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How to manage extractive sector risks

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This management briefing, published by Innovation Forum, sets out the latest trends in the extractives industry, with a data digest and the low-down on upcoming campaigns, finishing with a Q&A.

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How to manage extractive sector risks

  1. 1. Extractive sector push for strong climate deal In the run up to the United Nations’ climate negotiations in Paris, 11 extractive firms came out saying their boards supported a legally binding global deal to cap greenhouse gas emissions. The list includes oil and gas giants Shell, Gazprom and Statoil and mining companies Anglo American and BHP Billiton. The commitments were revealed in a survey sent out by the investor-focused data service CDP to the world’s largest 28 energy firms. Collectively, the group is responsible for more than a quarter (26%) of global greenhouse gas emissions. The results follow an earlier study by CDP which found that 46 of the world’s largest energy and materials firms are now pricing their carbon emissions internally in an effort to evaluate their climate change risks. Those pricing carbon at the higher end of the spectrum include US oil major ExxonMobil (at $80 per metric tonne of carbon dioxide equivalent) and Brazilian miner Vale ($50/tCO2 e). Post COP21, many energy companies have expressed frustration at the merely oblique reference to carbon pricing in the final agreement. UK Modern Slavery Act now in force Following in the footsteps of the US, Brazil and CONTENTS PAGE 01 Sector trends PAGE 03 Data digest PAGE 04 Activists and campaigning PAGE 05 Q+A with Charlotte Wolff, Statoil Produced by Innovation Forum www.innovation-forum.co.uk 1 Rivington Place, London EC2A 3BA +44 (0)20 3780 7430 Editor: Ian Welsh Contributers: Oliver Balch and Tom Idle Innovation Forum is a London-based company focusing on sustainable business analysis and debate around the world via events, research, advisory services and publishing. Design: Alex Chilton Design LATEST TRENDS Regulationandcommitments intheextractivesector Companies pushing for better rules and improved forward planning Howtomanage extractivesector risks MANAGEMENT BRIEFING: EXTRACTIVE SECTOR – JANUARY 2016 For full details about Innovation Forum’s sustainable extractives conference on 27th-28th April in London click here Energy companies arefrustrated atoblique references tocarbon pricing inCOP21 agreement
  2. 2. MANAGEMENT BRIEFING: EXTRACTIVE SECTOR PAGE 02 Australia, the UK has now approved its Modern Slavery Act which is designed to address the crime of slavery, forced labour or trafficking taking place in the supply chains of big business, particularly in the extractive industries and agricultural sector where it is thought to be most prevalent. The 2014 Global Slavery Index estimates there are more than 35 million people living in some form of slavery globally. According to the International Labour Organization, illegal profits from forced labour amount to more than $150bn a year. In the UK alone, 1,746 cases of slavery were reported in 2013 – 47% more than in 2012. So, the act demands that all large businesses prepare a slavery and human trafficking statement each year that clearly outlines the steps being taken to ensure that slavery and human trafficking are not present in their supply chains or in their own business. With the act having taken effect from October, organisations will have to produce their first statement by their next reporting period. Wayward future projections risk The non-profit Carbon Tracker Initiative (CTI), which has been very successful in exposing the risks associated with the oil and gas sector’s so-called stranded assets, has been at it again. This time, it is challenging the energy sector’s ability to project the likely future supply and demand scenario by continuing to rely on past assumptions. The organisation’s latest report, Lost in Transition: How the energy sector is missing potential demand destruction, claims that oil and gas company projections – complemented by energy forecasters such as the International Energy Agency (IEA) and the US Energy Industry Agency (EIA) – have failed to foresee the increasing demand of renewable energy. It points to the IEA’s solar capacity forecasts, where actual installed solar capacity in 2012 differed by 87.2% from the IEA’s projections in 2000 and by 41.5% from its 2007 projections. While the likes of BP, ExxonMobil, the EIA and the IEA all project that global population will rise to 9.7 billion by 2050, CTI argues that this growth is not entirely certain. Instead, the report looks at what would happen if the global population followed the UN’s lower growth trajectory and only increased to 8.3 billion by 2050. It found that fossil fuel demand would be 17% less than what the UN projects, with coal taking the biggest hit in CTI’s lower population projection as demand decreases by 25.5%. FPIC