With a population of 9 million, Kinshasa, capital of the Democratic Republic of Congo, is Africa’s No. 3 city. The war-torn, Francophone nation, despite its mineral riches, remains one of the continent’s poorest places with energy shortfalls across the board. Mining companies have paid the price amid government rationing.
By Joseph Kirschke, News Editor-Mining
In January, Democratic Republic of Congo (DRC) Mining Minister Martin Kabwelulu asked mining companies to cease expansions amid a severe electricity shortfall. “We’ll spend the year trying to address the problem,” he said; as one of Africa’s most unstable, poor and corrupt nations, the DRC is also the world’s top source of cobalt and sixth-largest producer of copper. In Australia, 7,900 miles away, meanwhile, a public-private partnership met the same problem with a different approach: a $23.4 million, 6.7-megawatt solar farm for a Rio Tinto bauxite mine—reducing carbon emissions 1,600 tons annually, while supplying energy to a nearby community.
Since the early 1990s, technology, economic integration and increased lifespans have reconfigured a globe of multiplying borders, while yielding climate change, inequalities, development needs, conflicts, population growth, financial crises and massive urbanization. Investors from private equity firms to philanthropists to banks to other institutions are joining governments and businesses with solutions such as eco-friendly products, ethical supply chains, carbon requirements, and alternative energy on an industrial scale, among many others.
That such investment has bypassed “upstream” mining companies is no surprise: with legacies of community displacement and environmental wreckage, their relatively new CSR is easily—and often—dismissed as “greenwash.” But mining is deeply misunderstood, too: Populated by unassuming, stubborn and hardworking engineers, accountants and miners, its workforce is as inward as its own projects. Theirs is also among the world’s most challenging and dangerous professions—indeed, most of them wouldn’t have it any other way.
But with huge capital and energy-intensive projects, companies are also solid bets for a new wave of investors banking on sustainability—crucial for the frontier markets miners are exploring faster than ever in a world where 1.2 billion survive on less than $1.25 day.
People like Gavin Power, deputy director of the U.N. Global Compact (UNGC), the world’s leading international framework encouraging business sustainability, sees potential for transformational change. “I believe the mining industry has an historic opportunity to be seen as the solution to global problems,” he said. “It covers sustainability writ large: labor, environment, anti-corruption—it’s all-encompassing.”
Such assertions are bolstered by social impact entrepreneurs, including Matt Bannick, who maintains that change-oriented investment should be industry focused. “Our experience is impact investors can massively increase the number of lives they touch,” he wrote in The Stanford Social Innovation Review. “For example, your company may be the first into a market where structures are weak, talent scarce and customers suspicious of your offering, while your trial-and-error efforts may develop entry of health care providers that can touch tens of millions of lives.”
For mining companies, this new, largely unrealized, investment stream offers massive room for growth, according to Power, whose UNGC partners with the London-based U.N. Principles for Responsible Investment (UNPRI) consisting of 1,250 signatories with more than $34 trillion in assets under management, 20% of global capital markets. “It’s a win-win-win,” said Power.
Juan Salazar, associate director for the sustainability and governance investment team at F&C Asset Management, agreed. “The potential for mining companies for lifting countries out of the poverty trap is there,” he said. “The issue is how to make it happen.”
Investors and Investment
Just as CSR and sustainability are evolving so, too, is the domain of sustainable or “responsible” investing, which, according to the UNPRI, seeks to “integrate consideration of environmental, social, and governance (ESG) issues into investment decision-making and ownership practices and thereby improve long-term returns.”
Global institutions have been responding. In Q4 2014, most notably, the Sustainable Stock Exchanges Initiative, a collaboration encompassing the UNPRI, the UNGC, the U.N. Conference on Trade and Development and the U.N. Environment Program Finance Initiative will be hosting its premiere Sustainable Stock Exchanges Global Dialogue to enhance regulatory initiatives and new listing rules. Nine partnering exchanges include Euronext, the New York Stock Exchange (NYSE), the NASAQ and the Johannesburg Stock Exchange, among others.
