground

Historically, environmental, social and governance (ESG) investment criteria grew from the fallout of the 1989 Exxon-Valdez disaster. The massive finan-

cial and environmental costs of the oil spill created a need for better ways to assess risks – environmental, capital or social – in extractives. ESG metrics are now used by investors to assess extractive firms’ activities, in order to protect their investments and highlight business opportunities.

A quarter-century after Exxon-Valdez, the extractive industry’s patchy envi-ronmental record, ongoing high levels of investment risk and historical lack of transparency mean banks and funding agencies are increasingly cautious, and NGOs more watchful.

A Greenpeace land-based oil spill patrol in the Russian Komi and Nenets regions found 204 sites of oil pollution including 20 fresh ones that occurred this year. The total polluted area is 130 hectares. “The process of oil extraction and transportation in Russia remains very dirty: many of the regulations are being violated. As a result waters and forests are polluted with millions of tons of oil,” says Vladimir Chuprov, head of the energy unit at Greenpeace Russia. “The companies must bear strict financial responsibility for the pollution.”

Ethical Corporation | August 2014??? Ethical Corporation | September 2014Financing extractives

CHUNG SUNG-JUN

ESG investment criteria grew from the fallout of Exxon-Valdez

10


Catherine Howarth, chief executive of ShareAction, a UK activist investment NGO, says: “The extractives sector is one that historically has caused shock and horror regarding its environmental, social and ethical impacts, though it is one from which we all benefit.”

ShareAction calls the mining giant Vedanta one of the “most notorious” extraction companies. A ShareAction representative spoke at Vedanta’s AGM on 1 August, to raise the issue of fatalities at the firm with the board of

MAR

IO T

AMA

ESG investments should recognise indigenous rights

ESG principlesEnvironmental criteria set standards for the environmental impacts of a firm’s activities.

Social criteria drive how a company communicates its activities and involves its stakeholders in its plans. This includes developing relationships with indigenous or local communities in extractive activities.

Governance standards refer to the transparency of a company’s financial information and accounting, the methods of involvement of stock and other stakeholders in decisions, plus conflicts of interest and corruption avoidance.

Social criteria include developing relationships with local communities

11


directors. Vedanta’s chief executive agreed at the AGM to a meeting with inves-tors about the topic. “We challenged the board to publish a detailed action plan, in the next six months, to set out how Vedanta will at least reduce by half the level of deaths on the company’s operations,” says Howarth.

“Progress with companies in the extractives sector will be made when persistent engagement is undertaken by investors,” she adds. “We are now planning to reach out to a number of asset managers with holdings in Vedanta to encourage engagement in support of that demand and on the topic in general.”

TransparencyInvestors are starting to perceive strong ESG indicators as a sign of good risk management and strategic planning, as well as evidence that a company has a higher capacity to adapt to change and lower the cost of its capital.

Signatories to the UN Principles for Responsible Investment, established

ADOL

F34

The UN’s PRI guide a quarter of the world’s financial stock

12


in 2005, now represent about a quarter of the world’s total financial assets. The Principles are voluntary, but they create a framework for building ESG into investment decision-making and enable investors to publicly demonstrate commitment to responsible investment.

The Equator Principles (EPs) are another ESG risk management framework. The EPs’ 80 members across 34 countries, including Barclays, Credit Suisse and BNP Paribas, represent more than 70% of international project finance credit in emerging markets.

EPs determine, assess and manage environmental and social risk for projects, offering a minimum standard for due diligence to support respon-sible risk decision-making. They focus on social and community standards and responsibility, including robust standards for indigenous peoples and labour standards.

However, the effective use of ESG risk assessment for extractives invest-ments has been dogged by a lack of transparency in the extractives business. In attempts to address the transparency problem, large-scale lenders such as the European Bank for Reconstruction and Development (EBRD) have become members of the Extractive Industries Transparency Initiative (EITI),

Banking standardsThe European Bank for Reconstruction and Development (EBRD) requires its extractive clients to report annually on their environmental and social performance. Across its portfolio, 95% of projects have fulfilled environmental and social reporting requirements within the past two years.

The World Bank Group committed $1.33bn to the extractives industry in 2013, almost double the amount of 2012. This increase is mostly attributed to a guarantee provided by its Multilateral Investment Guarantee Agency (MIGA), to a project in Ivory Coast on the construction and operation of on- and offshore oil and gas facilities to help Ivory Coast meet its growing energy demand.

