Environmental, social & governance (ESG) issues were top of the agenda at the first Saudi Arabian Future Minerals Forum earlier in January. In a year defined by shareholder and environmental activism as well as rising resource nationalism, the extractives sector is trying to forge a new way forward in 2022. Working out how to make it work is harder than it looks, though.
To meet environmental demands, closing down parts of the fossil fuel business seems a given. It will hurt, especially in times of high demand and soaring commodity prices, which BP’s Bernard Looney describes as a “cash machine”. The majors will probably need to split their hydrocarbon investments from their low-carbon targets in the next decade.
As the majors sell off their assets the oil and gas juniors will be in line for a windfall, especially since a projected copper shortage will hamper the acceleration of the green transition. However, eventually the spotlight will turn on them to see how they wind up operations once the green energy revolution is truly under way.
Some investors and governments, reliant on fossil fuel income, will not be as happy as environmentalists. They stand to lose a lot of money. A backlash is starting against prioritising sustainability and ESG targets in other sectors. In his 2022 annual letter Terry Smith of Fundsmith Equity Fund accused Unilever of being “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”.
Host governments
For single-commodity economies, reducing the world’s reliance on oil and gas comes at a huge price. Not all are in a position to benefit from the transition to battery minerals. With no room to diversify, they risk pushing their nations’ development back into the last century, with significant social and economic consequences. An ESG agenda without the “S” and the “G” would be meaningless.
The other challenge for the extractives industry is its relationships with host governments. According to Fitch Solutions, the risk of resource nationalism is rising globally. Governments across Sub-Saharan Africa, as well those in emerging markets such as Chile and Peru, that have previously been very hospitable to foreign investors, are resorting to increasing intervention for political, social and economic reasons.
Many believe resource nationalism is a product of foreign exploitation, corruption or power-hungry regimes. But the truth, as always, is more nuanced. Some governments, such as the previous Zambian administration, seized assets to gain political support against a backdrop of public frustration with poor behaviour by foreign miners. The government of Mongolia, on the other hand, successfully pressured Rio Tinto to waive its debt as costs mounted at Oyu Tolgoi.
Mining natural resources involve a delicate balancing act between significant capital investment, international expertise, tighter regulation, reasonable royalty regimes and local and community benefit. Letting everyone have a fair share of the pie is essential.
Conduct codes
There are few examples of long-term, successful partnerships between foreign mining companies and host countries. Botswana stands out with its diamond industry. Sheila Khama, former De Beers CEO in Botswana, puts it down to a combination of true political leadership and an informal agreement by successive governments to use mining revenues as investment. Botswana never used the cash to pay for recurrent expenditure.
Mining codes are one way of establishing ways of working that benefit all sides. They establish codes of conduct, fiscal agreements and clear licensing requirements. Subject to parliamentary approval, the codes must stand up in terms of public scrutiny, transparency and accountability. According to Peter Leon of Herbert Smith Freehills, the tighter the codes are the less likely they are to be exposed to levels of backdoor discretion that have befallen mining jurisdictions such as SA. Stabilisation agreements are another route.
The skills needed to be a CEO or chair of a Barrick Gold or a Vale nowadays are very different from those needed even a decade ago. Mark Bristow has shown how difficult, acrimonious relationships can be turned around, as he did in Tanzania.
Responding to a growing set of stakeholders is now the top priority. That could be why Rio Tinto just appointed Dominic Barton, a former Canadian ambassador to China, as its next chair, following the Juukan Gorge scandal at the end of 2019. China accounts for more than half of Rio Tinto’s revenue. Ironically, Barton’s first job is seeing off Canadian political opposition to his appointment.
Divestment from fossil fuel assets and investment in the green transition is inherently political. For investors and operators, this will be new terrain. Maintaining their licence to operate is akin to a politician in a political campaign, only the “electorate” is their diverse and often-at-odds stakeholders.
This op-ed was originally published in Business Day, on 25 January 2022