commitments on the rise The number of mining companies that now have a policy or commitment to free, prior and informed consent (FPIC) has nearly tripled since 2012. That is according to Oxfam’s 2015 Community Consent Index, which looked into the policies of 38 oil, gas and mining companies. The campaign charity defines FPIC as the principle that indigenous peoples and local communities must be adequately informed in a timely manner about projects that are likely to affect their lands, free of coercion and manipulation, and should be given the opportunity to approve or reject a project before any activity starts. However, while 14 mining companies now have public commitments to FPIC, none of them offer a commitment to withdraw from a project if a community decides to withhold consent and none of them has made a public commitment to uphold FPIC for all affected communities, beyond indigenous peoples. The index also shows that oil and gas companies are lagging well behind their mining counterparts, with not one having a public FPIC commitment. And the issue of gender didn’t get a look in either, with most of the 38 companies having little or no mention of the importance of women in any of the publicly available policy documents or guidelines. Water scarcity challenge solution: it’s at sea Mining – particularly for precious metals, diamonds, copper, and nickel – demands huge amounts of water. If water is scarce and becomes unavailable, work stoppages or mine shutdowns can become a reality. In Chile, the world’s biggest miner of copper, a government-sponsored study suggests that mining companies will be able to satisfy half their water needs using ocean water by 2026. A strain on fresh water supplies in the country’s arid north, where most of its copper mines are located, has seen mining firms increasingly turn to ocean water to supply their operations. Chile’s state copper commission Cochilco claims that seawater consumption could reach 10.7 cubic metres per second in 2026 – 4.3 times more than the expected amount for 2015 because of the use of seawater in new projects and expansions of existing plants. It is also thought that fresh water consumption by copper producers will total 10.8 cubic metres per second in 2026 – 19% less than the 2015 forecast, according to Cochilco. 14mining companies havenow madepublic commitments toFPIC For full details about Innovation Forum’s sustainable extractives conference on 27th-28th April in London click here ILO: illegal profits from forced labour are more than $150BNAYEAR
  3. 3. PAGE 03 Global Witness is putting pressure on the Extractive Industries Transparency Initiative (EITI), which boasts more than 90 of the world’s biggest oil, gas and mining companies among its members, to make the anonymous ownership of oil and mining assets in a number of African countries a thing of the past. In a recent report, Global Witness claims oil and mining assets worth $4bn have been allocated to companies whose ownership is “obscure”. The secrecy of lucrative deals in Nigeria, Angola, the Democratic Republic of Congo and the Republic of Congo to award oil and mining licences to private organisations could be depriving states of revenue that might be spent on health and education, argues Global Witness. While EITI has said it agrees that there is “urgent need for a substantial increase” in the levels of transparency being shown across the extractives sector, it has yet to decide whether it will mandate all countries involved in the initiative to disclose the true owners of oil, gas and mining companies or assets. Amnesty International has turned its attention to Colombia, which it says is not doing enough to prioritise the rights of indigenous people and afro-descendant communities, and instead focuses purely on economic interests. It wants communities to decide how their land is developed and, in a recent report, argues that Colombia is doing too much to support the efforts of companies to exploit territories for profit. The backdrop to this latest campaign is the ongoing peace negotiations between the government and the guerrilla group Revolutionary Armed Forces of Colombia (FARC). Many people that were forced from their lands during the armed conflict between the two are now looking to return. Amnesty International predicts that the civil war in Colombia has forced around six million people from their homes since 1985 because of violence. Now, it says that any peace deal is meaningless unless the rights of indigenous people are protected. So, companies are very much on the charity’s radar right now as it highlights displacement activity and what it sees as the unfair granting of licences to mining firms looking to exploit Colombia’s natural resources, often without obtaining free, prior and informed consent. Despite a 2012 land restitution and reparation programme being initiated for some of the victims of the armed conflict, few of those claiming their lands back have been able to gain legal ownership over them, making it easier for companies to move in, Amnesty