MIGA specialises in complex deals in infrastructure and extractive industries, especially those involving project finance and environmental and social considerations. Its 2013 performance standards, encompassing ESG factors, addressed assessment and management of environmental and social risks and impacts, labour and working conditions, resource efficiency and pollution prevention. In addition, MIGA assesses on community, health, safety and security, land acquisition and involuntary resettlement, plus biodiversity conservation and sustainable management of living natural resources, indigenous peoples and cultural heritage.

The International Finance Corporation (IFC), part of the World Bank Group, remains the largest global development institution focused on the private sector. IFC works to its own criteria, slightly different from mainstream ESG standards, which it calls Environmental, Social, and Trade (EST) Standards. These encompass rules on child labour, gender-appropriate labour practices, biodiversity protection and sustainable land management. In 2013, IFC committed 18 investments in the extractive sector totalling $389.3m, mostly in the oil and gas sector.

Equator principles members represent more than 70% of project finance in emerging markets

13

The cost of capital is likely to become higher for dirty companies


which strives to ensure countries’ populations receive fair recom-pense for the value of their coal or gas.

CorruptionAccording to corruption watchdog Transparency International, there is still widespread bribing of foreign officials associated with projects guaranteed by export credit agencies. Frameworks to combat this exist, such as the OECD Action Statement on Bribery and Officially Supported Export Credits, which attempts to deliver transparency, minimise bribery and create a toolkit for governments to reinforce their fight against corruption.

Where regimes are corrupt, or themselves engage in damaging activities, this may undermine extractives firms operating in such places, which can be given false promises on human rights or envi-ronmental safety that regimes fail to meet.

Juan Salazar, associate director for governance and sustain-able investment at F&C Investments, says it’s almost impossible for ESG analysis alone to eliminate investment risk and embed better extractives practice. “Weak governments can be an issue, where their record can prejudice a company operating in that area,” says Salazar. “Our job is to ensure the investor knows and has accurately assessed the risks of firms partnering with governments like these.”

Salazar adds that it’s about more than just reading reports. “When fund managers go to companies, we tag along, we check on their behaviour and corporate governance and attempt to ensure the CEO himself sees the concerns relating to ESG,” he says. “If we can raise awareness in that way and protect the investor, and impact positively, we are working well.” Salazar says the impacts of not managing ESG risk effectively are tangible. “ESG integration is vital to us, and fund managers consider and evaluate the attrac-tiveness of a company on this basis.” He notes that virtually every investor presentation for extractives F&C goes to now has health and safety, plus water on the agenda.

Howarth says ESG risk conscious investment can work, but it can be undermined by investor greenwash. Nonetheless, “the cost of capital is likely to become higher for dirty companies,” she says. “ESG is, bit by bit, edging towards larger influence but it can be one step forwards and two steps back. In the future, I predict firms who fail to address ESG issues will see risks rising for their business and increasing pressure from their investors.

“Over time it will become more perilous to ignore social and environmental impacts. The cost and risk associated with these areas in extractives is huge, and the long-term risk is serious for these industries.” n

URIE

L SI

NAI

Governments can’t always be trusted

14

Water management

The chilling effect of bad water policyBy Sam PhippsExtractive companies are becoming more aware of the impact of their water use and contamination risks

If the social and economic benefits of successful water management are obvious, it is tempting to use one word to sum up the risks of failure: Chile.

The South American country highlights what can go wrong if commercial imperatives dictate water policy.

In 1981 Augusto Pinochet, Chile’s then president, adopted the water code that is still in use today. It grants the state the right to give water use conces-sions to mining and logging companies free of charge and in perpetuity. These could then be bought, leased or sold without any consideration of local needs.

A treaty with Argentina in 1997 subsequently gave foreign mining corpora-tions unlimited access to water and energy in Chile. The result? Severe water shortages that have sparked protests by thousands of people across environ-mental, social and indigenous organisations.

“This wall [of profit] is drying up our basins, it is devastating the water cycles that have sustained our valleys for centuries, it is sowing death in our territories and it must be torn down now,” the protestors wrote in a letter to the president, Sebastián Piñera. They are demanding a repeal of the code and treaty. The Chilean experience might be at one extreme for scale and impact

Severe water shortages have sparked protests by thousands

Ethical Corporation | August 2014??? Ethical Corporation | September 2014Water

ZOONAR PF

15

More than 70% of Anglo American mines are located in water-stressed areas


but the risks of poor water manage-ment are numerous and widespread around the world, analysts say.

