Explosions that damaged a 40,000-year-old Aboriginal heritage site at a Rio Tinto Group iron ore mine in Australia are focusing investor concern on the growing reputational risk companies face from social issues, widening the advocacy battlefront beyond climate change and governance.
The world’s no. 2 miner is being challenged by shareholders over its decision to carry out new blasting on May 24 for production at its Brockman 4 mine in Western Australia. While the explosions were authorized under a 2013 decision by the state government, the incident has sparked widespread controversy.
“It raises the question about, what is legal versus what is right? And that’s something that companies and also the investment community is under increasing pressure to consider,” said Danielle Welsh-Rose, ESG investment director for Asia-Pacific at Aberdeen Standard Investments, which holds Rio shares and manages about $645 billion in global assets.
“Investors are already more focused on human rights and social issues than they have been in the past, so there’s definitely scope for something like this to trigger an investor response,” she said.
They also are wielding increasing influence in markets. Norway’s $1 trillion wealth fund is doubling down in its responsible investment strategy, recently excluding Brazilian iron-ore giant Vale SA in line with its rules on environmental damage, and utility Eletrobras SA, citing the risk of human rights violations, including increased pressure on indigenous lands.
Aberdeen has sought more information from Rio on the incident at Juukan Gorge in the Pilbara region. Two damaged rock-shelters at the site may have been occupied by humans as long as 46,000 years ago, according to the Australian Archaeological Association Inc.
Rio was reviewing its plans for the Juukan Gorge and will launch a comprehensive review of its broader heritage approach, iron ore CEO Chris Salisbury said Sunday, apologizing to the traditional landowners, the Puutu Kunti Kurrama and Pinikura Aboriginal Corporation. “We are sorry for the distress we have caused,” he said.
The landowners, who recognized Rio had complied with its legal obligations, said May 25 that they were first advised on May 15 about the blasting.
The company said May 27 it also was sorry that the recently expressed concerns of the traditional owners had not arisen through the engagements that had taken place over many years under the agreement that governs its operations on their country.
Rio had been informed on numerous occasions of the land’s importance and the community’s preference for keeping the shelters intact, the PKKPAC said in a statement May 30.
Debby Blakey, CEO of the Health Employees Superannuation Trust Australia, an industry pension fund that manages more than A$55 billion ($37 billion), has also written to the London-based producer seeking further explanation.
“If we show our dismay, and show the company, and expect a higher bar — and quite honestly expect them to do what they say they’re going to do in terms of their reconciliation action plan themselves — I think other companies will be more aware,” Blakey said. “Just because something is legal, doesn’t make it right.”
The firepower of socially conscious shareholders is growing. Almost $31 trillion was allocated to sustainable investing strategies in five key markets at the start of 2018, about a third higher than in 2016, according to a report by the Global Sustainable Investment Alliance.
So-called impact funds, which seek to actively generate social and environmental outcomes alongside a financial return, hold about $500 billion globally, the Global Impact Investing Network said in a report last year.
It’s likely investor groups will use votes against company boards at annual meetings, or table resolutions calling for action — familiar tactics used to articulate climate concerns — to highlight social issues, Aberdeen’s Welsh-Rose said.
“The reputation risk is something that is increasing now compared to how it was, I think because of that real collaborative investor action and increased sophistication of pressure groups, advocacy groups and investor groups.”
In Australia alone, investments in conservation, clean energy and other initiatives that are considered likely to have a positive impact on the environment or society will rise five-fold to A$100 billion in the next five years, according to the Responsible Investment Association Australasia.
“Social issues are just as important as the environmental, critical to protecting shareholder value,” according to Hesta’s Blakey, who said surveys of the pension fund’s members found they give about equal weight to the two issues.
While much recent ESG focus has been on climate and governance issues, that’s often been because there’s easier access to data in those areas, according to Aberdeen’s Welsh-Rose. “It’s a little bit more clear cut,” she said. “There’s a lot of work going on now to get companies to provide a lot more information and data on the social side.”
For Rio Tinto, there are specific questions to address on internal processes as a result of last month’s heritage site blasts, said Susheela Peres da Costa, head of advisory at Regnan, which advises institutional investors on ESG risks. A Rio spokesman pointed to the company’s plans announced Sunday to review and improve its handling of heritage issues.
“If this was a communication failure between the indigenous groups and Rio, it might raise questions about the stakeholder consultation process effectiveness,” she said. Alternatively, it could also be a matter of internal governance in communicating stakeholder risk properly. “It was a surprise to us, in particular because we think of Rio’s record on indigenous issues as relatively good.”
(By Sybilla Gross and David Stringer)