The Ethical Corp's Study on Extractive Industries

www.ethicalcorp.com
Published September 2014
Part of Ethical Corporation’s Briefing Series
Briefing:
Extractives
2 Human rights
9 ESG investment criteria
14 Water conservation
19 Managing social risks
26 CEO interview: Vedanta

2
Ethical Corporation | August 2014??? Ethical Corporation | September 2014Human rights
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FPIC seeks
to give
indigenous
peoples the
right to choose
whether their
land is used for
mining
Regulation and reform
Human rights in extractives
By Giles Crosse
The long struggle for binding, enforceable rules to protect
human rights in the extractives sector continues
On 27 June, the United Nations Human Rights Council adopted a resolu-
tion to “establish an open-ended intergovernmental working group with
the mandate to elaborate an international legally binding instrument on trans-
national corporations and other business enterprises with respect to human
rights”. The resolution, a step towards international law on human rights and
extractives, came about because policy makers and civil society believe a host
of voluntary efforts are failing to tackle rights abuses.
Indigenous rights
Many voluntary measures, such as ensuring free prior and informed consent
(FPIC), currently exist. FPIC seeks to give indigenous peoples the right to
choose whether their land is used for mining, and is embedded in the United
Nations Declaration on the Rights of Indigenous Peoples. The declaration is
not legally binding, but seeks to eliminate human rights violations by defining
commitments member states should make.
Before the UNHRC resolution, the UN General Assembly met on 3 June,
addressing the need for FPIC to be given from host communities, in areas
where extractive firms plan to work. This need for better community relations
should become part of the outcome document to stem from this September’s
World Conference on Indigenous Peoples. The conference will bring together
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3
representatives of indigenous peoples, giving them a voice in a final paper
which, along with the Rights Council’s resolution, will serve to guide new
laws on human rights. Together, the developments signal a policy shift at
international level, to move rights from the periphery into central, legally
defined territory.
Problems galore
The Extractives Industry Transparency Initiative (EITI) is a global coalition of
governments, companies and civil society, which uses its standard to encourage
accountability on how firms pay governments for oil, gas or gold. Compa-
nies working in EITI compliant
countries should report on
their payments to regimes,
which likewise disclose cash
received from firms. Some
29 countries are presently
compliant, with overall govern-
ment revenues covered by EITI
work estimated at $1.3 trillion.
EITI demonstrates how
multiple, well-intentioned drivers
towards equality exist in the
extractive space. But these
voluntary efforts are consist-
ently failing to deliver overall
required change.
“One of the big challenges
in the sector is engaging the
explorers and the companies,”
says Luke Wilde, Director at
Twentyfifty, a sustainability-focused consultancy. “Another is the increasing
strength and global operations of state-owned companies which are not
beholden to the markets, or easily influenced by stakeholder concerns.” This is
especially dangerous when poor, corrupt states have little interest in the rights
of their people, commonplace in Africa, Asia and South America. Often third
party partnerships between extractives firms and resource-rich governments
are created in the form of a new company, which receives special, opaque
leasing terms from government, and whose books are full of holes.
Wilde expects “a period of policy experimentation as governments and
other organisations such as the OECD try a range of interventions and begin to
identify what works” to fix transparency issues and rights violations. He points to
Massive projects with big social impacts NATTANAN76

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Human rights in the real world
Today, most multinational extractive firms set out human rights policies and actions in yearly
sustainability reports, to guide what they do on the ground. Shell’s 2013 report highlights four
key drivers: labour conditions, communities, supply chains and security.
Community feedback mechanisms are an important part of Shell’s measures. The firm
describes its work with the Iñupiaq people in Alaska, striving to ensure their subsistence way
of life is uninterrupted by Shell operations.
This responsibility extends to indigenous peoples’ resettlement. Shell says it seeks to
avoid this in projects and operations, but that if physical or economic resettlement is unavoid-
able, action and livelihood restoration plans are developed.
Less clear is how Shell and other firms’ criteria for defining “unavoidable”, and “livelihood
restoration” work are created, and what they mean in real life. For example, in Madagascar,
Rio Tinto has promised to restore much of the forest damaged by its extraction work. But
doing so takes years. Locals simply leave, as the forest providing many of their resources
becomes unavailable for use in the meantime. Rio Tinto built a school for locals affected by
its operations, but there are no teachers in the area, or money to pay them. It is into such real
world impacts that legislation may be able to extend its influence.
No forest, no people
PIERIVB

5
‘Protect, Respect, Redress
Framework’
The Protect, Respect, Redress Frame-
work, originally created by John
Ruggie when he was the UN Secre-
tary-General’s Special Representative
for Business and Human Rights, clar-
ifies how governments should deliver
rules and expectations on human
rights to businesses working in their
territories, how companies “know
and show” respect for human rights,
and seeks accountability and judicial
redress for harmed local peoples.
landmark cases, including the experiences of Shell in Nigeria, BP in Colombia,
Anglo Gold Ashanti in the DRC and Freeport in Indonesia, which have shaped
our understanding of the challenges involved. Today’s challenging schemes
include Rio Tinto’s Madagascar ilmenite extractive work, previously reported
in Ethical Corporation, and Cambodia’s Bokum Sakor National Park’s 99-year
lease, worth an estimated $4bn to Chinese Union Development Group, which
may prove to be a way in to mine the park, under the auspices of tourism
development.
“[Companies] have physical footprints which might necessitate homes
being moved, or farmland being given up. They have the potential to pollute
lands and waterways and the arrival of builders and miners can bring a range
of social ills,” Wilde argues. “The security forces which may be necessary to
protect their activities have also at times been responsible for human rights
abuses.”
Voluntary principles
Other voluntary initiatives are making a worthy attempt to shape the human
rights landscape. On 16 June 2011, the UN Human Rights Council endorsed
the “Guiding Principles on Business and Human Rights”. The Guiding Princi-
ples, in theory, provide a global standard for addressing adverse impacts on
human rights linked to business activity. They set out principles as part of a
‘Protect, Respect, Redress Framework’ concerning a state’s duty to protect
human rights, the corporate responsibility to respect human rights, and access
to remedy for victims of human rights abuse.
Ruggie’s rules clarify expectations