ConstraintsNo less than 82% of the global energy sector is exposed to some consid-erable degree of risk on water, and 79% of materials and mining interests, according to CDP-Water 2013. Overall, it found 57% of global companies are exposed in some way. The criteria it considered were: water stress or scarcity, high water prices, flooding, regulatory uncertainty and declining water quality. Companies that take action to manage water strategically are proving better financial performers, analysts say.

Key aspects of water manage-ment include physical (quantity and quality of water supply and infrastruc-ture); regulatory (rules on supply and discharge, legal licence to operate, water pricing); social (impact on local communities, social licence to operate) and reputational.

Extractive sector giant Anglo American, for instance, says more than 70% of its mines are located in water-stressed areas and therefore water is “more important than ever” to its future. Last year the group says it saved 32m cubic metres of water, the equivalent of 13,000 Olympic swimming pools, through Wett, its water efficiency programme tool. The company, which also main-tained a water recycling rate of 67% in 2013, aims to design a water-neutral mine by 2030.

Rusal effortsSimilarly Rusal, the world’s biggest aluminium producer, states its strong commitment to environmental sustainability, particularly with regard to Siberia and the Yenisei river. Aluminium production involves the mining of bauxite, which is initially processed into alumina.

“Water is a principal source of power for Rusal and a key to maintaining technological processes. That is why the company is committed to keeping

ANGL

O AM

ERIC

AN

Anglo American is on the road to a water-neutral mine

16

In 2010 the UN recognised the right to safe and clean drinking water and sanitation as a human right


Water is Rusal’s main source of energy

the rivers, its power and technical suppliers, clean,” a spokesman for Rusal’s environmental department says.

Water used by Rusal in aluminium production fell by 9% in 2012 from 2011 to 44.6m cubic metres. “Over 85% of Rusal’s aluminium is produced using renewable and environmentally friendly hydro-generated electricity that allows the company to aim for the lowest CO2 footprint in the industry,” the spokesman adds.

Rusal’s “safe future strategy” policy, established in 2007, aims to reduce the amount of greenhouse gases produced directly by its plants by half from 1990 levels, and during the first half of this year this target has been almost met. In 2011 Rusal established Yenisei Day, an “ecological marathon” of rubbish collection, sport, art projects and scientific studies aimed at protecting the Yenisei, which is the largest river system flowing into the Arctic. In 2013, in Krasnoyarsk alone, more than 30 tonnes of refuse were collected from the river’s shores by volunteers.

Liquid asset?Claire Cummins, sustainable development consultant at ERM, says under-standing the potentially complex legal and institutional context of any project is vital to successfully managing water-related issues. Just as business is beginning to recognise that understanding access and constraints to water is a critical issue, society in general has also grasped the crucial role of water in achieving development goals. In 2010 the UN recognised the right to safe and clean drinking water and sanitation as a human right.

Managing water related issues needs to include an understanding of how a project’s use and impact on water might affect neighbouring communities as well as any implications at regional, national and international levels. The risks to business from water are not only about securing supply but also managing business impacts from an unhealthy workforce, disenfranchised workers and communities and potentially civil unrest.

“I wouldn’t say there is one best-practice solution because the issues vary so much locally,” Cummins says. “You have to take into account environ-mental and social contexts as well as geopolitical. In general, water is not well

17

Water should be seen as having its own economic value


RON

CHAP

PLE

STOC

K

Tailings ponds can contain contamination

enough covered in the early stages. Leaving it to the impact assessment stage is certainly too late.”

There are clues as to best practice in other sectors. A Global Agenda Council statement on energy security in June 2014 reiterated the Dublin Prin-ciples of 1992 that water should be seen as having its own economic value, ie, become a visible part of the equation to determine cost-effective energy options. For instance, no longer can power plants be evaluated just on fuel costs or capital costs, the council says. Smart planning must take into account a richer model that includes life-cycle costs such as fuel collection, refinement and distribution as well as carbon and water costs.

“When the available supply of water is depleted, energy production becomes irrelevant,” the Global Agenda Council statement says. Cummins argues that the same must apply to water management in other sectors, including extrac-tives, where “a human rights lens” may provide insights into the complexities of being one water user amongst many.

Sometimes a legal licence to mine or quarry will not necessarily be matched by a social licence, because local communities concerned about water pollu-tion will prevent further activity. This can result in severe business interruption and financial loss.