International says. Did Shell abandon its drilling operations in the Arctic because of mounting opposition from environmentalists? The energy business had been pursuing exploration in the region, convinced of the enormous hydrocarbon potential there. But, according to some reports, executives within the business have been “surprised by the popular opposition it faced”. Having made a discovery of oil and gas in the Alaskan Arctic’s Chukchi Sea, Shell said that it was not enough to continue the search for the “foreseeable” future – a move expected to cost the company around $4.1bn in lost future earnings. Some reports suggest that continued exploration in the Arctic was undermining the company’s attempts to influence the debate about how climate change might be tackled. It had recently been forced to exit membership of the Prince of Wales’ Corporate Leader Group – a group it helped to found – because of its drilling activity. The likes of Greenpeace have been quick to claim responsibility for Shell’s decision, saying that it was a “big nod” to the global opposition to the company’s Arctic drilling plans, and especially the seven-million- strong Save the Arctic movement. RESEARCH Extractivesectordatadigest By Oliver Balch Global Witness uncovers African transparency concerns, FPIC in Colombia and why Shell halted Arctic activity Asset ownership secrecy depriving states of revenue Colombia should prioritise people over profit Shell gives up drilling in the Arctic MANAGEMENT BRIEFING: EXTRACTIVE SECTOR Greenpeace has been quick to claim responsibility for Shell’s decision Oil and mining assets worth $4bn have been allocated to companies whose ownership is ‘obscure’ For full details about Innovation Forum’s sustainable extractives conference on 27th-28th April in London click here
  4. 4. PAGE 04 ArcelorMittal to bring coke plant up to speed Environmental impacts for the minerals industry are not just a coalface phenomenon. The world’s largest steelmaker, Luxembourg-based ArcelorMittal, says it is working with state and federal regulators in the US to bring its Pittsburgh-area coke plant into line with environmental laws. ArcelorMittal’s US subsidiary is currently the subject of a lawsuit brought by the local green non-profit PennEnvironment. The group alleges that ArcelorMittal USA’s Monessen Coke Plant has clocked over 226 violations of the Clean Air Act by emitting excessive volumes of hydrogen sulphide, sulphur and particulate matter. Mining companies facing lawsuits in Africa and Brazil A group of 32 mining companies in South Africa is facing legal proceedings for the industry’s role in workers’ historical health problems. The class action lawsuit covers silicosis, tuberculosis and other respiratory illnesses suffered by as many as 190,000 South African gold mineworkers and 84,000 migrant workers between 1965 and 2005. In 2014, a coalition of large gold mining companies, including AngloGold Ashanti and AngloAmerican South Africa, proposed establishing a compensation fund as an alternative to drawn-out legal proceedings. There is a broader shift change in which transnational mining companies are being increasingly held to account for their actions in the global south. As a further example, African Mineral Limited was in court recently in a million dollar lawsuit over allegations of violent treatment of workers and villagers living near a mine in Sierra Leone. This of course is surpassed by the potential damages being sought from BHP Billiton and Vale – initially $5.2bn – in a Brazilian government-led suit following the collapse of a wastewater dam at an iron ore facility in late 2015 that polluted the Doce river basin. Coal hit by divestment campaign success Momentum behind the fossil fuel divestment campaign, one of the highest profile themes for environmental activists over the last 12 months, appears to be growing. The University of California became the latest American educational institution to shift $200m from its endowment and pension fund holdings (about 10% of its total portfolio) out of coal and oil sands companies. The move comes after the California state legislature ordered the state-controlled pension funds – CalPERS and CalSTRS – to divest from coal mining companies. The University of California is also following on the coattails of Stanford University and the University of Maine. In a separate development, global public relations firm Edelman has reportedly come out and said it will no longer work with coal companies and firms that actively lobby against prevailing climate science. Deepwater Horizon still proving costly for BP More than half a decade after the Deepwater Horizon oil spill, BP is still counting the cost of its major safety breach in the Gulf of Mexico. The UK energy major recently agreed to pay $20bn to settle claims arising from what the US Attorney General Loretta Lynch called “the worst environmental disaster in American history”. The funds will be used by the five affected states – Texas, Louisiana, Mississippi, Alabama and Florida – to remediate environmental damage. The settlement, which is the largest the US government has ever made with a single company, still requires court approval. ACTIVISTS & CAMPAIGNING CorporatetargetsunderNGOfire By Tom Idle Extractive companies held to account, and growing pressure for fossil fuel divestment BHP Billiton and Vale facing $5bn lawsuit in Brazil ArcelorMittal is cleaning up its Monessen facility MANAGEMENT BRIEFING: EXTRACTIVE SECTOR For full details about Innovation Forum’s sustainable extractives conference on 27th-28th April in London click here