Socially Responsible Investment (SRI) is a widely recognized approach using negative screening to avoid investment in harmful companies and encourage CSR. Lisa Woll, CEO of the Forum for Sustainable and Responsible Investment (US SIF), an association promoting ESG investment, said she seeks to broaden the “community investment” definition to “engage a wider range of investors” beyond SRI’s current parameters.
It’s a diverse field. Investors include private foundations like grant-making organizations; large scale financial institutions like J.P. Morgan and Citigroup; private wealth managers; commercial banks; retirement fund managers; boutique investment firms; and companies and community development finance institutions.
Top players are sovereign wealth funds-and similar state-administered entities, which, by Q1 2013, controlled $5.6 trillion worldwide, 57% of which came from natural resources, according to the McKinsey Global Institute. These include Norway’s $800 billion government pension fund, the world’s largest, along with CalPERS, California’s teachers’ pension fund, APG, PGGM, Switzerland’s $474 billion Central Bank and New Zealand’s Superannuation Fund. These are usually well-placed for long-term, counter-cyclical investments, aided by state backing, allowing them access to broader, cheaper capital.
Religious bodies in Europe and the U.S. have long since joined the movement: This much was clear when more than a dozen mining CEOs from companies, including top miners Rio Tinto and Newmont Mining Corp. quietly met Vatican officials last year for a press conference-free “day of reflection.” Underscoring the event was a report citing religious groups as the No. 3 investors in global stock markets with “remedial agent” abilities.
The shorter-term “impact investing” sector, meanwhile, is gaining ground: J.P. Morgan and the Global Impact Investing Network (GIIN), a leading coordinating body for social impact investing, for instance, forecast the sector to grow between $400 billion and $1 trillion in developing nations by 2022. But “it appears the percentage is quite modest,” noted Bannick. “These estimates are based on activity of a handful of leading players doing early-stage deals.”
Impact investment, also known as social investment or sustainable investment, is often defined as “actively placing capital in businesses and funds that generate social and or environmental good and a range of returns, from principal to above market, to the investor,” according to the GIIN. This investment is similar to, but separate from, the more established SRI.
Impact investing defies traditional investment philosophies. “The old binary system—the belief that for-profit investment could only maximize return and social purpose could be pursued through charity is breaking down,” according to Investing for Impact, a report by the Parthenon Group, a consulting firm. “Meanwhile the industry is developing globally and the financial products available are diversifying,” added the study.
Moreover, “as more impact funds demonstrate returns from high impact, more funds will look to invest in this sector; this will attract more funds, increasing the impact. By pioneering in new managers and investment areas, investors with a risk appetite can accelerate this and seed the next generation of impact funds that can be accessible to financial first investors.”
But impact investing can mean different things to different people: Some investors, like philanthropists, for example, see impact investing as providing sustainable, re-investable capital flows and be willing to not receive a return. Other investors, however, may accept low returns in exchange for major social or environmental benefits—as opposed to others seeking strong returns.
Still, “what we’re finding is it’s difficult for funders and investors to understand how mining works,” said Assheton Carter, a lead adviser at Equitable Origin, a stakeholder-based social and environmental certification, certificate trading and eco-label system for extractives exploration and production. “They won’t say no—but they won’t say yes; you can’t rely on philanthropists in northern California or Manhattan—we have to look at impact of scale.”
Global Initiatives in a Time of Scarcity
It seems a lot of mining companies need all the help they can get, amid record write-downs and a full $30 billion of impairments recorded in Q4 2012. For the first time in 10 years, the Toronto Stock Exchange (TSX) witnessed no initial public offerings (IPOs) for Q1 2013, while Australian stock exchange financing fell precipitously, too. Most of the world’s mining companies are listed on both exchanges; since 2009, Canadian-based companies have represented 40% of the world’s exploration expenditures, vulnerable when their activities cease after supply exceeds the demand for mineral commodities.
This slowdown presents the basis for strategies advocated by the World Economic Forum (WEF) a nonprofit alliance of business, political, academic, and other stakeholders to shape international, regional and industry agendas. “Mining and Metals in a Sustainable World,” and “Toward a Circular Economy” are its initiatives advocating renewable energy and recycling in the context of mineral extraction and use amid an industry where project energy costs represent up to 60% of expenditures.