ERM cites one example of a company caught in this kind of impasse after

18

Water management techniquesMining companies can use a range of techniques to comply with regulations and ensure the quality of water leaving mines does not affect users downstream or pollute the environment.

Surrounding surface and groundwater quality should be monitored and various treatment processes can be applied in different combinations, depending on the site.

Steps include:• Recycling water used for processing ore, in order to minimise the volume of water needing

treatment.• Capturing drainage water from precipitation at the mine site via liners and pipes and

directing the water to tailings dams to prevent potentially contaminated water from entering groundwater or flowing off site.

• Intercepting and diverting surface water from entering the mine by the use of dams to cut the potential for water contamination from exposed ore and waste rock.

• Allowing the water to evaporate in ponds to reduce the volume of contaminated water. In dry regions, enough water may be evaporated so that no water needs to be discharged that contains the contaminants at the mine site.

• Installing liners and covers on waste rock and ore piles to cut the potential for contact with precipitation and contamination of groundwater.

• Active treatment is also used frequently to counter acidic mine waters. Passive treatment – taking advantage of natural physical, chemical or biological processes to remove contaminates – is still under development.

Source: US Environmental Protection Agency


identifying huge mineral reserves in a pristine natural environment. It spent about $100m on lease and capital costs but could not begin activities for six years. In another instance, a mine was discharging 230,000 tonnes of tailings per day into a natural river system. This was within legal limits and, despite shareholder pressure, the company felt justified to continue. It declined to name the companies concerned.

However, the shareholders’ ethics committee found this to constitute “grossly unethical behaviour” and disinvested their entire $850m holding in the parent company. The share price fell 5% on the day of the announcement, wiping about $13bn off the company’s market capitalisation.

Key tools that extractive sector companies can use in considering their water use include modelling, human rights risk assessment and multi-stake-holder engagement, particularly in the monitoring and management of an impact assessment, analysts say. “Water is increasingly a high-profile issue with rising levels of international expectation,” Cummins says. n

19

Essay

Managing social risks in the extractive resources sectorBy Ramanie Kunanayagam and Evelyn DietscheHow corporations manage the risks that challenge their operational continuity is premised on the industry’s assessments of, and responses to, the sources and drivers of social risks

Two sustainability agendasOver the past two decades, corporations have predominately assessed and managed social risks on the basis of a sustainability agenda that has been driven from the bottom-up, focusing mainly on mitigating the local level impacts of foreign funded extractive resources projects. In parallel, a second, top-down sustainability agenda has also emerged, evolving from the global debate on ‘resource curse’ and what to do about it. In practice, the social risks that challenge corporations increasingly present a fusion of localised discon-tent, competition between sectors and transformative developments. The first step for bringing these two sustainability agendas closer together is to recapit-ulate how they have evolved.

The bottom-up agendaFrom the mid-1980s, the key policy concern was how countries could attract foreign investment to the extractive resources sector. There was a policy shift away from poorly managed state-owned resources companies and the need

Corporations have predominately focused on mitigating the local level impacts of projects

Ethical Corporation | August 2014??? Ethical Corporation | September 2014Social risks

RCHPHOTO

20

Social risksThe extractive resources sector faces several social risks:

Localised discontent captures situations where communities organise to express their discon-tent over the impacts of individual projects, including concerns over land access, resettlement, potential noise, health, safety hazards and environment degradation. Localised discontent ranges from community protests temporarily challenging the continuity of project development and operation, to violently demonstrated objections before development has commenced. A major point of contention is often whether compensa-tion is commensurate to the impacts suffered.

Competition between sectors arises when extractive resources projects interfere with other natural resources- based economic and social activities, such as agricultural, fishing and forestry. Affected stakeholders depend on these activities for their livelihoods and/or their collec-tive identity and organise to defend their interests against the competing extractive resources sector. Stakeholders may not per se be opposed to the extractive resources sector, but they want their rights to the use of land and/or water resources explicitly recognised before specific extractive projects are being developed and operated. The recognition of existing rights provides them with a basis for negotiating compensation and benefit sharing. It is possible that the formal rights granted by a national-level central public authority to resource developers contradict existing rights, for example because these include non-documented customary rights or because some other, possibly sub-national, public authority has also already allocated rights.