6
Few extractives
firms publish
human
rights impact
assessments
Importantly, the Guiding Principles define extractive firms’ human rights
responsibilities as “independent” of the behaviour of the ruling regime, in
theory preventing firms passing the buck to corrupt governments. The ideas
and concepts are helpful, but three years after their creation, firms still appear
reluctant to embed the ideas in practice.
“While most extractives have for some time been developing increasingly
sophisticated approaches to social performance, the human rights lens which
the UN Guiding Principles require will have been more or less new to many,”
says Wilde. “Most major extractives will now have a human rights policy and
will have or are developing their human rights due diligence processes, but we
have seen relatively few publish human rights impact assessments to date.”
Ursula Wynhoven, general counsel and chief of governance and social
sustainability at the UN Global Compact, agrees, saying: “There is much more
to be done. For instance, the majority of companies at present are still unaware
of the existence of the Guiding Principles.”
The business case
Jon Samuel, group head of government relations and social affairs at Anglo
American, says his company’s practices are already shaped by the UN
Extractives pollution isn’t cheap to clean up
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EVRENKALINBACAK
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Guiding Principles and International Finance Corporation (IFC) Performance
Standards. IFC, part of the World Bank Group, is a development institution
that helps the private sector fund solutions to development challenges. IFC
standards stipulate that businesses should respect human rights, and address
human rights impacts business may cause or contribute to. These standards,
Samuel argues, are doing the work new legislation seeks to achieve.
Samuel champions yet more principles, including, established in 2000, the
Voluntary Principles on Security and Human Rights. Set up by the US and
UK governments, NGOs and extractive firms,
they guide companies in maintaining safety
and security within an operating framework that
encourages respect for human rights. He also
praises the work of the ICMM, a group for mining
firms and associations, for seeking to improve
sustainable development in the mining and
metals industry.
“The Voluntary Principles on Security and
Human Rights have been widely adopted by
major companies, and the ICMM’s endorsement
of FPIC for indigenous peoples is an important
step forward, and one that surprised many. Add in
the work on implementing the Guiding Principles
and I think it is fair to say that a lot of progress
has been made, even if there are still laggards.”
Samuel adds: “We are still in the early days
of implementing the UN Guiding Principles. But
a huge amount of work has already been done
by governments, multilaterals, industry asso-
ciations and companies to align their policies
and standards to the Protect, Respect, Redress
Framework.”
Anglo American wants to be a welcome partner
wherever it operates, regardless of whether law
forces its hand, Samuel says. He adds: “We have
to be respectful of the rights and aspirations of host communities. Big rights
challenges in mining include: land acquisition, environmental and health
impacts and labour rights, particularly in our supply chains.
“Sensible companies are taking human rights increasingly seriously. Most
business leaders, like their fellow citizens, are supportive of human rights.
It is also a reflection of the costs of not getting these issues right, whether
through consumer boycotts, community unrest or legal action.” Samuel esti-
The oil and gas sector is slowly addressing human rights

8
EVRENKALINBACAK
mates failure to understand and manage stakeholder expectations has stalled
mining projects worth at least $25bn in recent years.
Wynhoven agrees that the social and economic cost of getting it wrong can
be huge. “For a large extractive company, some estimates put the total cost
of company-community conflict at $20-30m per week. There will continue to
be growing awareness of the Guiding Principles, and more and more busi-
nesses taking the necessary actions to follow through on their corporate
responsibility to respect human rights,” Wynhoven says. “The extractive sector
certainly seems to be making serious efforts, for instance, through its involve-
ment with sectoral associations such as ICMM and IPIECA [the global oil and
gas industry association for environmental and social issues]. However, many
companies in the sector have yet to engage at all.”
She predicts a trend of hardening up “soft law”, through a toughening of
guidelines and declarations into more binding rules on companies or govern-
ments they address. This is starting to occur in areas such as conflict minerals
in companies supply chains. If the pace of corporate action to respect rights
does not accelerate, frustration from governments and NGOs may result in
additional legislation.
The extractives sector is stepping up, but rules are on the way. Whether
they can work to truly engage rogue regimes, and alter their caustic commer-
cial partnerships, will be the key to improving human rights, and ultimately
profits too. n
Company-community conflict costs dearly
Failure to
understand
and manage
stakeholder
expectations
has stalled
mining projects
worth at least
$25bn

9
ESG
Financing criteria for extractives:
a changing dimension
By Giles Crosse and Matyas Horak
Environmental, social and governance investment criteria are gradually
helping to improve extractive practices on the ground
Historically, environmental, social and governance (ESG) investment criteria
grew from the fallout of the 1989 Exxon-Valdez disaster. The massive finan-
cial and environmental costs of the oil spill created a need for better ways to
assess risks – environmental, capital or social – in extractives. ESG metrics are
now used by investors to assess extractive firms’ activities, in order to protect
their investments and highlight business opportunities.
A quarter-century after Exxon-Valdez, the extractive industry’s patchy envi-
ronmental record, ongoing high levels of investment risk and historical lack
of transparency mean banks and funding agencies are increasingly cautious,
and NGOs more watchful.
A Greenpeace land-based oil spill patrol in the Russian Komi and Nenets
regions found 204 sites of oil pollution including 20 fresh ones that occurred
this year. The total polluted area is 130 hectares. “The process of oil extraction
and transportation in Russia remains very dirty: many of the regulations are
being violated. As a result waters and forests are polluted with millions of tons
of oil,” says Vladimir Chuprov, head of the energy unit at Greenpeace Russia.
“The companies must bear strict financial responsibility for the pollution.”
Ethical Corporation | August 2014??? Ethical Corporation | September 2014Financing extractives
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ESG
investment
criteria grew
from the fallout
of Exxon-Valdez

