11th in a series

T his Eurosif sector report has been compiled with research by GES Investment Services. It describes themajor environmental, social and governance (ESG) challenges facing the extractives industry as well asthe associated risks and opportunities these pose for long-term returns.

EXTRACTIVES OVERVIEW The importance of the extractive industries cannot beunderestimated. This sector drives the global economy, supplyingmost of our consumer products and associated services. In 2009,sales from the world’s top five listed mining companies wereabout €147 billion, whilst the top five oil & gas producers soldproduct worth nearly €1 trillion (fig 1).1 The most importantcommodities extracted from beneath the ground, by order ofrevenue in 2009, included oil & gas, coal, copper, iron ore, gold,aluminium, phosphate, lead, zinc, nickel, platinum and diamonds.A range of other industrial minerals used in chemicals andconstruction industries are also extracted such as potash,gypsum, kaolin, salt and asbestos.

The extraction of minerals and hydrocarbons exposes companiesand communities to a range of environmental, social andgovernance (ESG) risks which need to be carefully managed.Contributing factors include: high energy and water use,extensive physical impacts, the presence of toxic metals andother chemicals, and involvement in politically unstablecountries or conflict zones. In addition, project life cycles arelong and complex, involving exploration, development, mining,production, refining and product transportation to markets.Many extractive sites also require long-term post-closure care.

EXTRACTIVES TRENDSindigenous lands, and oil & gas from deepwater. The most salientexample from recent times was the April 2010 blow-out of BP’sMacondo oil well in the Gulf of Mexico. Due to the difficultoperating conditions found 1500 metres deep, BP was unable toprevent the blowout and mitigate the resulting spill quicklyenough. The financial impact on the company has also beensignificant. This experience illustrates why companies need robust,tailored safety and environmental engineering technologies andmanagement systems in place in order to prevent incidents andminimise their impacts, both ESG and financial.

Despite the ESG challenges, there are reasons for optimism.According to the World Bank Extractive Industries Review,“extractive industries can contribute to sustainable development,when projects are implemented well and preserve the rights ofaffected people, and if the benefits they generate are well used.”

The depletion of relatively high-grade, easy to extract mineral andhydrocarbon resources means that companies are transitioning intomore challenging operating environments to maintain productionand meet demand. Challenging operating environments, bothphysical and regulatory, imply greater ESG risks and are found bothin emerging and advanced economy settings. Overall, there hasbeen an increasing focus on emerging economies in recent years(fig 2) - particularly in parts of Africa and Asia. This trend showsthat companies are increasingly operating in areas of highenvironmental and social sensitivity. It also increases the likelihoodof being exposed to corruption practices and to regimes that maynot share extractive revenues fairly among their populations.

Companies operating in developed economies, such as Norway,Greenland, the USA, Canada and Australia also encounter higherESG risks when extracting arctic oil & gas, oil sands, minerals from

Figure 1. The world’s top five oil & gas (blue) and mining (yellow) companies, ranked by annual sales 2009.2

Extractives

1 Forbes Magazine, “Global 2000 List”. New York: 2009.2 Humphreys, D, “Emerging Players in Global Mining”. Extractive Industries and Development Series #5, World Bank, Washington DC: June 2009.

Figure 2. Global metal production growth share between emerging and advanced economies (World Bank, 2009).2

The following sections of this report summarise the key issues, risks and opportunities that extractive companies face, and provide examples ofgood practice with two case studies.

Sources: worldsteel, UNCTAD,WBMS, Brook Hunt

KEY CHAESG ISSUES● The production and consumption of fossil fuels is the source of 60%

of global greenhouse gas (GHG) emissions.3 Oil and gas productionamounts to about 6%, metals extraction to 5% and coal mining toabout 4% of total global GHG emissions.4

● The highest upstream GHG emissions occur in coal mining, aluminium5 and steel production, and production of hydrocarbonsfrom depleted reservoirs, oil sands, shales and coal.

● Extractive operations result in physical alterations to land,surface water and groundwater onshore, and to the seabed inoffshore environments. They are also responsible for highwater usage, noise and dust emissions, and introduction ofnon-endemic species,7 all of which can severely impactbiodiversity and human health.

● Land subsidence around underground mines is a potentiallymajor physical impact which can require the relocation ofentire towns. Physi

EcosyDistur

● The main wastes from mining are waste rock and processtailings. These can release toxic heavy metals, acid minedrainage, cyanide and other process chemicals into theenvironment, which endanger all forms of life. Large minesgenerate hundreds of thousands of tonnes of this material,which must be stored in properly engineered facilities.

● The key waste streams from oil and gas operations are drillcuttings, drill fluids and produced formation water (PFW),containing hydrocarbons, metals and other toxic chemicals, allof which can be deposited into the sea over the life of a project.

WastDisch

● The extractive sector can have a profound impact on socio-economic conditions and cultural life of local communities andeven whole countries.