Transformative developments comprise political and social upheavals affecting the extractive resources and other economic sectors. One case involves citizens’ fundamental discontent with government and its public authorities, the policies pursued, and/or the public goods and services provided (or not). Examples include countries such as Indonesia after Suharto, Peru following the downfall of Fujimori, and perhaps those North African and Middle Eastern coun-tries where the aftermath of the ‘Arab Spring’ is unfolding. The second case involves countries where emergence of a sizeable extractive resources sector has the potential to fundamentally change a country’s political economy and internal power balances, including for example the mining sector in Mongolia and the recent hydrocarbon discoveries along the East African coast.

Sovereign disputes are underpinned by international legal question over the sovereignty to allocate rights to explore and exploit extractive resources, including the cases of South Sudan, the Palestinian Territories, Western Sahara, and Namibia under Apartheid.


VOLK

ER G

ÖLLN

ER

Miners and farmers need to find agreement

21

When prices took a downturn, social investments became vulnerable to cost cuts


to overcome severe fiscal challenges at a time when commodity prices were low. In this context, the bottom-up sustainability agenda was prompted by the large-scale projects that were developed with private foreign invest-ment and which soon drew attention to their negative local-level impacts, and it also built on the collective action that the environmental move-ment had already achieved dating back to the late 1960s/early 1970s. Greenpeace, Friends of the Earth and other environmental advocacy groups had successfully pressured govern-ments to consider the environmental and social impacts of the decisions they take on supporting large-scale industrial activities. Alongside this development, corporate social respon-sibility (CSR) emerged as the voluntary and self-regulated industry response to external pressure.

The extractive resources sector’s initial approach to CSR was paternal-istic. Corporations provided comprehensive packages of goods and services to their workers and surrounding local communities. Enclave mining towns became islands of relative prosperity in the midst of poverty. Corporations resumed a quasi-governmental role in providing public goods and services. Examples include the mining towns in the Australian Pilbara, or those main-tained by the Rossing Foundation in Namibia and the Palabora Foundation in South Africa. Similar examples are found throughout Latin America.

The major downside of this approach was its vulnerability to the cyclical nature of the sector. When prices took a downturn, social investments became vulnerable to cost cuts and exposed the unsustainability of these islands and their complete dependence on corporations.

A second CSR approach is philanthropy, typically framed around ‘giving something back to society’ in return for the economic opportunities private entrepreneurs and corporations are able to capture. This approach has its roots in the United States and has involved large-scale grants, making a mark in the space of public policies and research. Following in the tradition

MIC

HEL

PORR

O

Greenpeace campaigns have impacted the oil business

22

The IFC published its first Environmental and Social Performance Standards in 2006


of the Ford Foundation, the Rockefeller Foundation and others, more recent examples include the Gates Foundation, the Vale Foundation, George Soros’ support to the Open Society Institute and other non-governmental organisa-tions, the Aga Khan Foundation, and the Tata Trust. Some companies have replicated this approach on the small-scale, providing donations and sponsor-ships to a wide range of small projects. If at all, this approach addresses social risks only in the short-term.

Equator PrinciplesThe scale of the projects developed in lower income countries with private foreign investment has prompted a departure from these CSR approaches. In the run-up to the World Bank Group’s 50th anniversary in the late 1990s, an influential NGO campaign criticised the Group’s involvement in the sector, prompting first the development of the Equator Principles and several global reporting initiatives and then the development of the so-called ‘Do No Harm’ practices that have since guided corporate standards on assessing and miti-gating local-level project impacts. Evolving from its earlier safeguard policies, the World Bank Group’s International Finance Corporation (IFC) published its first Environmental and Social Performance Standards in 2006. In 2011 these Standards were further strengthened and the Equator Principles also adopted them as their reference point. The IFC Standards are generally recognised as

MAR

IO V

EDDE

R

Philanthropy won’t cut it in the long run

23

Concerns about ‘resource curse’ started to flourish from the mid-1990s


the international benchmark for corpo-rate social performance and continue to be expanded.

The top down agendaThe NGO campaign around the World Bank’s 50th anniversary also fed into the debate about ‘resource curse’, which has evolved in parallel to the bottom up agenda. Broadly speaking, this debate has proposed that coun-tries dependent on the production of extractive resources are more likely to experience negative economic, political and social outcomes. In the early 2000s, the World Bank Group committed to conducting the Extractive Industry Review (EIR) to reconsider its role in supporting extractive resources projects. This review concluded that the Group should not get involved in funding such projects unless host countries could demonstrate a level of ‘good governance’ that would safe-guard them against these negative outcomes.