Wind and solar technologies, for example “require significantly more steel than any other energy sources,” noted the Swiss-based WEF in its collaboration with global management consulting firm Accenture. “Greater use of hydrogen cells and nuclear power means increased demand for metal catalysts such as zinc and platinum. Rare earths metals play a key role in clean technologies and are likely to experience significantly higher demand, though in much smaller volumes compared to core metals and commodities.”
Other world bodies advance similar agendas. Given that 98% of global population growth, forecast to increase to 9 billion from 6.9 billion in the next 30 years, will happen in developing nations, the World Business Council for Sustainable Development (WBCSD) has developed a Vision 2050. In it, a multistakeholder cross-industry alliance is progressing toward “eco-friendly” solutions—energy efficiency, along with increased agricultural output, halting deforestation and halving carbon emissions, among others.
Citing Organization for Economic Cooperation and Development (OECD) infrastructure investment requirements doubling to $325 billion through 2015, the WBCSD also cited Clean Edge Research data noting that the renewable energy market will increase to $325 billion by 2019, while $13 trillion in global investments will be necessary for transmission upgrades and distribution networks by 2030. Last year, the WBCSD followed up with Action2020 to establish a business agenda and priority framework.
Bank of England Gov. Mark Carney didn’t address mining specifically at May’s “Inclusive Capitalism Initiative” in London, when he defined its mission, but he may as well have. Since its 2011 foundation, the nonprofit ICI has addressed: “the dislocations caused by developments in capitalism, worldwide increases in inequality, large-scale financial scandals and fraying trust in business, historically high and persistent unemployment and short-term approaches to managing companies.”
Carney, also chair of the G20 Financial Stability Board, added, “unchecked market fundamentalism can devour the social capital essential for the dynamism of capitalism itself; individuals and their firms must have a sense of their responsibilities.”
All these speak to an increasingly acknowledged trend of “shared value” first championed by Harvard’s Michael Porter. “Societal needs, not just economic needs, define markets; social harms frequently create internal costs for firms, such as wasted energy or raw materials, costly accidents and the need for remedial training to compensate for inadequacies,” he wrote in Harvard Business Review. “Addressing harms does not raise costs for firms, because they can innovate through new technologies, methods, and management—and increase productivity.”
Or by “building supportive industry clusters,” investment can help sectors like mining,“ as firms have moved disparate activities to more and more locations they often lost touch with any location,” he added. “Indeed, many companies no longer recognize a home, but see themselves as ‘global’ companies.”
Earning and maintaining a critical “Social License to Operate (SLTO),” is a top challenge for miners, meanwhile, is crucial to promoting such value, said Ernst & Young. “The sector’s understanding of shared value is in its infancy, suggesting a real opportunity for the SLTO,” said the professional services firm in its 2013-2014 Business Risks in Mining and Metals Report. Through increased employment and other initiatives, “companies can find better ways to demonstrate shared value that draws attention to the benefits of their initiative,” alongside “effective management of layoffs.”
BHP Billiton and Mitsubishi Alliance have this in mind by allowing new and current workers cross-operational, broad-based training opportunities, awarding the Australian Institute of Management the ability to offer 140 training courses focused on customer service, business communication and project management. Elsewhere in Australia, BHP Iron Ore recruits indigenous drivers in the ore-prolific Pilbara region, while Rio Tinto is one of the largest private-sector employers of indigenous peoples in the entire country.
“Note that building local employment and supply capability in an economic frontier is arguably the most difficult thing that an extractive company is faced with,” Bruce Harvey, consultant and former global practice leader for communities at Rio Tinto, wrote in the journal Extractive Industries and Society in Q4 2013. “Hence it usually gets short shrift and a sports center is built instead.”
Walking on Water
South Africa, despite being home to the continent’s top mining industry and its leading economy, has seen 94 protests over lack of basic services since Q1 2014. Here, too, Anglo’s 10-year Group Water Strategy is transforming coal mine wastewater into drinkable water for three communities of 80,000 people 75 miles east of Johannesburg. So successful is the reverse-osmosis technology that the Witbank is doubling in size as its model is replicated elsewhere in the country by BHP Billiton plc and Glencore Xstrata.