● The right to consultation and the right to free, prior andinformed consent is an indigenous right that is nowincreasingly being recognized by national law, internationalnorms and voluntary best practice standards and guidelines.9

● The likelihood for human rights abuses is high where resourcesare extracted from conflict zones and areas depended upon byindigenous peoples and small-scale miners. The mostcontroversial examples include “coltan” metals and diamondsfrom the Democratic Republic of Congo and oil from Nigeria. Socio-Ec

& Huma

● Extractive industry operations have high workplace fatality andinjury rates.10 They also pose a health and safety risk tosurrounding communities.

● Workplace health and safety hazards include extreme workenvironments, the handling of flammable, explosive or toxic materialsand chemicals, and the presence of heavy metals and hydrocarbons.

● Community health impacts can result from metals,hydrocarbon and other chemical contamination of soil, waterand air, especially around smelters, refineries and mines. Thesecan be serious and long term, for example the impact of leadcontamination on the neurological development of children.

Health &

● The relationship between corruption and natural resources canbe explained in part by the wealth and power that the accessto resource revenues may generate, and by the fact that manyresource rich countries have weak institutions.11

Corru

3 United Nations Environment Program, “World Greenhouse Gas Emissions by Sector”, 2009. 4 World Coal Institute, “Coal Mine Methane”, 2010. Greenhouse gas emissions sources and activities (Sourced from UNFCCCb & WRI); US Environmental Protection Agency, “Coalbed MethaneOutreach Program: Frequent Questions”, July 2009; Australian Commonwealth Scientific and Research Organisation, “Strategies to Reduce GHG Emissions from Coal Mines: A Review of theAustralian Perspective”, New Delhi: March 2010. 5 Aluminium refining: 1% of global greenhouse gas emissions. 6 Carbon Positive, “Facts and Statistics on Climate Change”, 2006. http://www.carbonpositive.net/viewarticle.aspx?articleID=162. 7 Australian Department of Industry Tourism and Resources, “Leading Practise Sustainable Development for the Mining Industry: Mine Closure and Completion”, Canberra: 2006.

Climate

LLENGES BUSINESS RISKS & OPPORTUNITIES● Extractive companies face both regulatory restrictions and

operational challenges related to climate change.Infrastructure costs in vulnerable locations will increase.

● Companies will pay more for their GHG emissions. For instance, under Europe’s Cap and Trade system, a tonne of carbondioxide cost €13 to emit in 2009-10. This may increase to €40by 2020 if Europe is to meet its emissions targets.6

● Companies that reduce GHG emissions will benefit from lower energy and carbon costs and enhanced reputation. They willalso conserve valuable fossil fuel resources.

● Extractive companies may have better opportunities for carboncapture and storage, although there remain technical andregulatory risks related to this disposal method.

● GHG emissions from coal mining can be greatly reduced, andrevenue gained, by recovering and selling coal mine methane.

● Companies operating in highly biodiverse and sensitiveenvironments incur higher planning, compliance, monitoringand rehabilitation costs.

● Companies failing to control their physical and ecosystemimpacts face unnecessary relocation & rehabilitation costs,fines and reputational damage (eg. reputational damage to oilsands operators due to high cumulative land impacts). Postoperational maintenance will also be more complex.

● Extractive companies that systematically address and manageenvironmental issues early in project lifecycles will reducetheir physical impacts, rehabilitation and legacy costs. Sitesafety and energy efficiency can also be better optimised.

● Progressive rehabilitation during active operations results in acontinued reduction in closure liabilities and less post-operational work. Using this approach, companies can alsorefine existing techniques and engage in rehabilitation relatedresearch and development.

ical &ystembances

● Mines in high rainfall and seismic activity zones face thegreatest environmental and safety risks, technical challengesand costs related to waste rock and tailings management.8

● Acid mine drainage can create a damaging, expensive legacylasting hundreds of years if not properly managed.

● Waste streams and related emissions often representproduct/income loss and depletion of natural resources.

● Non-routine spills damage the environment, pose a health andsafety risk, as well as harm companies’ financial andreputational stability.

● Companies that manage their waste and emissions properlyhave less impact on the environment and local communities.Associated benefits include lower health- and security-relatedcosts, and support for future project activities (ie. social licenseto operate).

● Properly captured and stored mining wastes can berehabilitated to restore former land uses and ecosystems. Theyare more easily monitored and can be reopened for futuremetal extraction.

tes &harges

● When projects disregard local communities and the benefits ofresource exploitation do not reach them, extractive companiesmay face community opposition. This may lead to workstoppages, blockades, conflict and violence, harming companyreputation and rising project costs.

● Downstream supply chain risks are high where metals/hydrocarbons are sourced from conflict zones and regions ofknown forced labour.

● Companies with good human rights records are more likely tocreate constructive partnerships with civil society, local

businesses and authorities, thereby enhancing their sociallicense to operate.

● Investment in security force training and a commitment toadhere to the UN Voluntary Principles on Security and HumanRights will lead to better conflict management and decreasethe risk of disruptions.

● Indigenous people have a unique set of skills, particularlyregarding local conditions and the environment, which can beutilised for mutual benefit in extractive projects.

conomic an Rights

● In addition to loss of life and human suffering, high injury,sickness and fatality rates can result in loss of workforce faithin management, loss of community trust, difficulties inattracting employees and expensive litigation for companies.

