Juukan Gorge incident and Covid-19 pandemic highlight focus on ESG

Rachael JohnsonWednesday 2 December 2020

The rock shelters – of high significance to the Indigenous Puutu Kunti Kurrama and Pinikura people – were destroyed by blasting in May.

AustralianSuper is Australia’s largest superannuation fund and was one of a range of investors that engaged with Rio Tinto on this issue. Andrew Gray, its Director of ESG and Stewardship, told Global Insight, ‘AustralianSuper spoke to the company … and indicated that given the gravity of the issue we did not believe that a financial penalty was sufficient accountability for those involved […] the fund pressed the board in direct discussions to impose a greater degree of accountability.’

A spokesperson for Rio Tinto tells Global Insight that the decision to have the CEO and two other senior executives step down ‘followed the publication of the [Board] Review (into events at Juukan Gorge) in August’ and the reaction to it from investors and other stakeholders. This Board Review included the decision to only impose financial penalties on the senior executives involved.

Rio Tinto’s spokesperson says that after the Review was published, ‘significant stakeholders expressed concerns about executive accountability for the failings identified, which undermined the Group’s ability to rebuild […] trust and to move forward.’

In a statement issued in September announcing that the senior executives would step down, Rio Tinto Chairman Simon Thompson said, ‘we have listened to our stakeholders’ concerns that a lack of individual accountability undermines the Group’s ability to rebuild […] trust.’

Meanwhile, a statement on Rio Tinto’s website acknowledges their ‘deep’ regret for the events at Juukan Gorge, noting that the company has ‘unreservedly apologised to the Puutu Kunti Kurrama and Pinikura people.’

Deborah Gilshan, an independent adviser on investment stewardship and ESG, argues that the collaboration between investors to push for greater accountability at Rio Tinto makes this engagement stand out. ‘It is really rare to see individual pension funds, as well as their representative bodies, [and] organisations like the Australasian Centre for Corporate Responsibility, all publicly commenting […] and challenging the board,’ she says.

The tone of this engagement reflects a wider trend towards greater focus on ESG issues, which has been gathering momentum over the last few years.

This trend has been driven by a variety of factors. In particular, there’s a growing public desire to see personal values reflected in investments such as pension pots.

There’s also a developing understanding that ESG factors are sources of both risk and return for a business, which, when well managed, contribute to its long-term success. In addition, Gilshan notes ‘an expectation of much more assertive, transparent investor stewardship through [initiatives] such as the new [UK] Stewardship Code.’

The Covid-19 pandemic has accelerated this rise in ESG engagement by making these issues more visible and therefore harder to ignore, both for investors and the general public.

Because the pandemic has affected all companies, ESG has become universally relevant. The way companies have responded has laid bare their culture and values. The areas of weakness exposed generally fall under the ESG umbrella and have particularly emphasised the importance of the ‘social’ bucket.

As a result, the social licence of companies to operate has taken centre stage. ‘As the world continues to struggle with the pandemic, many corporations are reviewing potential liability related to the health and safety of their workers, as well as the economic impacts of various lockdowns,’ says Elise Groulx Diggs, Co-Chair of the IBA Business Human Rights Committee and an associate tenant at Doughty Street Chambers. ‘The “S” [of ESG], which was really anaemic, is really growing very fast.’

For Gilshan, the pandemic ‘has amplified existing systemic risks around inequalities.’

The intensified focus on the social licence of companies to operate has brought renewed debate about the priorities of business and the need to be mindful of all stakeholders, not just shareholders. ‘There has to be a realisation in boardrooms […] that you have to think much more about all of your stakeholders and how you engage with them,’ says Gilshan.

There is a growing expectation that companies will do what is right as well as what is legally compliant.

‘Being a member of a board should never just be about […] achieving compliance,’ says Roger Barker, Director of Policy and Corporate Governance at the UK Institute of Directors. ‘It’s about forming judgements about what is in the best interests of the company.’

The need to place boardroom decision-making in a broader context will characterise good governance coming out of the pandemic. ‘There’s a questioning of what actually should matter to boards of directors,’ says Barker, ‘because they take a quantifiable measure of materiality and [ESG issues] don’t tend to show up on their risk registers.’

He adds that if boards are looking through the lens of reputation, the need to be a good corporate citizen and ESG, then they’re having to change their priorities.

Business leaders will need to acknowledge the shift in society’s priorities in order to retain their social licence to operate, build trust and play a central role in rebuilding the global economy post-Covid. Social responsibility should be embedded throughout strategy, rather than tagged on to it. ‘Strategy needs to be built in to a sustainable ESG framework of achieving financial returns and having a positive social impact,’ says Barker.

Perhaps boards should move away from the idea of corporate social responsibility when assessing ESG risks, and instead consider stakeholder capitalism or business and human rights.

‘ESG tools are designed to assist investors in deciding where to invest capital, including possible decisions to divest from corporations that are performing poorly, for example failure to meet carbon emissions targets or failure to engage fully with local communities concerning extractive projects,’ says Groulx Diggs.

‘This is totally in line with the work we’re trying to do in business and human rights,’ she explains.