Savings are key too. Anglo’s water strategy project requires water action plans to provide 14% in-water usage by 2020; company officials, however, said they are ahead of schedule with 20% savings in six years. To date, the miner has conserved 35 million cubic meters of water, including a savings of $85 million.
Other water-related endeavors include a $100 million desalinization plant in Chile and a coalition with South African officials and companies to supply bulk water to communities; 12% of eMahaleni’s drinking water needs, Anglo added, are already being met. In all, Anglo seeks to run water-neutral mines by 2030, according to Richard Garner, Anglo’s group water manager. “The alternative is not worth contemplating, that without water and energy companies—like communities—can wither and die,” he wrote in an article in The Guardian’s Sustainable Business partner zone, a section of the newspaper.
Accenture said such programs have a bright future in a potential “water market” on a planet where 98% of water supplies are saline at a time when agriculture alone accounts for up to 80% of water usage and can raise crop yields between 100 and 400%. “But it is often too expensive for small-scale farmers in developing countries,” added the management consulting firm in Q3 2014.
Other mining countries are ripe for more such investment. Despite being one of the world’s fastest-growing economies and projected to double by 2024, Mongolia is still extremely impoverished. Although hosting the multibillion-dollar Oyu Tolgoi copper-gold project—one of the world’s biggest mines—U.N. Development Program (UNDP) officials report 30% of the desert nation’s provinces are “well below the international norm that defines absolute water scarcity;” half the population has no access to clean water.
“Technology is moving fast and will provide new solutions to the water problem,” Accenture added. “Basic minerals companies should work with technology providers, equipment vendors, neighboring companies, universities and communities to most effectively tackle the problem.”
In a South African public-private partnership, Anglo American is seeking to supply bulk water to communities amid plans to operate water-neutral mines by 2030, said Richard Garner, Anglo’s group water manager. “The alternative is not worth contemplating, that without water and energy companies—like communities—can wither and die,” he said.
Industries, Linkages and Engines
Mining industries in countries like South Africa closely linked to manufacturing, present transformational opportunities for investors through “spinoffs,” according to the World Bank’s 2014 Contribution of the Mining Sector to Socioeconomic and Human Development report. Mining allows “big gains in value-added employment because many of the skills needed by companies selling goods and services to mining operations—such as machine repair and servicing, tubing, construction, industrial clothing, and catering—are easily transferrable to other industries.”
Chile, whose mining-heavy economy is one of Latin America’s most prosperous, presents similar opportunities in a country where 10% of the workforce—720,000 jobs—are tied to goods and services purchased by mining and mining-related sectors. In 2011, Santiago’s Mining Ministry joined 250 Chilean businesses to help them become world-class suppliers within five years. Through $54 billion in investment between 2012 and 2015, the World Bank added, the 709,000 jobs serving the mining service industry is expected to rise “substantially.”
The same World Bank report also noted, whether voluntarily or through regulatory mandates, mining operations have changed from “enclave statuses” to being “engines of growth.” This often depends on a country’s geographic size, number of mines “and ability to develop regional or sub-regional markets, which means cooperation on trade barriers, infrastructure and the development of training and educational institutions,” the report said. “These are challenges not likely to succeed without socioeconomic reforms—still in some countries, the success of mining and related industries might lead to reform, rather than the other way around.”
Mining companies in these contexts are filling an important social void—in this case, the long shadows of Apartheid rule, which linger 20 years on. “By not holding businesses that pollute and wastewater to account, government is not protecting water as a basic right,” said South Africa’s Human Rights Commission in a Q1 2014 statement. “People who cannot afford to pay for water are denied access and their bodies bear the cost through illness linked to chemical pollution.”
Not unlike the notions of CSR and sustainability themselves, terminology surrounding social or community investment is similarly confusing—including notions of “philanthropy,” “charitable giving,” “CSR” and “community programs” and “social contributions,” according to experts. “A gradual shift is occurring as companies move from pure philanthropy toward strategic social investments that create value for both society and business,” says Neil Morris, a South Africa partner for auditing firm KPMG.
“Corporate funds are more likely to be invested in the long term, and society will benefit from the skills and expertise of a company investing in a manner related to its core interests,” added Morris.
