When the member CEOs of the International Council on Mining and Metals (ICMM) meet next week there is surely only one issue on the agenda; whether to back a call by the $3.8 trillion investor coalition for a global independent public classification system and corresponding independent and public audits to monitor the safety risk of mining company tailings dams post the Vale dam disaster in Brumadinho, Brazil.
ICMM brings together 27 mining and metals companies and over 30 national and regional associations. A spokesperson said the member CEOs will “consider a range of actions”. But the demand of the huge investor coalition coralled by institutions including the Church of England Pensions Board, LGPS Central, Church Commissioners for England and Sweden’s Public Pension Funds is clear. And they appear to have the support of mining giant BHP’s CEO, Andrew Mackenzie, who has backed them. Indeed, the ICMM itself made a similar call in 2016, but did not follow through.
Even now, the mining sector is not speaking with one voice…yet. RI asked Vale whether it backed the investor call, but the company said it had “no comment for now on this matter.” They said Vale’s Board of Directors had established an Extraordinary Independent Consulting Committee for Dam Safety.
For investors, the outcome of the mammoth engagement on mining tailings dams is crucial. After 2015’s Samarco disaster, which killed 19, investors were shocked into apparent action. The PRI said the tragedy was “located in poor management of ESG issues”, and showed that “engagement by investors and policymakers on ESG factors, sustainability and corporate governance has become a national, economic and political priority.”Yet Brumadinho was more deadly, environmentally destructive and value destroying. What does that mean for the ramped up engagement and increased ESG consideration that the PRI was advocating? This time out, some investors decided to pull their money. The Church Commissioners in the UK, the body that manages the historic property assets of the Church of England, who clung onto their holdings in Vale after Samarco, was quick to divest its £7m holding. Sister organisation, The Church of England Pensions Board, sold a much smaller holding of less than £500,000. The Ethical Council of the Swedish AP funds, which together manage roughly $155bn of state pension assets, has recommended Vale for exclusion. John Howchin, its Secretary-General, said its confidence in Vale was now “non-existent”. Vale says it has no estimate for the potential total cost of the Brumadinho disaster. But it is, and will continue to be, very material for investors. Vale’s share price was knocked by some 20%, wiping $15bn off the company value. While the stock is slowly rallying, the firm has said it will suspend some operational sites in order to decommission other upstream dams, slashing its production of iron ore by 10% at a cost of 5bn reais (£1bn) over three years. Investors are trying to work out their financial response; weighing up a 20% rise in iron ore price rises against knock-on effects in steel markets. This has led to related sector share hikes in rivals such as Rio Tinto and Ferrexpo, Vale’s competitor in the iron ore pellet market. The longer-term ramifications are less clear. Next week’s ICMM meeting should give some guidance. The cost of what investors are calling for will be enormous. Some believe Vale could be taken into public ownership. Litigation will also rack up. The mayor of Brumadinho is demanding 5m reais
($1.3m) a month in compensation from Vale for the city’s loss of revenue. He’s also asked it to compensate the families affected by the accident. US investors are to file a class action lawsuit against Vale for failing to disclose environmental risks. And the incident could escalate Vale’s Samarco liabilities, many of which are ongoing.
There were investors who, in part, swerved fallout from both disasters. Erste Asset Management in Vienna had excluded Vale from its responsible fund universe because of its poor human rights record even before the first dam collapse, and says there has not been any major improvements – especially in terms of emergency alert systems – since that disaster. Walter Hatak, Senior ESG analyst at Erste AM, said, “Unfortunately when we look at the number of people who died in the recent accident it has proven that we were right not to include Vale in our investable universe.”
Similarly, in 2012 analysts at €320bn asset manager Union Investment found weaknesses in Vale’s ESG scores and lowered its ESG rating for the company, causing its ESG-focused global and emerging market debt portfolios to exclude the miner. However, Union said Vale remained a constituent of a few of its conventional funds.
Janne Werning, ESG analyst within portfolio management at Union, says the recent disaster will have repercussions for ESG in the high-risk sector: “More investors will see the need for further ESG integration and risk analysis – particularly human rights risk – in the metals and mining industry as a whole.”