Concerns about ‘resource curse’ had started to flourish from the mid-1990s. Academic research had produced two strands of arguments. One focused on the macro-economic impacts of an export-oriented extractive resources sector, highlighting challenges such as the volatility of commodity prices and resources revenue streams, the potential negative impacts of an appreciating exchange rate (‘Dutch Disease’), or crowding-out effects harming the non-resources traded sectors. Another strand focused on the political economy of resource-dependent economies, emphasising that negative aggregate outcomes might be derived from the rent-seeking behaviour of politicians and bureaucrats, or may be the result of rentier states, where the sector has negatively shaped countries’ socio- political structures.

Both strands have prompted a search for answers to the question what can be done about ‘resource curse’. The proposition, that ‘good governance’ could provide a safeguard to prevent poor macro-economic performance as

KOKO

PHOT

O

Blessing or curse?

24

Knowing that ‘good governance’ matters is not the same as knowing how to achieve it


well as rent-seeking and rentier states, has led international NGOs and the home governments of international corporations to support the conjecture that more transparency in the sector might lead to better accountability and, therefore, to better government decisions and policies.

Over the past decade, this top-down agenda has gained significant strengths, but it is also facing several challenges. First, knowing that ‘good governance’ matters is not the same as knowing how to achieve it in particular country contexts. Second, increasing transparency is but a first step towards improving accountability and public policies. Third, there is increasing overlap and duplication in the efforts undertaken by international NGOs and development agencies. Fourth, this agenda still has some way to go before it can demonstrate its actual impact.

The industry has started to respond to this agenda with initiatives such as the ICMM’s Resource Endowment Initiative (REI) and the subsequent Mining: Partnerships for Development (MPD) toolkit and other efforts. These have typically looked back to provide an evidence base for discussing occurred impacts. However, the industry has not yet fully grasped how it could more constructively contribute to assessing potential impacts upfront, beyond those that occur at the local project level.

The challenge ahead is ‘adding value’The fusion of localised discontent, competition between sectors and trans-formative developments is increasingly putting pressure on corporations to add more value to host countries’ economies and societies. Corporations have two options. The first option is the developmental approach; it involves stepping in for government and its public agencies to provide public goods and services to local communities and beyond. In a post-paternalistic and beyond-philanthropy world, this approach involves corporations resuming the role of a quasi-development agency seeking to address a wide range of issues while not directly controlling these, as was the case under the pater-nalistic approach.

This approach bears two risks. First, as was the case with the paternalistic approach of the earlier days, corporate budgets are vulnerable to the cyclical nature of the sector, thus posing a sustainability challenge for the corporate

PAUL

A BR

ONST

EIN

Some mining companies are providing public services

25

Enlightened self-interest can help to create shared public value


PAUL

A BR

ONST

EIN

Skills can benefit the local workforce

provision of public goods and services. Second, while this approach can help to address localised discontent, it is unlikely to address the challenges underlying competition between different natural resources sectors and more fundamental discontent with governments, their policies and poor provision of public goods and services. In short, companies cannot act as a substitute where public agencies and policies continue to fail, including capturing the opportunities that come with extractive resources projects.

The alternative option is to adopt a more sustainable, strategic approach to social invest-ment. This option builds on four elements. The first is to conduct strong, front-end loaded baseline and impact assessments that extend beyond the local project impact area to capture and analyse the sources of, and drivers behind, the full range of potential socio-political and socio-economic risks that a project may face. This means that project-level impacts are exam-ined also for wider structural and institutional conditions that could potentially affect impact mitigation and management, and that the relative importance of a project for the regional and/or national economy is also assessed and factored into a project’s social risks and opportunities profile.

The second element is identifying entry points where corporate social invest-ment can add value to areas where public policies authorities are currently not sufficiently addressing the drivers of social risks and opportunities. Corpora-tions may link their social investment to issues where the expressed needs of affected citizens overlap with corporations’ business interests. In short, enlightened self-interest can help to create shared public value. For example, an obvious area for collaborative social investment is skills and enterprise development.

The third element is investing in delivery-oriented development partners staffed with experts who understand the public policy perspective of economic and social development, while at the same time being able to work with corpo-rates and other third parties to deliver concrete beneficial outputs.