Development and Transparency
International development aid and its delivery have long been problematic. New language by the U.S. Agency for International Development (USAID) acknowledged shortcomings in global aid delivery. “We have to pursue a more strategic focused and results-oriented approach, from strengthening our policy and budget management to enacting a world-class evaluation policy,” the organization said amid a new “Local Sustainability” initiative. Governments like South Africa’s, with a new Draft National Strategy on Sustainable Development urging “a more radical redefinition of our development path,” is embedding such language, too.
This is crucial, according to U.K. and Africa-based nongovernmental organizations (NGOs), reporting assistance is enabling to obscure $60 billion of “sustained looting” of the African continent by way of climate change mitigation, tax avoidance and profit by multinationals. In all, sub-Saharan Africa reportedly gets $134 billion in loans, foreign investment and development aid annually, while $192 billion leaves the region; figures by Global Financial Integrity (GFI), meanwhile, indicate Africa’s such illegal outflows were nearly 50% higher than the Global South’s average between 2002 and 2011.
More recently, in a Q2 2014 report, GFI reported African nations are losing up to 12.7% of national revenue from dubious trade practices and illicit outflows totaling $542 billion—80% from what it called “trade misinvoicing,” wherein companies deliberately change import and export prices to beat taxes. The Washington-based nonprofits study examined five countries over 10 years.
This offers more potential for investors seeking impact. “The most basic rule of efficient markets is transparency,” Richard Murphy, an accountant and founder of the Tax Justice Network told IBTimes UK. “Opaque markets misallocate resources, result in inefficient decisions and lead to corruption.”
Across-the-board investment in frameworks, standards, institutions and coalitions, such as the Extractive Industries Transparency Institute (EITI), Publish What You Pay (PWYP) and the London-based International Council on Mining and Minerals (ICMM), and many other transparency-based NGOs, can enhance dialogue opportunities.
Transparency in bourses are also overdue, according to a May report by Christian Aid revealing a “black hole” in London’s FTSE 100. With 29,891 subsidiaries, the advocacy organization reported, only 26% of governments and investors can understand their worth via freely available information. Further data points to heavy use of “secrecy jurisdiction” tax havens by 90% of the units. In their Losing Out report, Christian Aid and Sierra Leone’s Budget Advocacy Network claimed six foreign mining companies were given $150 million in 2012 sales tax exemptions—whereas government health services that year got $25.7 million; education, $35.2 million; roads, $91.6 million; and farming $30.2 million.
Overall, Foreign Direct Investment (FDI) coupled with foreign exchange earnings have also proven a strong trigger for companies to enhance credit ratings and, in turn, draw long-term funding from foreign lenders. This is significant, noted consultancy firm Oxford Policy Management (OPM) for countries “building from a low base” like Tanzania from 1999 to 2006 or even titans like Brazil where investments by Rio Tinto-based Vale S.A., the No. 3 miner, represented 5% of the national total in 2010.
Basic mechanisms for international aid delivery have also been strongly criticized. Micro-credits for farmers in sub-Saharan Africa, for instance, have been singled out as disasters for overly encouraging consumption spending. “Many of the poorest individuals have been forced to pay off their microloan by selling off their household assets, borrowing from friends and family, as well as taking out new microloans to repay old ones,” wrote Milford Bateman, a development consultant, in The London Guardian.
Anglo’s New Development Angle
Again, companies like Anglo American have entered the breach through enterprise development, according to the company Global Lead for Socio-Economic Development Christian Spano. “In the countries where we work, our experience is entrepreneurs are more than business people looking to make a profit. “Very often they are also driven by a vision to promote social progress, create jobs, or deliver innovative products and services;” indeed, mining operations themselves are high-technology enterprises.
To this end, Anglo’s program has backed more than 48,000 small businesses and entrepreneurs, distributed more than $100 million, and supported more than 76,000 jobs beginning in South Africa in 1989 and expanding into Chile, Botswana, Brazil and further within South Africa by 2012, he added.
As the program “evolved beyond supply chains, expanding the scheme to a wider pool of small and medium enterprises was an important step,” he said. “Focusing too narrowly on companies already poised to develop as a result of the sector’s growth would only perpetuate inequalities, which could increase tension and affect economic growth.”