10
Catherine Howarth, chief executive of ShareAction, a UK activist investment
NGO, says: “The extractives sector is one that historically has caused shock
and horror regarding its environmental, social and ethical impacts, though it is
one from which we all benefit.”
ShareAction calls the mining giant Vedanta one of the “most notorious”
extraction companies. A ShareAction representative spoke at Vedanta’s
AGM on 1 August, to raise the issue of fatalities at the firm with the board of
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ESG investments should recognise indigenous rights
ESG principles
Environmental criteria set standards for the environmental impacts of a firm’s activities.
Social criteria drive how a company communicates its activities and involves its stakeholders in
its plans. This includes developing relationships with indigenous or local communities in extractive
activities.
Governance standards refer to the transparency of a company’s financial information and
accounting, the methods of involvement of stock and other stakeholders in decisions, plus conflicts
of interest and corruption avoidance.
Social criteria
include
developing
relationships
with local
communities

11
directors. Vedanta’s chief executive agreed at the AGM to a meeting with inves-
tors about the topic. “We challenged the board to publish a detailed action
plan, in the next six months, to set out how Vedanta will at least reduce by half
the level of deaths on the company’s operations,” says Howarth.
“Progress with companies in the extractives sector will be made when
persistent engagement is undertaken by investors,” she adds. “We are now
planning to reach out to a number of asset managers with holdings in Vedanta
to encourage engagement in support of that demand and on the topic in
general.”
Transparency
Investors are starting to perceive strong ESG indicators as a sign of good risk
management and strategic planning, as well as evidence that a company has
a higher capacity to adapt to change and lower the cost of its capital.
Signatories to the UN Principles for Responsible Investment, established
ADOLF34
The UN’s PRI guide a quarter of the world’s financial stock

12
in 2005, now represent about a quarter of the world’s total financial assets.
The Principles are voluntary, but they create a framework for building ESG
into investment decision-making and enable investors to publicly demonstrate
commitment to responsible investment.
The Equator Principles (EPs) are another ESG risk management framework.
The EPs’ 80 members across 34 countries, including Barclays, Credit Suisse
and BNP Paribas, represent more than 70% of international project finance
credit in emerging markets.
EPs determine, assess and manage environmental and social risk for
projects, offering a minimum standard for due diligence to support respon-
sible risk decision-making. They focus on social and community standards
and responsibility, including robust standards for indigenous peoples and
labour standards.
However, the effective use of ESG risk assessment for extractives invest-
ments has been dogged by a lack of transparency in the extractives business.
In attempts to address the transparency problem, large-scale lenders such
as the European Bank for Reconstruction and Development (EBRD) have
become members of the Extractive Industries Transparency Initiative (EITI),
Banking standards
The European Bank for Reconstruction and Development (EBRD) requires its extractive clients
to report annually on their environmental and social performance. Across its portfolio, 95% of
projects have fulfilled environmental and social reporting requirements within the past two years.
The World Bank Group committed $1.33bn to the extractives industry in 2013, almost double
the amount of 2012. This increase is mostly attributed to a guarantee provided by its Multilateral
Investment Guarantee Agency (MIGA), to a project in Ivory Coast on the construction and operation
of on- and offshore oil and gas facilities to help Ivory Coast meet its growing energy demand.
MIGA specialises in complex deals in infrastructure and extractive industries, especially those
involving project finance and environmental and social considerations. Its 2013 performance
standards, encompassing ESG factors, addressed assessment and management of environmental
and social risks and impacts, labour and working conditions, resource efficiency and pollution
prevention. In addition, MIGA assesses on community, health, safety and security, land acquisition
and involuntary resettlement, plus biodiversity conservation and sustainable management of living
natural resources, indigenous peoples and cultural heritage.
The International Finance Corporation (IFC), part of the World Bank Group, remains the largest
global development institution focused on the private sector. IFC works to its own criteria, slightly
different from mainstream ESG standards, which it calls Environmental, Social, and Trade (EST)
Standards. These encompass rules on child labour, gender-appropriate labour practices,
biodiversity protection and sustainable land management. In 2013, IFC committed 18 investments
in the extractive sector totalling $389.3m, mostly in the oil and gas sector.
Equator
principles
members
represent more
than 70% of
project finance
in emerging
markets

13
The cost of
capital is likely
to become
higher for dirty
companies
which strives to ensure countries’ populations receive fair recom-
pense for the value of their coal or gas.
Corruption
According to corruption watchdog Transparency International, there
is still widespread bribing of foreign officials associated with projects
guaranteed by export credit agencies. Frameworks to combat this
exist, such as the OECD Action Statement on Bribery and Officially
Supported Export Credits, which attempts to deliver transparency,
minimise bribery and create a toolkit for governments to reinforce
their fight against corruption.
Where regimes are corrupt, or themselves engage in damaging
activities, this may undermine extractives firms operating in such
places, which can be given false promises on human rights or envi-
ronmental safety that regimes fail to meet.
Juan Salazar, associate director for governance and sustain-
able investment at F&C Investments, says it’s almost impossible for
ESG analysis alone to eliminate investment risk and embed better
extractives practice. “Weak governments can be an issue, where
their record can prejudice a company operating in that area,” says
Salazar. “Our job is to ensure the investor knows and has accurately
assessed the risks of firms partnering with governments like these.”
Salazar adds that it’s about more than just reading reports. “When fund
managers go to companies, we tag along, we check on their behaviour
and corporate governance and attempt to ensure the CEO himself sees the
concerns relating to ESG,” he says. “If we can raise awareness in that way
and protect the investor, and impact positively, we are working well.” Salazar
says the impacts of not managing ESG risk effectively are tangible. “ESG
integration is vital to us, and fund managers consider and evaluate the attrac-
tiveness of a company on this basis.” He notes that virtually every investor
presentation for extractives F&C goes to now has health and safety, plus water
on the agenda.
Howarth says ESG risk conscious investment can work, but it can be
undermined by investor greenwash. Nonetheless, “the cost of capital is likely
to become higher for dirty companies,” she says. “ESG is, bit by bit, edging
towards larger influence but it can be one step forwards and two steps back.
In the future, I predict firms who fail to address ESG issues will see risks rising
for their business and increasing pressure from their investors.
“Over time it will become more perilous to ignore social and environmental
impacts. The cost and risk associated with these areas in extractives is huge,
and the long-term risk is serious for these industries.” n
URIELSINAI
Governmentscan’talwaysbetrusted

