By Debbie Carlson
Ten years ago — maybe even a year ago — it would be unlikely that the CEO of a major mining corporation would have lost his job for destroying a cultural artifact.
But that’s exactly what happened in September when Rio Tinto PLC /zigman2/quotes/202627887/composite RIO +2.22% /zigman2/quotes/208934945/delayed UK:RIO +1.59% /zigman2/quotes/200083756/delayed AU:RIO +1.62% Chief Executive Officer Jean-Sébastien Jacques stepped down after the company destroyed two ancient caves of archeological and cultural importance to Aboriginal indigenous groups in Australia’s Pilbara region.
“This is significant,” says John Streur, CEO at Calvert, an investment firm that uses ESG, or environmental, social and governance, principles.
Initially, Rio Tinto issued apologies and cut executives’ bonuses, but investors weren’t satisfied. Jacques’ forced resignation was the sharpest example yet of the growing importance of social factors among investors in 2020, spurred by concerns over systemic racism and health-care issues from Covid-19.
‘Shift in society’
“The Rio Tinto example is ... a general shift in society toward corporations not only having to have a purpose, but having to play a major social role in society,” says Paula Luff, owner of Viso Strategies, a corporate sustainability consultancy and the former head of corporate social responsibility at oil company Hess /zigman2/quotes/203832174/composite HES +2.93% .
Indigenous groups may now have a stronger hand when negotiating community benefit agreements, known as free prior informed consent, says Keith Doxtator, director of the Oneida Trust Enrollment Department, which manages and distributes the Oneida Nation’s trust funds.
“Investors are not willing to just sit idly by and own a company that is making these oversteps, are not doing their due diligence, are not collecting the free prior informed consent needed to go out and do that type of work,” he says.
The extractives industry is a tough business because of the environmental impact mining has on a location, and often local opposition is high, Calvert’s Streur says. It’s critical for companies to have good relationships before operating, Luff says, noting mines have life spans that last decades.
Rio Tinto had a relatively good reputation when it came to community relations, she says, but the company still failed. Chris Salisbury, Rio Tinto’s iron-ore head, told the Wall Street Journal this month that a “blind spot” due to personnel changes at the company led to a “major systemic failure.”
Stewardship of capital
Erika Karp, founder and CEO of investment firm Cornerstone Capital Group, says that also speaks to a larger problem with governance and stewardship of capital — human, social and financial capital.
“Rio Tinto has just told us in a very obvious way, that it is a poorly governed company. Governance is huge when it comes to valuation,” she says.
Streur says that can reflect a company’s reputation as both an employer and a supplier. “Your reputation is going to follow your product,” he says.
In the U.S., extractive companies have also destroyed sacred places, says Steven Heim, managing director at Boston Common Asset Management, an ESG investment firm that advocates for indigenous rights. He pointed to Energy Transfer Partner’s 2016 destruction of ancient burial sites and cultural artifacts of the Standing Rock Sioux Tribe as part of the fight over the Dakota Access Pipeline.
There’s a financial cost to these violations. A study by First Peoples Worldwide, part of the University of Colorado Law School, showed the costs for Energy Transfer Partners and other firms with a stake in the pipeline were at least $7.5 billion.
ETP’s stock had significantly underperformed the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.19% before being delisted. A broader study by the University of Queensland showed that for a mining project with a capital cost of $3 billion to $ 5 billion, community conflict project delays can cost $20 million per week in net present value.
Effect on the U.S.
It’s possible the Rio Tinto fallout may affect a proposed mine in the U.S. A joint venture between the company and BHP Billiton /zigman2/quotes/202855126/composite BBL +0.86% , named Resolution Copper, wants to build a $7 billion underground copper mine 60 miles east of Phoenix, called Oak Flat, a sacred place for several Native American tribes including Western Apache Tribes.
Roger Featherstone, director of Arizona Mining Reform Coalition, a group that includes environmental groups and Apache Stronghold, a coalition of several Native tribes, says he hopes the firing of the Rio Tinto executives gives his group more leverage to fight the proposed mine.
Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @DebbieCarlson1.