What Can We Learn From the Rio Tinto Disaster?

In May of this year, mining company Rio Tinto RIO destroyed a 46,000-year-old sacred Indigenous site in Western Australia’s Juukan Gorge so that it could mine iron ore. The company demolished two rock shelters, or caves, that held evidence of human habitation for millennia and yielded artifacts like stone relics, faunal remains, and human hair, to get at around USD 135 million worth of iron ore.

The destruction was irreversible but legal. Australian media firm ABC reported that, “Rio Tinto obtained permission to mine in the area in 2013, a right which was not affected by the discovery of ancient artifacts such as stone relics, faunal remains, and human hair in one of the Juukan caves a year later.”

Sustainalytics points out that Rio Tinto was advised of the high significance of the site in 2014 and 2018 but did not re-evaluate its plans. In August 2020, the company revealed that it had had three options to avoid the site but chose to destroy it and that the traditional owners had given their consent to disturb the site without being presented alternatives.

In response, Rio Tinto’s chief executive officer Jean-Sébastien Jacques has agreed to step down and will remain in the position until a replacement is found, or until March 31. Chris Salisbury, the iron-ore division head, and Simone Niven, the corporate relations head, will also depart the company. Additionally, the three will not receive a performance-related bonus for 2020, and Jacques' 2016 Long-Term Incentive Plan award will be reduced by GBP 1 million.

Sustainalytics rates this controversy as Category 4 because of the high impact of the significant cultural site's destruction, particularly on Indigenous communities, and the management failures that contributed to its occurrence. Rio Tinto has conceded that the destruction should not have occurred.

Rio Tinto chairman Simon Thompson said in a statement that, “What happened at Juukan was wrong, and we are determined to ensure that the destruction of a heritage site of such exceptional archaeological and cultural significance never occurs again at a Rio Tinto operation. We are also determined to regain the trust of the [traditional owners of the caves] Puutu Kunti Kurrama and Pinikura people.”

For some, though, Rio Tinto’s statements are too little too late.

The BBC reported that the company knew what it was doing--and did it anyway. “In the days running up to the caves' destruction in May, Rio Tinto hired lawyers in case opponents tried to seek injunctions to stop them," the report said.

This incident is a clear-cut example of why governance matters, and why shareholders need to take a more active role in holding companies in which they have invested accountable. Shareholders can also take away learnings from this incident, so that they can do their part in ensuring something like this never recurs.

What Can We Learn? As investors, the question is: What can we learn from this appalling event?

Morningstar’s director of sustainability stewardship research, Jackie Cook, pointed to three key points to consider in light of what has happened:

• How this damages Rio Tinto's social license to operate, and what it is going to cost shareholders
• The importance of strong senior leadership, including board leadership, for navigating ESG risks
• Growing awareness of racial injustice and how this is relevant to resource extraction around the world

Let’s look at each of these in turn.

Erosion of Trust Will Cost A company's social license to operate refers to whether a company's business, operating practices, and procedures are acceptable to all its stakeholders, including employees, investors, the communities it serves, and the public. It is a kind of trust that the company builds over time with all stakeholders, including the community in which it operates and the community it serves.

“Rio Tinto was widely known for its public commitments on responsible mining, and specifically Aboriginal land rights, and for holding itself to high standards of conduct, over and above minimum legal requirements. This incident shows a significant gap between Rio Tinto’s stated commitments and their consistent application in practice, which is difficult to reconcile. As a result of this incident, Rio Tinto has suffered considerable damage to its reputation, trust, and social licence to operate,” pointed out Alberto Serna Martin, Sustainalytics’ associate director of ESG research.

He added that with Rio Tinto’s history of responsible mining, this incident was an aberration: “I can’t understand what was in their mind.”

This erosion of trust will cost the company--and any other company that fails to act--in the long run.

“In Rio Tinto’s case, it has many other projects ongoing in Australia, and also in Africa and Canada. It needs community and stakeholder approval for these projects. Now, negotiations will be tougher and will take longer. This will end up costing more,” Martin noted.

Bonnie Lyn de Bartok, founder and CEO of The S Factor, agrees and adds that the cost of this erosion of trust would be far more than the USD 135 million in iron ore--and could in fact run into the billions.

Problems at the Top For Cook, the decision from Rio Tinto senior management to go ahead with destroying the Juukan site was incomprehensible. "It's hard to believe that the company thought it could get away with this without public outcry and shareholder revolt. Clearly, senior management is not in touch with how the world would view this. Perhaps they anticipate that the anger and outrage will blow over as public attention shifts to the next thing."

She adds, “Firing the executives, but leaving long term bonuses partly intact, seems like a salve, not a remedy.”

“The company could have gone with three options that caused no harm to the sites, but instead, chose to go with the fourth – the only one that harmed the site. I agree that the steps that the board has taken against these executives are not enough,” de Bartok says, pointing to Rio Tinto’s Cultural Heritage Board review, that found that as far back as 2012-13, the company had four pit options to consider of which, three avoided the Juukan 1 and Juukan 2 rock shelters to varying degrees. The fourth option impacted the rock shelters in order to access higher volumes of high-grade iron ore. This was the mine design option chosen by Rio Tinto and it was the one that was advised to the traditional owners in March 2013 as the basis for the section 18 notice that was submitted later that year.

“While there is always a risk of bad actors in any food chain, that does not seem to be the issue here… but Indigenous rights were clearly violated and given the extensive work that’s been done in Australia to address historic wrongs with respect to its Indigenous population, it is particularly surprising. Also, there has been little mention of the Board’s responsibility, especially as it pertains to the setting of executive compensation,” pointed out Andrew Hoffman, portfolio manager at Leith Wheeler Investment Counsel.

Going a step further, de Bartok says, “The company should not be given permits.”

Cook points out that this issue is very likely to be on the corporate ballot at the company's next AGM in the form of a human-rights shareholder resolution and perhaps votes against board members and pay practices. However, questions remain.

“Is that enough? What governance arrangements would limit the likelihood of this happening again? What can we learn about the management and board skills needed to run a successful company now and into the future?” Cook asks.

Shareholders aren’t particularly proactive when it comes to controversy, de Bartok points out. Both shareholders and the company ignored stakeholder concerns, failing to be reactive at critical moments. “This was avoidable,” she points out.

Hoffman agreed, saying “When you also consider the underlying dispute was not new (since 2013 or earlier) one should wonder just how vocal shareholders were. It’s easy for a pension plan to come out now and point fingers at the company but what does their (proxy voting) track record look like and/or engagement with the company? Investors can sometimes forget ownership comes with responsibility and that their voice matters.”