But not all ESG risk analyses found cause for concern with the company. Last year, the Corporate Human Rights Benchmark graded Vale as the sixth best performing firm, saying the 30% increase in its score since the previous year supported “the idea that rapid change is possible where there is sufficient will tointegrate human rights into business thinking”. The scoring system, which relies on public information disclosed by companies on their websites and other platforms, doesn’t take into account or quantify the number of human rights violations against a company; rather, it awards points for simply having a policy, or demonstrating how they deal with and disclose complaints. It even awards points for a company not meeting its fatalities targets as long as it explains why they were not met. The CHRB has since suspended Vale from the benchmark and says it will review “any adjustments to our methodology needed to deal with such emergent, large scale, human rights impacts when more information is available”.
Other ESG information does seem to have played a role in forewarning investors of the impending risk. Vale has never been a constituent of MSCI’s main ESG indexes – the EM ESG leaders index, EM SRI index, and EM ESG universal indexes. In 2015, before the Samarco incident, an MSCI rating put Vale in the zero percentile for toxic emissions and waste. The report read: “Vale has a poor history of effectively implementing its policies…Its overall performance on this key issue is hindered by several controversies that bring the quality of the company’s oversight into question.” Lack of oversight was shown to be one of the key causes of the Samarco disaster.
There’s been no shortage of engagement with Vale and the mining sector as a whole in the wake of Samarco. Just how meaningful the interactions were is hard to gauge, but publicly available documents indicate investors have been left assured their money was in the right place.
Vale seems to have been open to scrutiny. In 2018, First State Investments undertook a “bespoke visit” to what had been the Samarco site to witness the remediation
work. A report reads: “This was not a PR exercise, the company was under no obligation to accommodate this tour or answer questions, yet at all times during the visit they were open, honest and transparent.” (First State no longer have an interest in Vale since its Global Resources fund closed in December.)
But transparency is not enough without real data, diligence and safety assurance. KLP, the Norwegian pension insurer, met Vale executives in June 2017 and raised concerns regarding dam safety. The asset manager’s new Head of Responsible Investments, Jeanett Bergan, told media: “We know the company implemented many measures to ensure tailings dams safety, and it is of course very worrisome that these measures were not sufficient”. KLP continues to be invested in Vale.
Schroders – Vale’s tenth largest shareholder as of September 2018 – joined calls with Vale management and met with them in Brazil in 2016. At the time, it said it was continuing to monitor, engage and scrutinise the companies and had “taken into account their responsiveness to this issue and their historic approaches to ESG and sustainability”. It also said it was using the incident to review other mining companies’ tailings arrangements. Approached for comment on Brumadinho, a spokesperson for Schroders said: “I don’t think this is one we’ll be able to help with.”
Dayna Linley-Jones, Sustainalytics’ Director of Research, says investors should step up their engagement to reflect the complexity of the issue: “They need to be asking, what are the governance structures within a company on tailings? Do they have integrated centralised management or is this a site-by-site managed issue? What methods were used to construct the dams? Do upstream dams have decommissioning plans? Are the company’s third party audits truly conducted by third parties with no conflict of interest?”The German inspection firm TÜV SÜD which signed off on many of Vale’s tailings dams has said it will no longer certify those owned by the company, and has raised concerns, which it called “heightened uncertainty”, over whether the current safety certifications system is appropriate. Brazilian authorities arrested two TÜV SÜD employees in the wake of the disaster, but freed them shortly afterwards.
The firm has also been investigating its own role in the collapse of the Brumadinho dam and hired two external law firms to look into its auditing practices.
Michael Marshall, LGPS Central Director of Responsible Investment & Engagement, says the investors want history to record the tragedy at Brumadinho as a turning point for the mining sector and tailings dam management. “What has happened is unacceptable first and foremost for communities and the environment, but also from an investment perspective and for the beneficiaries dependent on our investment products.”
He maintains the issue is sector-wide and not Vale-specific. He declined to say how much LGPS Central has invested in Vale or whether it will be divesting.
The investors have scant faith in the mining industry’s ability to regulate itself. Adam Matthews, Director of Ethics & Engagement at the Church of England Pensions
Board, says it’s now time for something different. He says the proposed new system would help investors understand the risk in tailings dams holdings. “This should act as a transparent tool that would enable people to have confidence that a company have ‘X’ number of tailings dams within a certain classification.”
Matthews is gathering more investors to push for the reform: “We’ve simply had too many incidents,” he tells RI. “The current model has proven once again that it is not working and something has to change to allow responsible investors to remain invested with confidence.”
Next week’s ICMM meeting will reveal whether the critical call is being heard. The stakes are incredibly high for mining companies and the investors in them.
With reporting by Hugh Wheelan.