In 2006, the model was exported to Chile, creating “Emerge,” an enterprise development program supporting small- and medium-size businesses outside the supply chain. “Emerge provides access to capital, but more importantly focuses on mentoring and business advice,” noted Spano, “giving entrepreneurs the knowledge base on which to grow,” with a three-tier approach—matching entrepreneurial maturity while allowing them to graduate along a development scale.
As evolution continued, by early 2014, Zimele, in turn, launched Godisa and Sebenza funds via a partnership with the South African government, according to Spano, expanding work to non-mining areas. In the works, meantime, is a concept to provide capital to customized houses to generate an income stream covering the property’s cost; Anglo is also developing a concept allowing SMEs to access finance to trade in low-carbon technology while using a carbon credit repayment system.
In Mongolia, Rio Tinto-owned Oyu Tolgoi has developed a similar “Mongolia First” program wherein local contractors are managing five of 12 major infrastructure programs under way in the South Gobi region, while Oyu Tolgoi has more than 500 active Mongolian suppliers.
Anglo American plc has backed more than 48,000 private enterprises and entrepreneurs by distributing more than $100 million while supporting 76,000 jobs beginning in South Africa in 1989 and expanding into Chile, Botswana, and Brazil through 2012, says Global Lead for Socio-Economic Development Christian Spano.
Bridging Two Worlds
Positive vehicles to boost mining reform itself are not new either. The World Bank, notably, has contributed $1.4 billion to supporting mining sector reform from 1988 to 2012; owing to extreme poverty, African nations have received 70% of funds totaling $246 million via eight projects, the Washington-based institution has reported. Two projects in East Asia and South Asia have received commitments of $26.3 million and $92 million, respectively, while two new African projects were approved in 2012 totaling $50 million.
Discrepancies between extractive sector revenues and foreign aid, naturally, are massive in scale. In 2008, oil and mineral exports from Asia, Africa and Latin America tallied at $1 trillion—nine times the value of international development assistance to the same regions at $128.6 billion. Yet some countries, especially India, are nowhere near their mining potential to begin with, contributing just 1.2% to the economy, according to the Federation of Indian Chambers of Commerce and Industry, which estimates the sector could add up to $250 billion in GDP by 2025 with proper framework among the highest mining taxes globally.
In such cases, “greater integration of mining, through linkages, holds promise for increasing mining’s contribution to national economies at each stage of the value chain,” agreed a 2012 report by the ICMM. “The extent and nature of these contributions, however, will vary depending on country-specific circumstances.”
Just as miners tap innovation and use creativity to access ore grades, so too, they are delivering practical community assistance with an ear to the ground. The Canadian Institute of Mining, Metallurgy and Petroleum’s (CIM) Toward Sustainable Mining (TSM) awards, for example, honored Iamgold for alleviating food and water scarcity near its Essakane operation in the Saharan Desert with a solar-powered well and water storage system for local villagers; the infrastructure also boosted incomes while reducing reliance on gold panning for money. Altogether, the Toronto miner spent four times more on local goods and services at its communities than Canadian International Development Agency (CIDA) gave Burkina Faso for its 2011-2012 fiscal year.
“It’s one thing for a mining company to show up in a country and buy a whole lot of equipment from one supplier who becomes very wealthy,” Wilson Prichard, a political science professor at the University of Toronto, told Canada’s Financial Post in Q1 2014. “It’s a very different thing for a mining company to build business models that can be sustained beyond the life of the mines;” in June, Quebec’s Mining Association (QAM) also adopted the TSM initiative.
According to Adrienne Baker, director at Energy and Canadian Clean Conference, there are nearly a dozen factors driving electricity-oriented innovation like that used in Australia’s Western Cape York Peninsula and the arid plains of the Sahara. These include carbon emissions legislation via carbon taxes—in place or proposed in South Africa, Brazil and Canada.
Overall, wind and solar power investments will represent 60% of energy investments by 2022; all these are being driven by positive examples worldwide. In the past decade, Rio Tinto, for instance, has sought to lower carbon intensity by 6%.