  5. 5. PAGE 05 successfully implement that and ensure people’s voices are properly heard? In preparing our human rights policy, we engaged dozens of external stakeholders in our drafting – and FPIC was raised a few times as an important issue. Managing local expectations and conducting and facilitating meaningful engagement is important – and something we are committed to in all of our projects and operations. Ensuring that these requirements are well understood, hardwired into our management systems, and implemented skilfully is something we invest in. What’s likely to keep you most busy as we go into 2016? We will continue to work on climate-related issues and linking this work with the UN Sustainable Development Goals, as well as evolving our business in line with our company vision of shaping the future of energy by transforming the oil and gas industry, and providing energy for a low carbon future, while remaining competitive at all times.★ Putting a price on carbon will be crucial for Statoil as it prepares to remain competitive in the new economy, says Charlotte Wolff, the company’s vice-president of sustainability. Interview by Tom Idle. What is the number one priority for Statoil right now? Climate change. As the world’s population grows, we need to provide more energy to more people. Climate science makes it very clear that we need to transition towards a low carbon future – and we’re committed to evolving our business to respond. How will you do that? Well, it is a combination of proactive climate advocacy and engagement as well as real industrial achievement to reduce carbon emissions and to increase our renewables portfolio. We know that putting a price on carbon works. Our Norwegian operations have been subject to a carbon price since 1991, which has led to the company having only half the carbon intensity compared to the industry average. We have also been publicly advocating for a legally binding and effective agreement in Paris at COP21 to limit global warming below 2C. We’re committed to reducing our own emissions too, promoting the use of natural gas as a suitable source of power for the transition towards lower carbon, fully aligned with the recommendations of the IPCC 5th assessment report. For our Norwegian operations, we will meet our 2020 carbon emissions reduction goal of 800,000 tonnes CO2 almost four years early – and we are now committed to increasing our target by 50% to 1.2 million tonnes CO2 . How has your stakeholder base – particularly investors – changed in terms of their demand for more disclosure and transparency on sustainability issues in recent years? Investors want to have the confidence that management can manage risks effectively, while undertaking profitable business. Every year we strengthen our sustainability reporting as well as our disclosures in other media. What are the implications of new, stronger human rights legislation on your business operations? We have worked proactively on human rights issues for years – and we recently brought our commitment to the fore through a standalone human rights policy. We have an internal human rights steering committee and engage our board of directors regularly on the topic. For new legislation, such as the UK Modern Slavery Act, we inform our practices with the support of internal and external resources and stakeholder engagement. We are currently carrying out human rights assessments of a select group of suppliers. And these will be followed up through improvement plans and the results are also shared with our corporate executive committee. Is there still a gap between the concept of enabling communities to have free, prior and informed consent (FPIC) of new developments and projects – and ways to Q&A – EXPERT VIEW ClimatechangetopofagendaforStatoil Charlotte Wolff is Statoil’s vice-president for sustainability. She will be speaking at Innovation Forum’s sustainable extractives conference in London on 27th-28th April. Manage local expectation and conduct meaningful engagement MANAGEMENT BRIEFING: EXTRACTIVE SECTOR