Finally, the fourth element is using corporately funded pilot interventions to test the grounds for leveraging and scaling such interventions through more sustainable, collaborative efforts. These would bring together the resources of governments, corporates, and developmentally oriented third parties for long-term solutions to addressing the fusion of localised discontent, competition between sectors and transformative developments – and to better capture the opportunities that the sector entails. n

26

Ethical Corporation | August 2014??? Ethical Corporation | August 2014?? Ethical Corporation | August 2014??? Ethical Corporation | September 2014Vedanta

26

CEO interview: Tom Albanese, Vedanta

A safe pair of handsBy Andrea Spencer-Cooke and Fran van DijkFor Tom Albanese, the new chief executive of diversified British-Indian resources major Vedanta, health and safety is non-negotiable

Vedanta Resources is no mining minnow. Listed on the London Stock Exchange, it is a global, diversified company with operations in India, Sri

Lanka, Zambia, Namibia, South Africa, Liberia, Ireland and Australia, with inter-ests in zinc, lead, silver, copper, iron ore, aluminium, power, oil and gas. As the world’s largest integrated zinc-lead producer, it boasts among its key assets the world’s largest zinc-lead mine, Rampura Agucha. It is also the largest private sector producer of iron ore in India, and owner of the fastest growing energy company in the world – Cairn India.

Booming demandAll this puts Vedanta in a prime position to benefit from booming demand in Asia’s third largest economy: in the first quarter of 2014 alone, according to the Finan-cial Times, India’s GDP expanded by almost 6%. And it is this growing market demand for Vedanta’s products that frames the view of Tom Albanese, incoming chief executive of Vedanta and its India-focused subsidiary Sesa Sterlite, when it comes to the company’s corporate social responsibility (CSR) challenges.

“There is strong, long-term, enduring demand for what we produce,” Albanese says.

Vedanta is the largest private sector producer of iron ore in India

27

Ethical Corporation | August 2014??? Ethical Corporation | September 2014Vedanta

“My long-term vision for Vedanta is to be seen as a leading supplier of natural resources and meet higher levels of global wealth and lifestyle as well as rising expectations about water, community engagement and health and safety. The markets are there for us if we can properly manage quality and meet today’s and future expectations.”

With growth comes visibility, and these expectations are changing along with Vedanta’s expanding role as an industry major. As a global player, Vedanta must play by global stand-ards, and this lies at the heart of Albanese’s approach. Before taking up the reins as Vedanta’s chief executive in April this year, he held the top job at rival mining giant Rio Tinto, and brings to his new job a sound understanding of the extractive industry’s key CSR risks.

Zero toleranceSix months is not long, but already the newcomer is crys-tal-clear on his number one sustainability priority: improving Vedanta’s health, safety and envi-ronment (HSE) record. Albanese doesn’t mince his words. “We have a safety challenge. We have a safety record that we’re not proud of,” he says. “I’ve told the board it is not acceptable. I’ve made it one of my own responsibilities to improve this.”

His strategy? To bring the company into a position “where it is seen to match expected global rather than local norms.” In other words, to align Vedanta with global industry best practice.

Caption neededVedanta Cheat Sheet 2013-14• UK-listed diversified global natural resources major active

in zinc, lead, silver, copper, iron ore, aluminium, power, oil and gas

• Active in Australia, India, Ireland, Liberia, Namibia, South Africa, Sri Lanka an Zambia

• Direct employees 28,000• Subcontractors 60,000• Indirect work opportunities 500,000 (estimated)• Total revenue $12.945bn• Payments to exchequer $5.295bn• Underlying attributable profit $93.4m• Community investments $49m• Founder and Executive Chairman Anil Agarwal

CEO Tom Albanese has high expectations

28


This requires culture change and intense focus from the top, but Albanese is confident Vedanta can live up to its aspiration of “zero harm” and is “very impressed” by his team’s willingness to aim for best practice. Our Journey Towards a Sustainable Future, Vedanta’s Sustain-able Development Report 2013-14, notes a fall in the number of Category 4 and 5 environmental spillages and a 37% reduction in lost-time injury frequency rates over the past four years, so the trend is in the right direction.

But the company definitely has a way to go, especially with rolling out best HSE practices to contractors – a yawning gap in the 2013-14 sustaina-bility report that Albanese is aware of. “It’s where all the mining companies see a higher level of safety problems, when people come in without the training our employees have,” he says.

Vedanta founder and executive chairman Anil Agarwal agrees. In the 2013-14 sustainability report Agarwal writes: “The most important area where we must do better is in our employee and contractor fatal-ities, and both Tom and I share the view that the current fatalities and safety performance need to be improved drastically.”

With some 75% of Vedanta’s effective labour force contracted out, this is a critical key performance indicator for future reports, along with human rights awareness and anti-corruption. Vedanta is currently conducting a gap analysis on compliance with the UN Convention on Human rights to become a signatory.