From Risks to Opportunities
Paul O’Connor, a J.P. Morgan executive director of global risk assessment, said a paradigm shift is under way: investors, attuned to risk benefits of sustainability, moreover, see long-term benefits as well. “We want clients that demonstrate the right commitment and ability to manage risks,” he said during a London conference organized by Ethical Corp., a business intelligence firm. “This might be environmental management, industrial safety, resource efficiency or biodiversity.”
“We try to sensitize people to the importance of communication,” he added. “A lot of investor groups are using ESG as a differentiator, trying to actively select investee management. Where our emerging market clients are concerned, they need to be especially aware of this—investor-oriented groups could screen them out if they’re not careful about communications.”
And as they grow within the CSR space, mining, oil and gas companies are becoming a sounder investment than ever, added Salazar. “If there’s one industry that’s come a long way, its extractives,” he noted. “In managing sustainability risks, the extractives can be more tangible—they’ve come a long way.”
It’s a level of awareness, he added, that continues spanning across portfolios on a massive scale. “The range is vast of pension funds and investors aware of the impacts of ESG performance,” said Salazar, whose London-based firm handles $134 billion in assets under management. “It’s piqued the attention of the public, the press, companies—and investors know this is out there.”
The numbers resound across sectors. An 18-year Harvard Business School study, for instance, reported companies with high sustainability enjoyed lower volatility and returns 4.8% higher than their less CSR-oriented counterparts. The survey, issued in 2012, showed superior performance in returns on equity and returns on assets; a similar analysis by Deutsche Bank Climate Advisors revealed similar results among risk-adjusted returns at the securities level.
An Investor Listing Standards Proposal with reporting requirements for stock exchanges, meanwhile, has already been submitted to the 60-member World Federation of Exchanges; developed by a multistakeholder partnering of stock exchanges and UNPRI signatories, it is paving the way for a framework including CSR reporting standards for stock exchanges.
This underscores a broad push for “integrated reporting,” linking a company’s ESG performance in the context of the financial context in which it operates. The nonprofit Global Reporting Initiative’s (GRI) standards have been a mainstay among sustainability reporting, used by 4,000 entities from 60 countries. GRI Guidelines apply to corporations, public agencies, small businesses, industry associations and NGOs, among others.
A newly created Sustainability Accounting Standards Board, meanwhile, is establishing standards for integrated reporting and an understanding of relevant issues to 35,000 publicly listed companies in the U.S.
Salazar noted that extractives companies have made great progress in their own sustainability reporting. “They provide clarity on material risks, and that’s very helpful. Reports used to be huge; now they are concise with more information on company websites. They are addressing issues we like companies to address.”
O’Connor agreed, but noted gaps exist. “There is a real spectrum of quality. We see everything from really good, indepth, assured, relevant, accurate reporting, using good metrics and sophisticated analytics right down to about zero;” Corporate Knights Capital has reported seven key indicators as most prevalent among cross-sector publicly listed companies: employee turnover, greenhouse gases, energy, lost-time injury rates, payroll, waste and water.
It’s a space that has been filled many times over in other arenas. “Regulations, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to control systems to supply chains to political stability to natural disasters,” noted Harvard Business Review. “However, in the absence of an agreement on how to define and measure reputational risk, it has been ignored.”
Lonmin plc, operator of a project where 34 were killed in South Africa’s notorious 2012 Marikana massacre, encapsulated the issue well in an ongoing dialogue with the Bench Marks Foundation, an NGO. “Sustainability reporting is not an exact science and has changed a great deal in the last decade as have environmental and other standards,” the London-based platinum miner said in a Q4 2013 statement.
“Companies must engage not only the demands of their shareholders, all of whom have competing agendas,” noted E&Y. Moreover, “balanced reporting that ensures the right long-term messages reach the long-term investors and attract them to the share register is required—while not causing the more fickle cyclical investor to rush for the exits.”
Professional services firm KPMG added that specifics need reporting attention. “Access to fresh produce, involvement in community health, increased levels of community education—all may also have commercial implications for the company where these factors impact on employee health and productivity,” KPMG said in its 2013 Community Investment Dividend report.
“They’re doing lots of this already,” said Gus MacFarlane, director of advisory services for U.K.-based risk advisory firm Maplecroft, “but it’s not being connected well internally or externally; by identifying risk and how you’re managing it you can give mainstream investors comfort.”
