The irony of Lonmin - an award-winning sustainable investment
- Maximilian Pichulik
- 27 Aug 2012 02:08 (South Africa)
Over the weekend, I pulled out Lonmin’s 81-page 2011 Sustainability Report. I dwelled over their glistening sustainability credentials, which include:
- 3rd by Sustainability Services for GRI (Global Reporting Initiative) performance
- Excellent Ranking by Ernst & Young for 2010 Sustainable Development Report
People, planet, and profit are seemingly important to Lonmin, and are continually stressed throughout their sustainability report. Lonmin was even actively marketing itself as a “sustainable investment” up to May 2012, according to its Citi roadshow presentation.
However, there were “principal risks” identified within Lonmin’s staff and community stakeholder engagement. They stated that “poor community and employee relations” could result in “strike action and civil unrest”. There was an engagement strategy with unions and employees, alongside recognition agreements in place. Furthermore, there also seemed to be such community unrest within the Marikana operations that a “Bapo Ba Mogale Development Team” was established and chaired by Lonmin’s CEO, Ian Farmer. But it seemingly all went wrong.
Sustainable investment has been a journey over many years, emanating out of stakeholder activism, the increasing role of corporate governance, and in recent years, a growing consciousness that business must operate by a set of values and practices, which can sustain itself in society and environment for decades to come.
I remember spending some time with the renowned strategist and Harvard professor, Michael Porter. He said execs in the US were not talking about “sustainability” 10 years ago, and that the role of business in society and the environment was a fairly new discipline. There is also a conscious shift amongst global individual and institutional investors seeking a blend of financial and/or social and environmental returns, termed “blended value" by Jed Emerson in the US.
Not so long ago, our SRI funds were merely means of negatively screening “sin” investments like tobacco, alcohol and gambling. Local asset managers like Fraters developed “Shari’ah-compliant” funds, which Islamic investors could participate in. As the industry evolved, it became apparent that the financial markets needed a common language to measure environmental, social and governance factors. In 2000, the Global Reporting Initiative (GRI) established its first full guidelines on how to identify, measure and target non-financial metrics. The King 3 report also placed a particular importance on the “triple bottom line” and integrated reporting as part of good corporate governance, as companies cannot separate their business objectives from the society and environment in which they operate.
From 2006, the sustainability report floodgates opened, with global mining, petroleum and financial services companies producing beautiful, lengthy documents. All of them read like a child’s lullaby. Smiling black children, green grass and wind farm-laden landscapes became the order of the day. Yet we would read shocking stories of the oil fields in Niger Delta or reports from the UK Aid-funded “Alternative Report", which stripped sustainability reports of major multinationals line by line, providing detailed accounts of unethical practices in communities in which they operate across the world. It became all too common, even in SA, that a company could produce glossy, award-winning sustainability reports, spend 1% of post-tax profit on CSI (Corporate Social Investment), yet maintain a culture where senior managers couldn’t have cared less about sustainability issues.
When it comes to mining and sustainability, grey areas are prevalent. The nature of exploding rock, extracting resources with humans and heavy machinery, the imminent safety risks and the potential damage of natural ecosystems are some of the impact risks, which need to be managed. In mining, there is seemingly no win-win situation for financial, society and environment returns. There is only a weigh-up of both positive and negative impacts to manage. The recent fracking debate is a great example of this socio-economic and environmental “weigh-up”. I just often wonder how we compare socio-economic gains to the loss of human life and sensitive environmental ecosystems.
Coming back to Marikana, the two real burning questions for me are: Firstly, does an average investor know what he/she invests in, when choosing a listed “sustainable” investment? Are there businesses listed on “for-good” indices, pushing the right E(nvironment),S(ocial) and G(overnance) marketing buttons, yet involved in unethical business practices?
Secondly, the question of controls and independent verification becomes important. If there are serious social, environmental and governance risks, could there not be a mechanism to revoke a listing on a “for-good” index. An independent “impact” verification/assessment of Lonmin would have quickly understood the underlying risks in their Marikana stakeholder relations. These risks could have easily been flagged if exchanges or rating agencies took these non-financial metrics seriously, with real financial consequences (de-listing from the index) to Lonmin, if the situation wasn’t rectified. Perhaps, if Lonmin’s stakeholder issues had been flagged beforehand, and the risks understood by the market, the market would of priced this risk, and perhaps placed more attention on the problem prior to a tragedy occurring.
Although Marikana has left much more than a bad taste in all our mouths, and Juju’s drumbeat for economic freedom beats louder, perhaps the debate of who shares the spoils of resource wealth should be broadened. What constitutes an ethical and values-driven private mining industry that provides benefits to all stakeholders? How can we find ways to incentivise and amplify a positive impact on society?
One outcome I do wish out of the Marikana tragedy is the recognition that we as a society, and our financial markets, cannot support unsustainable practices. Cyril Ramaphosa, an ANC NEC member and director of Lonmin, said in the Sunday Times, “We need to think beyond the social and labour plans that mining companies develop. We must measure success not merely by regulatory compliance, but by the tangible differences we make in the lives of people in mining communities.” I believe that with the right tools to measure and act on risks before they occur, the financial markets can play a powerful role in supporting sustainable practices. South Africa’s yardstick for success cannot be measured in financial and GDP growth alone. We need more inclusive measures. DM