Rio Tinto Juukan Gorge case highlights ESG risks for investors

Environmental, social and governance (ESG) issues are in sharp focus with Rio Tinto’s board examining the company’s destruction of a 46,000-year-old aboriginal heritage site in WA.

Rio Tinto’s (ASX:RIO) case is highlighted in a report from S&P Global ‘The Growing Importance of ESG in the Resources Sector’ which said global investor scrutiny of ESG risks is increasing amid rising awareness of cultural issues.

Investor groups have campaigned for Rio Tinto to explain how the 46,000-year-old Juukan Gorge rock shelters in WA came to be destroyed at its Brockman 4 minesite in May.

“Investor activism on ESG issues is increasingly strident. We expect ESG risks to become more pertinent for mining companies as they implement their projects,” said the report’s author Paul Bartholomew, S&P Global Platts’ Asia-Pacific head of metals news and insight.

ESG issues may not always be clear-cut, and the Rio Tinto event highlights the fact that social risk factors go beyond legal obligations, said the report.

Stakeholder satisfaction

Any company looking to develop a new project or expand an existing one will need to ensure all stakeholders are satisfied above and beyond government legislation, it said.

“Rightly or wrongly, the investor will be concerned about how things ‘look’ to the wider market and community,” said the report.

S&P Global Ratings, the credit rating unit of S&P Global, said it is taking ESG issues into account as part of its underlying corporate ratings criteria and they can affect the unit’s opinion of the creditworthiness of a corporate entity.

“ESG factors may have a positive or negative influence on an entity’s credit quality when compared with sector peers or the broader resources sector,” said report co-author S&P Global Ratings credit analyst, Minh Hoang.

ESG issues important for investor groups

Super fund HESTA and the Church of England’s pension fund have called for answers from Rio Tinto on the Juukan Gorge issue. ESG fund managers are attracting more investor interest.

Rio Tinto said in a statement on its website it “deeply regrets” the events at Juukan Gorge and has apologised to the Puutu Kunti Kurrama and Pinikura people, the custodians of the heritage site.

“The destruction of the rockshelters should not have happened, and we are absolutely committed to listening, learning and changing,” said Rio Tinto.

The company said it is taking steps to strengthen its cultural heritage governance, controls and approvals processes in its iron ore business.

Fellow iron ore miners, BHP (ASX:BHP) and Fortescue Metals Group (ASX:FMG) have either put on hold or are reviewing plans to mine in areas containing aboriginal heritage sites in the Pilbara region of WA, said the report.

Oil and mining companies consider ESG in investment plans

Other resources companies have come under investors’ magnifying glass for ESG risks.

Thermal coal producers were the subject of discussion earlier this year when BlackRock said it will taper its investment in the sector because of environmental regulations.

Oil majors BP and Shell have set targets for their carbon emissions in response to investors’ calls, and Woodside (ASX:WPL) and Santos (ASX:STO) have expressed similar sentiment, said the report.

But S&P Global warned in its report that implementing wider consultation processes for resources projects could mean projects take longer to develop.