  6. 6. MANAGEMENT BRIEFING: EXTRACTIVE SECTOR PAGE 06 What’scomingupatInnovationForum SUPPLY CHAIN RISK & INNOVATION Supply Chain Risk & Innovation is the new subscription publication for business from Innovation Forum. It’s packed with concise, practical insight into global supply chains. It is published ten times a year and is required reading for senior management, buyers and procurement executives and business sustainability professionals. Each issue contains the essential key trends, information, data, research and practical case studies, presented in a clear, analytical format. UPCOMING EVENTS Sustainable drinks – strategy and collaboration in spirits, beer and wine 15th March 2016, London How business can build resilience for smallholder farmers 22nd-23rd March 2016, London How business can tackle deforestation 6th-7th April 2016, Washington, DC Sustainable apparel forum 19th April 2016, London Sustainable extractives forum 27th-28th April 2016, London Withfocuseddebatesandpractical workingsessionson:  Doingmorewithless:how to be more strategic in terms of sustainability and CSR activities and yield greater impact from actions  Localcontent:what best practice looks like and advice on how to reach sustainable local content agreements  Thepost-2015development agenda:how can extractive companies play a role, individually and collaboratively, in the achievement of the SDGs?  Achievinggoodresource governance:lessons learned from successes and failures in efforts to drive greater transparency  Localcommunityengagement: what role can business play in ensuring community welfare in the long-term?  GrowingexpectationsfromBig Finance:the role of investors in driving environmental and social sustainability performance among extractive companies Hearfromtheseleading experts: Cynthia Carrol, chairman VedantaResourcesHoldingsLtd Eddie Rich, deputy head ExtractiveIndustries TransparencyInitiative Christian Spano, global lead for socio-economic development AngloAmerican Janina Gawler, global practice leader, communities and social performance RioTinto Brian Sullivan, executive director IPIECA Julie Vallat, head of ethics and human rights unit TotalS.A. John Clarke, CEO BanroCorporation Veronica Nyhan Jones, head of advisory services, infrastructure and natural resources department IFC Stephane Brabant, partner HerbertSmithFreehills Nicky Black, head of social performance DeBeers SUSTAINABLE EXTRACTIVES FORUM Howtomanageriskandnavigateuncertainty 27th-28thApril2016 CONTENTS WHAT'S NEW 01 What you need to know – all the news and analysis 06 Data digest – all the best research sifted and analysed CORPORATE INSIGHT 09 Innovation of the month – Toyota’s hydrogen supply chain 10 Corporate comment – Carlsberg 11 Corporate targets versus achievements – Mars 13 Corporate case study – AkzoNobel’s search for sustainable suppliers NGOS AND CAMPAIGNS 15 NGO campaigns – who’s targeting whom and why 18 Activist Q+A – Greenpeace SUPPLY CHAINS IN FOCUS 19 Sector snapshot – palm oil 22 Supply chain collaboration – can it really work? WHAT'S NEXT 26 Preview of what to look out for in the coming weeks Anew online information- sharing platform set up by the global chemicals giant GlaxoSmithKline (GSK) is expected to result in emissions reductions within the supply chain of 25%. So far, 500 suppliers have been invited to join the GSK Supplier Exchange which they will be able to use to share best practice on energy efficiency and reducing environmental impacts. The British business, which sells healthcare products like Nicorette, Sensodyne and Panadol, spends more than £2bn a year buying materials. And more than 40% of the company’s carbon footprint comes from the procurement of those materials. The company’s head of global NOVEMBER 2015 // ISSUE 01 risk&innovation risk innovation risk innovation Essential insight • GSK’snewsupplierinformation exchangeisexpectedtocut valuechainemissionsby25%. • Working conditions remain the top supply chain priority for business. • While human rights is a key concern for companies, less than half have measures in place to deal with it internally. • More food and drink companies are aware of their climate-related exposure in the supply chain – but less than a quarter are disclosing supply chain emissions. • Nespressoisgamblingon newproductioninwar-torn SouthSudan–whichcouldbe a$10mcoffeeexportmarket withintenyears. • Coca-Cola “on target” to replenish 100% of the water it uses in its production and products by 2020 through water stewardship projects. THIS MONTH Whatyouneedtoknow environmental sustainability, Matt Wilson, says that the business established that 65% of suppliers did not have an active programme in place to reduce energy costs – and no one single supplier has more than a 1% impact on GSK’s carbon footprint, making the task seem huge. So, it sees the Supplier Exchange as the most efficient way of helping multiple suppliers – getting them to talk to each other via a Facebook-like online network and share information, case studies and documents that will enable them to make investment and business decisions. In the past 12 months, GSK has been running energy reduction workshops at a number of its supplier sites and has identified opportunities to save 5,000 tonnes of CO2 and reduce energy costs by 20-30%. 500GSK suppliers sharebest practice onenergy efficiency andreducing impacts GSK expects supplier information exchange to cut value chain emissions by 25%

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