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Water management
The chilling effect of bad
water policy
By Sam Phipps
Extractive companies are becoming more aware of the impact
of their water use and contamination risks
If the social and economic benefits of successful water management are
obvious, it is tempting to use one word to sum up the risks of failure: Chile.
The South American country highlights what can go wrong if commercial
imperatives dictate water policy.
In 1981 Augusto Pinochet, Chile’s then president, adopted the water code
that is still in use today. It grants the state the right to give water use conces-
sions to mining and logging companies free of charge and in perpetuity. These
could then be bought, leased or sold without any consideration of local needs.
A treaty with Argentina in 1997 subsequently gave foreign mining corpora-
tions unlimited access to water and energy in Chile. The result? Severe water
shortages that have sparked protests by thousands of people across environ-
mental, social and indigenous organisations.
“This wall [of profit] is drying up our basins, it is devastating the water
cycles that have sustained our valleys for centuries, it is sowing death in our
territories and it must be torn down now,” the protestors wrote in a letter to the
president, Sebastián Piñera. They are demanding a repeal of the code and
treaty. The Chilean experience might be at one extreme for scale and impact
Severe water
shortages
have sparked
protests by
thousands
Ethical Corporation | August 2014??? Ethical Corporation | September 2014Water
ZOONAR PF

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More than
70% of Anglo
American
mines are
located in
water-stressed
areas
but the risks of poor water manage-
ment are numerous and widespread
around the world, analysts say.
Constraints
No less than 82% of the global energy
sector is exposed to some consid-
erable degree of risk on water, and
79% of materials and mining interests,
according to CDP-Water 2013. Overall,
it found 57% of global companies are
exposed in some way. The criteria
it considered were: water stress or
scarcity, high water prices, flooding,
regulatory uncertainty and declining
water quality. Companies that take
action to manage water strategically
are proving better financial performers,
analysts say.
Key aspects of water manage-
ment include physical (quantity and
quality of water supply and infrastruc-
ture); regulatory (rules on supply and
discharge, legal licence to operate,
water pricing); social (impact on local communities, social licence to operate)
and reputational.
Extractive sector giant Anglo American, for instance, says more than 70%
of its mines are located in water-stressed areas and therefore water is “more
important than ever” to its future. Last year the group says it saved 32m cubic
metres of water, the equivalent of 13,000 Olympic swimming pools, through
Wett, its water efficiency programme tool. The company, which also main-
tained a water recycling rate of 67% in 2013, aims to design a water-neutral
mine by 2030.
Rusal efforts
Similarly Rusal, the world’s biggest aluminium producer, states its strong
commitment to environmental sustainability, particularly with regard to Siberia
and the Yenisei river. Aluminium production involves the mining of bauxite,
which is initially processed into alumina.
“Water is a principal source of power for Rusal and a key to maintaining
technological processes. That is why the company is committed to keeping
ANGLOAMERICAN
Anglo American is on the road to a water-neutral mine

16
In 2010 the UN
recognised
the right to
safe and clean
drinking water
and sanitation
as a human
right
Water is Rusal’s main source of energy
the rivers, its power and technical
suppliers, clean,” a spokesman for
Rusal’s environmental department
says.
Water used by Rusal in aluminium
production fell by 9% in 2012 from
2011 to 44.6m cubic metres. “Over
85% of Rusal’s aluminium is produced
using renewable and environmentally
friendly hydro-generated electricity
that allows the company to aim for the
lowest CO2 footprint in the industry,”
the spokesman adds.
Rusal’s “safe future strategy” policy,
established in 2007, aims to reduce
the amount of greenhouse gases
produced directly by its plants by half
from 1990 levels, and during the first
half of this year this target has been almost met. In 2011 Rusal established
Yenisei Day, an “ecological marathon” of rubbish collection, sport, art projects
and scientific studies aimed at protecting the Yenisei, which is the largest river
system flowing into the Arctic. In 2013, in Krasnoyarsk alone, more than 30
tonnes of refuse were collected from the river’s shores by volunteers.
Liquid asset?
Claire Cummins, sustainable development consultant at ERM, says under-
standing the potentially complex legal and institutional context of any project
is vital to successfully managing water-related issues. Just as business is
beginning to recognise that understanding access and constraints to water is
a critical issue, society in general has also grasped the crucial role of water in
achieving development goals. In 2010 the UN recognised the right to safe and
clean drinking water and sanitation as a human right.
Managing water related issues needs to include an understanding of how a
project’s use and impact on water might affect neighbouring communities as
well as any implications at regional, national and international levels. The risks
to business from water are not only about securing supply but also managing
business impacts from an unhealthy workforce, disenfranchised workers and
communities and potentially civil unrest.
“I wouldn’t say there is one best-practice solution because the issues vary
so much locally,” Cummins says. “You have to take into account environ-
mental and social contexts as well as geopolitical. In general, water is not well