Building trustAs an extractive company active in developing econo-mies, contributing to local communities is a huge part of Vedanta’s CSR approach. In 2013-14, the company poured some $49m into community development, and here, Albanese is upbeat. “I think we’ve done a very good job on CSR,” he says. “Over 4 million people have been touched by Vedanta’s programmes in education, housing, or women’s education. These are strong CSR programmes, as strong as I’ve seen for any of the mining majors.”

But Vedanta faces fierce criticism from NGOs such as Amnesty Interna-tional and grassroots activists. Indeed an entire website, www.foilvedanta.org,

Contractors need better HSE practices

Strategic Pillars Vedanta’s Business Strategy:• Growth

• Long-term value

• Sustainability

Vedanta’s Sustainability Strategy:• Responsible stewardship

• Building strong relationships

• Adding and sharing value


29

OLI S

CARF

F

Human rights NGOs have criticised Vedanta

is devoted to the company’s alleged misdemeanours, ranging from pollution and illegal mining to human rights abuses and tax evasion. Addressing these concerns head-on and rebuilding corporate reputation is a must if Vedanta wants a place at the best practice table and a clear licence to operate.

Albanese is working on spearheading a cultural shift in the organisation to engage with local communities and earn consent. He says: “Over the last few months, we’ve recognised that we won’t develop until we have the consent of communities. This is an important change and achievement – we’ve had important projects held up because we were not meeting stakeholder expec-tations, so I see a direct contribution to the bottom line.”

He intends to move the company into a place “where we engage more with the global civic community and non-governmental organisations” and build more partnerships. It may be too early for the “trust” word, but Vedanta’s chief executive grasps the nature of the challenge. He says: “In the resources sector there will always be differences of opinion with civil society, so it has to be about how we deal with those relationships. We may not agree all the time, but we have to have mutual respect.”

Towards a sustainable society?Vedanta’s business strategy is to combine growth with long-term value and sustainability. But what does this mean? “To ensure a long-term future of the Group,” the company states, “we aim to grow our reserves and resources at

High returnsVedanta has delivered a total shareholder return of 200% over 10 years

Albanese is working to engage with local communities and earn consent

30


Andrea Spencer-Cooke and Fran van Dijk are Founding Partners of One Stone Advisors, a global sustainable business consultancy and certified B-Corp.

Critical Voices TimelineIn recent years, Vedanta has come under fierce criticism from NGOs for health, safety and environmental violations across its operations and those of subsidiaries.

2010• Amnesty International, Human Rights Watch and ActionAid join celebrities

Bianca Jagger, Michael Palin and Joanna Lumley to campaign against a proposed bauxite mine in Nyamgiri Hills, Orissa, homeland of the Dongria Kondh people.

2011• Amnesty reports toxic mud leaking from red mud ponds linked to

Vedanta’s alumina refinery in Orissa. A report by the Indian Central Pollution Control Board and State Pollution Control Board denies this.

2012• Foil Vedanta reported several pollution incidents relating to fly ash at

Vedanta’s Jharsuguda aluminium complex in Odisha.

2013• The Indian Supreme Court permits resumption of iron ore mining by

Vedanta subsidiary Sesa Goa at Chitradurga in Karnataka, following a 2011 ban on mining in the area for “reckless” and “environmentally irresponsible” operations.

• Foil Vedanta reports gas leak from Vedanta subsidiary Sterlite’s copper smelting plant at Tuticorin, Tamil Nadu. The smelter was shut down following public pressure for breaching emissions limits and reopened two months later.

a faster rate than we deplete them through constant exploration and acqui-sitions.” That kind of limitless growth inherently contradicts most accepted definitions of sustainability.

To his credit, Albanese gets this. He says: “There are limits on how using non-renewable resources can meet the definition of sustainability – the very nature of our business is that we’re extracting something that’s not renewable in anyone’s lifetime. But that being said, we’re also in the business of providing enduring value over a long period. Mining can create sustainable outcomes.”

For Albanese, sustainability is about doing business with a smaller footprint, empowering employees, making sure communities are comfortable with, and benefit from, the company’s presence. “It’s about a sustained effort, looking away from quick wins, a multi-year journey.” n

the ethical corp's study on extractive industries

Investor Relations

rights of indigenous

human rights violations

reformhuman rights

rights abuses

rights councils resolution

eiti work

eiti compliant countries

vedanta2ethical corporation