● Extractive companies can positively address pre-existingcommunity health problems, such as HIV/AIDS and malaria.

This prevents further human suffering, ensures a healthyworkforce and working environment, and stabilises andimproves the local community.

● The knowledge transfer of health and safety trainingprogrammes can also have benefits beyond project boundariesand positively impact company culture.

& Safety

● Companies engaging in corruption foster political instabilityand unpredictability, ultimately leading to an undesirablebusiness environment.12

● Corruption allegations are expensive and can lead to financialcosts and lost business opportunities.13

● Companies with robust anti-corruption policies and managementsystems help to break down bribery and corruption cycles and arebest equipped to succeed in business.

● Companies that are highly transparent can more easilydemonstrate their non-involvement in bribery and corruptionand show their economic contribution to the country.

uption

Change

8 World Resources Institute, “Mining and Critical Ecosystems: Mapping the Risks”, Washington, DC: 2003. 9 World Resources Institute, “Development Without Conflict, the Business Case for Community Consent”, 2007.10 National Occupational Health & Safety Commission Australia, “Fatal Occupational Injuries: How Does Australia Compare Internationally”, Canberra: 2004; US Bureau of Labor Statistics, “Oiland Gas Industry Fatal and Nonfatal Occupational Injuries Fact Sheet”, Washington DC: 2010; US Bureau of Labor Statistics, “Number of Fatal Work Injuries 1992-2008”, Washington DC: 2010. 11 U4 Anti-Corruption Resource Centre, “Corruption in Natural Resource Management”, Bergen, Norway: 2008.12 Extractive Industries Transparency Initiative, “EITI Benefits”, Oslo, Norway: 2009. 13 Eurosif Theme Report “Corruption”, June 2010.

CASE STUDIES

Eurosif wishes to acknowledge the support and direction provided by the Extractives Sector Report Steering Committee:CM-CIC Asset Management

Edmond de Rothschild Asset ManagementSchroders

SNS Asset ManagementThreadneedle Asset Management Ltd.

Triodos Bank

La ruche - 84 quai de Jemmapes • 75010 Paris, FranceTel : +33 (0)1 40 20 43 38

contact@eurosif.org • www.eurosif.org

Kungsgatan 35 11156 Stockholm SwedenTel +46 8 787 99 10

shane.chaplin@ges-invest.com • www.ges-invest.com

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This sector report has been compiled by :

14 Apache Energy, “Protecting Marine Environments”, Perth, Australia: 2004. 15 World Resources Institute, “Development Without Conflict, the Business Case for Community Consent”, 2007.

Low impact construction and operations in a sensitive offshore environmentIn 2003, mid-sized oil & gas company Apache Corporation (Apache)developed the Victoria and Double Island oil fields in a sensitiveshallow water coral reef environment, off the Western Australiancoast. The project involved laying two underwater pipeline bundlesand installing two small offshore oil platforms.

The company went to considerable lengths in order to avoidenvironmental impacts from the project. The optimisation of thepipeline route and special work vessel procedures were two keymeasures put in place at the time to avoid damage to marinehabitats. The seabed condition was verified by post-constructiondiver surveys. Workforce participation was encouraged in order toachieve the HSE goals for the project’s construction phase.

Apache used smaller size platforms, hence reducing its physicalfootprint. The company also adopted a zero discharge policy forconstruction and facility operations, involving shore-basedprocessing and separation of the recovered well liquids, instead ofhigher-risk offshore processing. Oil-containing waste water wasdisposed of via deep-well injection at the shore base facility, ratherthan off to the sea.

Successful implementation of the project enhanced the company’sreputation, allowing it to gain approval for other similar projects.Apache received the Department of Industry and Resources’ Awardfor Environmental Excellence for the project, and was the only oil &gas company in to be a finalist in the Australian Prime Minister’sEnvironmentalist of the Year Award in 2003.14

Obtaining community consent in the PhilippinesThe Malampaya Project, an off-shore gas project operated byShell Philippines Exploration (Shell), shows how costlycommunity opposition can be avoided through securing andmaintaining community consent. The company initiated theengagement with stakeholders in 1996, approximately two yearsbefore construction work began. The consent process employedthe following four strategies:

● community outreach and interviews with key opinion leadersand decision makers;

● information, education and communication activities;

● perception surveys and participatory workshops as an introductionof the project; and

● participatory involvement in the formulation of environmentalmanagement plans.

The initial environmental assessments and community interviewsresulted in a re-routing of the offshore pipeline in order to avoidimpact on areas of rich biodiversity and indigenous ancestralwaters. Throughout the project, the company continuouslyrevised its public engagement plan to address concerns as theyarose. To ensure ongoing acceptance of the project, Shellcontinues to support multi-stakeholder monitoring andgrievance mechanisms during project operations. The companyalso operates social development programmes that provideservices requested by the communities.

Shell estimated that while the community engagement activitiescost €5 million, the company saved up to €58 million by avoidingdelays. The company also gained reputational benefits, beingawarded the World Summit Business Award for SustainableDevelopment Partnerships by the UNEP and the InternationalChamber of Commerce.15