17
Water should
be seen as
having its own
economic
value
RONCHAPPLESTOCK
Tailings ponds can contain contamination
enough covered in the early stages. Leaving it to the impact assessment stage
is certainly too late.”
There are clues as to best practice in other sectors. A Global Agenda
Council statement on energy security in June 2014 reiterated the Dublin Prin-
ciples of 1992 that water should be seen as having its own economic value,
ie, become a visible part of the equation to determine cost-effective energy
options. For instance, no longer can power plants be evaluated just on fuel
costs or capital costs, the council says. Smart planning must take into account
a richer model that includes life-cycle costs such as fuel collection, refinement
and distribution as well as carbon and water costs.
“When the available supply of water is depleted, energy production becomes
irrelevant,” the Global Agenda Council statement says. Cummins argues that
the same must apply to water management in other sectors, including extrac-
tives, where “a human rights lens” may provide insights into the complexities
of being one water user amongst many.
Sometimes a legal licence to mine or quarry will not necessarily be matched
by a social licence, because local communities concerned about water pollu-
tion will prevent further activity. This can result in severe business interruption
and financial loss.
ERM cites one example of a company caught in this kind of impasse after

18
Water management techniques
Mining companies can use a range of techniques to comply with regulations and ensure the
quality of water leaving mines does not affect users downstream or pollute the environment.
Surrounding surface and groundwater quality should be monitored and various treatment
processes can be applied in different combinations, depending on the site.
Steps include:
• Recycling water used for processing ore, in order to minimise the volume of water needing
treatment.
• Capturing drainage water from precipitation at the mine site via liners and pipes and
directing the water to tailings dams to prevent potentially contaminated water from entering
groundwater or flowing off site.
• Intercepting and diverting surface water from entering the mine by the use of dams to cut
the potential for water contamination from exposed ore and waste rock.
• Allowing the water to evaporate in ponds to reduce the volume of contaminated water. In
dry regions, enough water may be evaporated so that no water needs to be discharged
that contains the contaminants at the mine site.
• Installing liners and covers on waste rock and ore piles to cut the potential for contact with
precipitation and contamination of groundwater.
• Active treatment is also used frequently to counter acidic mine waters. Passive treatment
– taking advantage of natural physical, chemical or biological processes to remove
contaminates – is still under development.
Source: US Environmental Protection Agency
identifying huge mineral reserves in a pristine natural environment. It spent
about $100m on lease and capital costs but could not begin activities for six
years. In another instance, a mine was discharging 230,000 tonnes of tailings
per day into a natural river system. This was within legal limits and, despite
shareholder pressure, the company felt justified to continue. It declined to
name the companies concerned.
However, the shareholders’ ethics committee found this to constitute
“grossly unethical behaviour” and disinvested their entire $850m holding in
the parent company. The share price fell 5% on the day of the announcement,
wiping about $13bn off the company’s market capitalisation.
Key tools that extractive sector companies can use in considering their
water use include modelling, human rights risk assessment and multi-stake-
holder engagement, particularly in the monitoring and management of an
impact assessment, analysts say. “Water is increasingly a high-profile issue
with rising levels of international expectation,” Cummins says. n

19
Essay
Managing social risks in the
extractive resources sector
By Ramanie Kunanayagam and Evelyn Dietsche
How corporations manage the risks that challenge their operational
continuity is premised on the industry’s assessments of, and
responses to, the sources and drivers of social risks
Two sustainability agendas
Over the past two decades, corporations have predominately assessed and
managed social risks on the basis of a sustainability agenda that has been
driven from the bottom-up, focusing mainly on mitigating the local level
impacts of foreign funded extractive resources projects. In parallel, a second,
top-down sustainability agenda has also emerged, evolving from the global
debate on ‘resource curse’ and what to do about it. In practice, the social risks
that challenge corporations increasingly present a fusion of localised discon-
tent, competition between sectors and transformative developments. The first
step for bringing these two sustainability agendas closer together is to recapit-
ulate how they have evolved.
The bottom-up agenda
From the mid-1980s, the key policy concern was how countries could attract
foreign investment to the extractive resources sector. There was a policy shift
away from poorly managed state-owned resources companies and the need
Corporations
have
predominately
focused on
mitigating the
local level
impacts of
projects
Ethical Corporation | August 2014??? Ethical Corporation | September 2014Social risks
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Social risks
The extractive resources sector faces several social risks:
Localised discontent captures situations where communities organise to express their discon-
tent over the impacts of individual projects, including concerns over land access, resettlement,
potential noise, health, safety hazards and environment degradation. Localised discontent
ranges from community protests temporarily challenging the continuity of project development
and operation, to violently demonstrated objections before development has commenced. A
major point of contention is often whether compensa-
tion is commensurate to the impacts suffered.
Competition between sectors arises when extractive
resourcesprojectsinterferewithothernaturalresources-
based economic and social activities, such as agricultural,
fishing and forestry. Affected stakeholders depend on
these activities for their livelihoods and/or their collec-
tive identity and organise to defend their interests
against the competing extractive resources sector.
Stakeholders may not per se be opposed to the
extractive resources sector, but they want their rights to the use of land and/or water resources
explicitly recognised before specific extractive projects are being developed and operated.
The recognition of existing rights provides them with a basis for negotiating compensation and
benefit sharing. It is possible that the formal rights granted by a national-level central public
authority to resource developers contradict existing rights, for example because these include
non-documented customary rights or because some other, possibly sub-national, public
authority has also already allocated rights.
Transformative developments comprise political and social upheavals affecting the extractive
resources and other economic sectors. One case involves citizens’ fundamental discontent
with government and its public authorities, the policies pursued, and/or the public goods and
services provided (or not). Examples include countries such as Indonesia after Suharto, Peru
following the downfall of Fujimori, and perhaps those North African and Middle Eastern coun-
tries where the aftermath of the ‘Arab Spring’ is unfolding. The second case involves countries
where emergence of a sizeable extractive resources sector has the potential to fundamentally
change a country’s political economy and internal power balances, including for example the
mining sector in Mongolia and the recent hydrocarbon discoveries along the East African coast.
Sovereign disputes are underpinned by international legal question over the sovereignty to
allocate rights to explore and exploit extractive resources, including the cases of South Sudan,
the Palestinian Territories, Western Sahara, and Namibia under Apartheid.
VOLKERGÖLLNER
Miners and farmers need to find agreement