The International Integrated Reporting Council (IIRC), meanwhile, issued its framework in Q4 2013, developed with 140 businesses and investors worldwide, to establish guiding principles and elements governing overall content of an integrated report, while explaining fundamental underpinning concepts. “Integrated reporting on integrated thinking is providing a new paradigm for better management,” explained Johannesburg-based IIRC Senior Project Manager Ian Jameson.
“If you connect the reasons why you’re investing in the community to a business benefit, you’re anchoring it,” said KPMG Australia partner Chi Woo. “You’re anchoring the focus of the investment to the business and you’re then articulating to the external audience why you’re doing it.”
Yet F&C is hearing from “companies that are being asked to disclose different things for different investors, so it’s very challenging for them to come up with reporting that caters to the needs of everyone,” added Salazar. “There needs to be convergence on reporting standards—we are concerned the frameworks are battling against each other in playing to their own strengths, and they run the risk of confusing companies. I don’t see the convergence happening, and that doesn’t bode well for the progress that’s already taken place.”
To this end, “we could use more and more investors raising these issues,” added Salazar.
No. 1 miner BHP Billiton, which reports having spent $1.5 billion in community programs via charitable giving, local programs and in-house corporate charities, provides an online portal of 40 case studies. These include contributions to training and education, economic development, environment, health, indigenous communities and disaster relief, and range from job creation in South Africa to biodiversity programs in Australia to establishment of a girls’ school in Pakistan.
Private equity firms will surely be impacted should the European Parliament revise the EU’s Shareholder Rights Directive next year, mandating EU institutional investors engage companies with sustainability initiatives. Other countries have seen similar regulations afoot, like Taiwan where, since 2008, all publicly listed firms have been required to reveal information in areas including commitments to society and community, environmental protection and consumer rights. In other nations like Belgium, governments require pension fund managers to disclose the degree environmental, social or ethical considerations directly factor into investment decisions.
One of the biggest new challenges is to “make sure a risk management framework exists around human rights, climate change and water management,” noted Salazar. “Investors have started to ask these questions.”
With Africa’s official 2009 oil, gas and minerals exports equaling five times international donor aid, others, like the Adam Smith Institute, argue extractives can contribute some $1 trillion in annual development aid. “This can be done by removing barriers to investment, and by creating the environment conducive to it,” said the U.K. think tank, “or by enabling the governments to tap new revenues from particular sectors.”
Indeed, when it comes to resource-heavy nations, “linkages cannot be forced upon the mining sector without enabling business conditions,” noted the World Bank, including power access, transportation infrastructure, human and financial capital, economies of scale, and outreach or technical assistance programs. As the No. 1 copper miner and one of Latin America’s fastest-growing nations, the Oil, Gas and Mining Unit Working Paper cited Chile as the “most appropriate” example where “public-private cooperation is required to kick start the process.”
Past, Present, Future
Much more needs to be done, however. The current SRI reporting system, in particular, is deeply flawed, according to Catherine Coumans, a research coordinator at Mining Watch Canada. “Shareholder proposals have been put forward without anyone from the SRI firm setting foot in the community, typically based on desk research from NGOs engaged with communities in struggle; SRI research firms and dialogue with the mining company in question,” Coumans wrote in Business and Human Rights (Edward Elgar Publishing Inc., 2012).
“Recently, SRI firms have started to make limited field visits but have not yet changed the essential nature of the resolutions or the lack of convergence with community goals,” she added. “It is important SRI firms understand the history of struggle and aims of a community to not propose action that may undermine community agency in pursuit of their own goals; SRI firms need to recognize if a community conflict is focused on stopping operations, it is unlikely the SRI firm’s resolution can be aligned with community objectives.”
Julie Tanner, assistant director of SRI for Christian Brothers Investment Services Inc., an investment management firm representing socially responsible investment for Catholic institutions with $5 billion in assets under management, noted, “there’s a lot more engagement that should be going on between companies and investors; In a lot of cases, the companies don’t have time for stakeholder engagement—it’s a very young area.”
Responsible investing, however, remains a priority for the future. “There are enormous costs in ignoring these issues,” added Power. “And stakeholders are not expecting it, they’re demanding it.”
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