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Transparency in the mining sector: moving beyond box-ticking
11 November 2013
On 2 October Kigoda Consulting’s Mike Davies participated in a panel session at the Principles for Responsible Investment’s “PRI in Person” event in Cape Town. The session, which was titled “Mining in Africa: boosting sustainability in the mineral economy”, eventually, and perhaps inevitably, turned into an introspection on the Marikana tragedy and whether or not responsible investors could have better assessed early warning signs and acted on these. However, the panel debate started with a fairly strong assertion from one of the panellists that the mining industry is probably one of the most transparent with respect to sustainability or ESG issues.
Many mining companies have taken many steps to be more transparent in the disclosure of material environmental and social factors. Some such as Gold Fields and Exxaro Resources are, for example, leaders on the JSE Top 100 Carbon Disclosure Leadership Index. The International Council on Mining and Metals (ICMM), which includes 21 mining and metal companies as members, provides industry leadership on addressing the sector’s sustainable development challenges. The 10 commitments made by ICMM members include the integration of sustainable development considerations into corporate decision-making and the implementation of effective and transparent engagement, communication and independently verified reporting arrangements with stakeholders.
However, the recent Bench Marks Foundation analysis on ICCM-member Lonmin’s track record on meeting the targets and commitments set out in its various Sustainable Development reports shows that there is often a high degree of public relations spin in the efforts of some mining companies to portray themselves as being responsible corporations. While mining companies might be slowly improving their transparency in some areas, it will remain important to interrogate their claims. Furthermore, there remain crucial areas where the mining sector fails to be transparent, limiting effective stakeholder engagement, an essential component of a “social licence to operate”. Although two of the following examples are drawn from South Africa, they have relevance in many other sub-Saharan African countries too.
1. Tax and revenue transparency
A recent Africa Progress Panel (APP) report, Equity in Extractives, highlighted the implications that governance problems stemming from a lack of transparency in the extractive sector can have for African countries. The report found that the frequent use of offshore-registered companies allows foreign investors to minimize tax liability and “avoid disclosure and to facilitate the transfer of illicit funds”.
The APP report cites a Global Financial Integrity study that estimates that trade mispricing through false invoicing leads to an average annual loss of USD38bn to African countries. This exceeds the amount of development aid provided to these countries each year. A further USD25bn is estimated to be lost through other illicit outflows.
There are clearly questions regarding how the revenue raised by governments from extractive companies is spent. The lack of development in many mining areas reflects the need for more equitable distribution of revenue. However, mining companies have a responsibility to comply with tax legislation in good faith to ensure that the countries in which they operate receive a fairer share of the mineral wealth extracted from those countries.
The issue of financial transparency, tax fairness and social justice has been pushed up the international agenda at the September 2013 G20 meetings and through the High Level Panel on Illicit Cash Flows in Africa, which is led by Thabo Mbeki. Mining companies found to be using offshore jurisdictions, shell companies and aggressive tax planning face reputational damage, increasing regulation and potentially financial penalties.
2. Social and labour plans
Under South Africa’s Mineral and Petroleum Resources Development Act, which governs the mining sector, companies are required to implement a Social and Labour Plan (SLP) as a condition of their mining licences. The SLPs are intended to promote employment, address black empowerment issues and advance socio-economic welfare both in operating areas and in areas from which migrant labour is drawn.
Both mining companies and government have expressed unhappiness over SLPs. Mining companies feel there is too little guidance on the content of SLPs, while the Department of Mineral Resources is frustrated that the mining companies fail to adhere to their commitments. However, given the role that SLPs should play in terms of encouraging effective stakeholder engagement with workers and communities, a major failing of SLPs is the lack of transparency. There is considerable variation in the quality of the plans. Mining companies are not even required to undertake community engagement as part of the process. Some communities will not have seen the local economic development programme. This lack of transparency completely undermines the process.
Given the tensions that can arise between mining companies and affected communities, stakeholder engagement is a crucial exercise. A failure to achieve a ‘social licence to operate’ can result in shut-downs, labour strikes and community violence. However, as mining lawyer Peter Leon has noted, the Marikana tragedy “illustrates the underlying weakness of social and labour plans”, which are “not delivering the necessary benefits to mine communities”. Leon has called for applicants for mining rights to conclude a community development agreement. This, along with the adoption of the Free and Prior Informed Consent (FPIC) principle, could be a step in the right direction. But any stakeholder engagement should be built on transparency and openness if trust is to be built.
3. Rehabilitation and closure
The environmental impacts of mining are widely acknowledged. However, a 2012 report by the WWF reviewing the financial provisions for mine rehabilitation and closure in South Africa found:
- High variation in the quality of Environmental Management Plans (EMPs)
- EMPs with inadequate or no rehabilitation plans
- Insufficient financial provisions made for closure
- A lack of publicly available independent reviews of financial provision calculations
Rehabilitation of mine sites should be based on the “polluter pays” principle, otherwise the tax payer will ultimately be hit with the expense. In South Africa, the Department of Mineral Resources now has responsibility for almost 6,000 abandoned mines, many of which are part of the Acid Mine Drainage problem, as financial provision for rehabilitation and the ongoing environmental issues caused by these mines was insufficient. In 2009, the Auditor General estimated that the cost of rehabilitating these abandoned mines will be R30 billion. Meanwhile, a PWC report in 2012 found that only 65% of the total estimated provision for the rehabilitation of mines operated by the top 39 mining companies is funded.
However, as the WWF notes, a lack of transparent disclosure means that stakeholders, whether affected communities or investors, are unable to analyse mine-specific information on financial provisions for rehabilitation. This makes it almost impossible to determine whether or not adequate financial provision for the rehabilitation of mine sites has been made and whether a mine will meet its sustainability commitments or not.
Without transparency in areas such as those outlined above, the disclosure of ESG data by mining companies will potentially be seen as a “box ticking” PR exercise, rather than a true commitment to make the sector more sustainable.
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