21
When prices
took a
downturn,
social
investments
became
vulnerable
to cost cuts
to overcome severe fiscal challenges
at a time when commodity prices were
low. In this context, the bottom-up
sustainability agenda was prompted
by the large-scale projects that were
developed with private foreign invest-
ment and which soon drew attention
to their negative local-level impacts,
and it also built on the collective
action that the environmental move-
ment had already achieved dating
back to the late 1960s/early 1970s.
Greenpeace, Friends of the Earth and
other environmental advocacy groups
had successfully pressured govern-
ments to consider the environmental
and social impacts of the decisions
they take on supporting large-scale
industrial activities. Alongside this
development, corporate social respon-
sibility (CSR) emerged as the voluntary
and self-regulated industry response
to external pressure.
The extractive resources sector’s
initial approach to CSR was paternal-
istic. Corporations provided comprehensive packages of goods and services
to their workers and surrounding local communities. Enclave mining towns
became islands of relative prosperity in the midst of poverty. Corporations
resumed a quasi-governmental role in providing public goods and services.
Examples include the mining towns in the Australian Pilbara, or those main-
tained by the Rossing Foundation in Namibia and the Palabora Foundation in
South Africa. Similar examples are found throughout Latin America.
The major downside of this approach was its vulnerability to the cyclical
nature of the sector. When prices took a downturn, social investments became
vulnerable to cost cuts and exposed the unsustainability of these islands and
their complete dependence on corporations.
A second CSR approach is philanthropy, typically framed around ‘giving
something back to society’ in return for the economic opportunities private
entrepreneurs and corporations are able to capture. This approach has
its roots in the United States and has involved large-scale grants, making a
mark in the space of public policies and research. Following in the tradition
MICHELPORRO
Greenpeace campaigns have impacted the oil business

22
The IFC
published
its first
Environmental
and Social
Performance
Standards
in 2006
of the Ford Foundation, the Rockefeller Foundation and others, more recent
examples include the Gates Foundation, the Vale Foundation, George Soros’
support to the Open Society Institute and other non-governmental organisa-
tions, the Aga Khan Foundation, and the Tata Trust. Some companies have
replicated this approach on the small-scale, providing donations and sponsor-
ships to a wide range of small projects. If at all, this approach addresses social
risks only in the short-term.
Equator Principles
The scale of the projects developed in lower income countries with private
foreign investment has prompted a departure from these CSR approaches.
In the run-up to the World Bank Group’s 50th anniversary in the late 1990s,
an influential NGO campaign criticised the Group’s involvement in the sector,
prompting first the development of the Equator Principles and several global
reporting initiatives and then the development of the so-called ‘Do No Harm’
practices that have since guided corporate standards on assessing and miti-
gating local-level project impacts. Evolving from its earlier safeguard policies,
the World Bank Group’s International Finance Corporation (IFC) published its
first Environmental and Social Performance Standards in 2006. In 2011 these
Standards were further strengthened and the Equator Principles also adopted
them as their reference point. The IFC Standards are generally recognised as
MARIOVEDDER
Philanthropy won’t cut it in the long run

23
Concerns
about
‘resource
curse’ started
to flourish from
the mid-1990s
the international benchmark for corpo-
rate social performance and continue
to be expanded.
The top down agenda
The NGO campaign around the World
Bank’s 50th anniversary also fed into
the debate about ‘resource curse’,
which has evolved in parallel to the
bottom up agenda. Broadly speaking,
this debate has proposed that coun-
tries dependent on the production of
extractive resources are more likely
to experience negative economic,
political and social outcomes. In the
early 2000s, the World Bank Group
committed to conducting the Extractive
Industry Review (EIR) to reconsider its
role in supporting extractive resources
projects. This review concluded that
the Group should not get involved in
funding such projects unless host
countries could demonstrate a level
of ‘good governance’ that would safe-
guard them against these negative
outcomes.
Concerns about ‘resource curse’
had started to flourish from the mid-1990s. Academic research had produced
two strands of arguments. One focused on the macro-economic impacts of
an export-oriented extractive resources sector, highlighting challenges such
as the volatility of commodity prices and resources revenue streams, the
potential negative impacts of an appreciating exchange rate (‘Dutch Disease’),
or crowding-out effects harming the non-resources traded sectors. Another
strand focused on the political economy of resource-dependent economies,
emphasising that negative aggregate outcomes might be derived from the
rent-seeking behaviour of politicians and bureaucrats, or may be the result
of rentier states, where the sector has negatively shaped countries’ socio-
political structures.
Both strands have prompted a search for answers to the question what
can be done about ‘resource curse’. The proposition, that ‘good governance’
could provide a safeguard to prevent poor macro-economic performance as
KOKOPHOTO
Blessing or curse?

24
Knowing
that ‘good
governance’
matters is not
the same as
knowing how
to achieve it
well as rent-seeking and rentier states, has led international NGOs and the
home governments of international corporations to support the conjecture
that more transparency in the sector might lead to better accountability and,
therefore, to better government decisions and policies.
Over the past decade, this top-down agenda has gained significant
strengths, but it is also facing several challenges. First, knowing that
‘good governance’ matters is not the same as knowing how to achieve it in
particular country contexts. Second, increasing transparency is but a first
step towards improving accountability
and public policies. Third, there is
increasing overlap and duplication in
the efforts undertaken by international
NGOs and development agencies.
Fourth, this agenda still has some way
to go before it can demonstrate its
actual impact.
The industry has started to respond
to this agenda with initiatives such as
the ICMM’s Resource Endowment
Initiative (REI) and the subsequent
Mining: Partnerships for Development
(MPD) toolkit and other efforts. These
have typically looked back to provide
an evidence base for discussing occurred impacts. However, the industry has
not yet fully grasped how it could more constructively contribute to assessing
potential impacts upfront, beyond those that occur at the local project level.
The challenge ahead is ‘adding value’
The fusion of localised discontent, competition between sectors and trans-
formative developments is increasingly putting pressure on corporations to
add more value to host countries’ economies and societies. Corporations
have two options. The first option is the developmental approach; it involves
stepping in for government and its public agencies to provide public goods
and services to local communities and beyond. In a post-paternalistic and
beyond-philanthropy world, this approach involves corporations resuming
the role of a quasi-development agency seeking to address a wide range
of issues while not directly controlling these, as was the case under the pater-
nalistic approach.
This approach bears two risks. First, as was the case with the paternalistic
approach of the earlier days, corporate budgets are vulnerable to the cyclical
nature of the sector, thus posing a sustainability challenge for the corporate
PAULABRONSTEIN
Some mining companies are providing public services

25
Enlightened
self-interest
can help to
create shared
public value
PAULABRONSTEIN
Skills can benefit the local workforce
provision of public goods and services. Second, while this approach can
help to address localised discontent, it is unlikely to address the challenges
underlying competition between different natural resources sectors and
more fundamental discontent with governments, their policies and poor
provision of public goods and services. In short,
companies cannot act as a substitute where public
agencies and policies continue to fail, including
capturing the opportunities that come with extractive
resources projects.
The alternative option is to adopt a more
sustainable, strategic approach to social invest-
ment. This option builds on four elements. The first
is to conduct strong, front-end loaded baseline
and impact assessments that extend beyond the
local project impact area to capture and analyse
the sources of, and drivers behind, the full range
of potential socio-political and socio-economic
risks that a project may face. This means that project-level impacts are exam-
ined also for wider structural and institutional conditions that could potentially
affect impact mitigation and management, and that the relative importance
of a project for the regional and/or national economy is also assessed and
factored into a project’s social risks and opportunities profile.
The second element is identifying entry points where corporate social invest-
ment can add value to areas where public policies authorities are currently not
sufficiently addressing the drivers of social risks and opportunities. Corpora-
tions may link their social investment to issues where the expressed needs
of affected citizens overlap with corporations’ business interests. In short,
enlightened self-interest can help to create shared public value. For example,
an obvious area for collaborative social investment is skills and enterprise
development.
The third element is investing in delivery-oriented development partners
staffed with experts who understand the public policy perspective of economic
and social development, while at the same time being able to work with corpo-
rates and other third parties to deliver concrete beneficial outputs.
Finally, the fourth element is using corporately funded pilot interventions to
test the grounds for leveraging and scaling such interventions through more
sustainable, collaborative efforts. These would bring together the resources of
governments, corporates, and developmentally oriented third parties for long-
term solutions to addressing the fusion of localised discontent, competition
between sectors and transformative developments – and to better capture the
opportunities that the sector entails. n

26
Ethical Corporation | August 2014??? Ethical Corporation | August 2014?? Ethical Corporation | August 2014??? Ethical Corporation | September 2014Vedanta
26
CEO interview: Tom Albanese, Vedanta
A safe pair of hands
By Andrea Spencer-Cooke and Fran van Dijk
For Tom Albanese, the new chief executive of diversified British-Indian
resources major Vedanta, health and safety is non-negotiable
Vedanta Resources is no mining minnow. Listed on the London Stock
Exchange, it is a global, diversified company with operations in India, Sri
Lanka, Zambia, Namibia, South Africa, Liberia, Ireland and Australia, with inter-
ests in zinc, lead, silver, copper, iron ore, aluminium, power, oil and gas. As the
world’s largest integrated zinc-lead producer, it boasts among its key assets
the world’s largest zinc-lead mine, Rampura Agucha. It is also the largest
private sector producer of iron ore in India, and owner of the fastest growing
energy company in the world – Cairn India.
Booming demand
All this puts Vedanta in a prime position to benefit from booming demand in Asia’s
third largest economy: in the first quarter of 2014 alone, according to the Finan-
cial Times, India’s GDP expanded by almost 6%. And it is this growing market
demand for Vedanta’s products that frames the view of Tom Albanese, incoming
chief executive of Vedanta and its India-focused subsidiary Sesa Sterlite, when it
comes to the company’s corporate social responsibility (CSR) challenges.
“There is strong, long-term, enduring demand for what we produce,”
Albanese says.
Vedanta is
the largest
private sector
producer of
iron ore in
India

27
Ethical Corporation | August 2014??? Ethical Corporation | September 2014Vedanta
“My long-term vision for
Vedanta is to be seen as a leading
supplier of natural resources
and meet higher levels of global
wealth and lifestyle as well as
rising expectations about water,
community engagement and
health and safety. The markets
are there for us if we can properly
manage quality and meet today’s
and future expectations.”
With growth comes visibility,
and these expectations are
changing along with Vedanta’s
expanding role as an industry
major. As a global player, Vedanta
must play by global stand-
ards, and this lies at the heart
of Albanese’s approach. Before
taking up the reins as Vedanta’s
chief executive in April this year,
he held the top job at rival mining
giant Rio Tinto, and brings to his
new job a sound understanding
of the extractive industry’s key
CSR risks.
Zero tolerance
Six months is not long, but
already the newcomer is crys-
tal-clear on his number one
sustainability priority: improving
Vedanta’s health, safety and envi-
ronment (HSE) record. Albanese
doesn’t mince his words. “We
have a safety challenge. We have a safety record that we’re not proud of,”
he says. “I’ve told the board it is not acceptable. I’ve made it one of my own
responsibilities to improve this.”
His strategy? To bring the company into a position “where it is seen to match
expected global rather than local norms.” In other words, to align Vedanta with
global industry best practice.
Caption needed
Vedanta Cheat Sheet 2013-14
• UK-listed diversified global natural resources major active
in zinc, lead, silver, copper, iron ore, aluminium, power,
oil and gas
• Active in Australia, India, Ireland, Liberia, Namibia, South
Africa, Sri Lanka an Zambia
• Direct employees 28,000
• Subcontractors 60,000
• Indirect work opportunities 500,000 (estimated)
• Total revenue $12.945bn
• Payments to exchequer $5.295bn
• Underlying attributable profit $93.4m
• Community investments $49m
• Founder and Executive Chairman Anil Agarwal
CEO Tom Albanese has high expectations

28
This requires culture change and intense focus from the top, but Albanese is
confidentVedantacanliveuptoitsaspirationof“zeroharm”andis“veryimpressed”
by his team’s willingness to aim for best practice. Our Journey Towards a
Sustainable Future, Vedanta’s Sustain-
able Development Report 2013-14,
notes a fall in the number of Category
4 and 5 environmental spillages and
a 37% reduction in lost-time injury
frequency rates over the past four years,
so the trend is in the right direction.
But the company definitely has a
way to go, especially with rolling out
best HSE practices to contractors – a
yawning gap in the 2013-14 sustaina-
bility report that Albanese is aware of.
“It’s where all the mining companies
see a higher level of safety problems,
when people come in without the training our employees have,” he says.
Vedanta founder and executive chairman Anil Agarwal agrees. In the
2013-14 sustainability report Agarwal writes: “The most important area where
we must do better is in our employee and contractor fatal-
ities, and both Tom and I share the view that the current
fatalities and safety performance need to be improved
drastically.”
With some 75% of Vedanta’s effective labour force
contracted out, this is a critical key performance indicator
for future reports, along with human rights awareness
and anti-corruption. Vedanta is currently conducting a
gap analysis on compliance with the UN Convention on
Human rights to become a signatory.
Building trust
As an extractive company active in developing econo-
mies, contributing to local communities is a huge part of
Vedanta’s CSR approach. In 2013-14, the company poured some $49m into
community development, and here, Albanese is upbeat. “I think we’ve done a
very good job on CSR,” he says. “Over 4 million people have been touched by
Vedanta’s programmes in education, housing, or women’s education. These are
strong CSR programmes, as strong as I’ve seen for any of the mining majors.”
But Vedanta faces fierce criticism from NGOs such as Amnesty Interna-
tional and grassroots activists. Indeed an entire website, www.foilvedanta.org,
Contractors need better HSE practices
Strategic Pillars
Vedanta’s Business Strategy:
• Growth
• Long-term value
• Sustainability
Vedanta’s Sustainability Strategy:
• Responsible stewardship
• Building strong relationships
• Adding and sharing value

29
OLISCARFF
Human rights NGOs have criticised Vedanta
is devoted to the company’s alleged misdemeanours, ranging from pollution
and illegal mining to human rights abuses and tax evasion. Addressing these
concerns head-on and rebuilding corporate reputation is a must if Vedanta
wants a place at the best practice table and a clear licence to operate.
Albanese is working on spearheading a cultural shift in the organisation to
engage with local communities and earn consent. He says: “Over the last few
months, we’ve recognised that we won’t develop until we have the consent
of communities. This is an important change and achievement – we’ve had
important projects held up because we were not meeting stakeholder expec-
tations, so I see a direct contribution to the bottom line.”
He intends to move the company into a place “where we engage more with
the global civic community and non-governmental organisations” and build
more partnerships. It may be too early for the “trust” word, but
Vedanta’s chief executive grasps the nature of the challenge. He
says: “In the resources sector there will always be differences of
opinion with civil society, so it has to be about how we deal with
those relationships. We may not agree all the time, but we have to
have mutual respect.”
Towards a sustainable society?
Vedanta’s business strategy is to combine growth with long-term value and
sustainability. But what does this mean? “To ensure a long-term future of the
Group,” the company states, “we aim to grow our reserves and resources at
High returns
Vedanta has delivered a
total shareholder return
of 200% over 10 years
Albanese
is working
to engage
with local
communities
and earn
consent

30
Andrea Spencer-Cooke
and Fran van Dijk are
Founding Partners of One
Stone Advisors, a global
sustainable business
consultancy and certified
B-Corp.
Critical Voices Timeline
In recent years, Vedanta has come under fierce criticism from NGOs for
health, safety and environmental violations across its operations and those
of subsidiaries.
2010
• Amnesty International, Human Rights Watch and ActionAid join celebrities
Bianca Jagger, Michael Palin and Joanna Lumley to campaign against a
proposed bauxite mine in Nyamgiri Hills, Orissa, homeland of the Dongria
Kondh people.
2011
• Amnesty reports toxic mud leaking from red mud ponds linked to
Vedanta’s alumina refinery in Orissa. A report by the Indian Central
Pollution Control Board and State Pollution Control Board denies this.
2012
• Foil Vedanta reported several pollution incidents relating to fly ash at
Vedanta’s Jharsuguda aluminium complex in Odisha.
2013
• The Indian Supreme Court permits resumption of iron ore mining by
Vedanta subsidiary Sesa Goa at Chitradurga in Karnataka, following
a 2011 ban on mining in the area for “reckless” and “environmentally
irresponsible” operations.
• Foil Vedanta reports gas leak from Vedanta subsidiary Sterlite’s copper
smelting plant at Tuticorin, Tamil Nadu. The smelter was shut down
following public pressure for breaching emissions limits and reopened
two months later.
a faster rate than we deplete them through constant exploration and acqui-
sitions.” That kind of limitless growth inherently contradicts most accepted
definitions of sustainability.
To his credit, Albanese gets this. He says: “There are limits on how using
non-renewable resources can meet the definition of sustainability – the very
nature of our business is that we’re extracting something that’s not renewable
in anyone’s lifetime. But that being said, we’re also in the business of providing
enduring value over a long period. Mining can create sustainable outcomes.”
For Albanese, sustainability is about doing business with a smaller footprint,
empowering employees, making sure communities are comfortable with, and
benefit from, the company’s presence. “It’s about a sustained effort, looking
away from quick wins, a multi-year journey.” n

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