Norway’s ‘ethical divestment’ from Rio Tinto

20 10 2011

 

Source:

Al Jazeera

 

The Scandanavian country’s state pension fund sold holdings because of ‘severe

environmental damage’ at Indonesia mine.

NAJ Taylor<http://english.aljazeera.net/profile/naj-taylor.html> Last Modified: 19

Oct 2011 13:28

 

[cid:image001.jpg@01CC8F07.4429E0C0]

 

 

Rio Tinto chairman Tom Albanese argued that his company ‘only worked with partners

that valued environmental performance and human rights’ [EPA]

 

 

This is the concluding chapter of a four-part essay that examines how the Norwegian

Pension Fund came to embargo Anglo-Australian mining giant Rio Tinto. Catch up on

the first chapters here: 1. The blacklisting of Rio

Tinto<http://english.aljazeera.net/indepth/opinion/2011/08/2011823133628702154.html>,

2. West Papua: A history of

exploitation<http://english.aljazeera.net/indepth/opinion/2011/08/201182814172453998.html>

and 3. Mining companies funded Indonesian

abuses<http://english.aljazeera.net/indepth/opinion/2011/08/2011828142858857222.html>.

 

Part 4: Norway’s ‘ethical divestment’

 

New Guinea, geographically as well as historically, is Australia’s closest relative.

Separated from the mainland during the last glacial period, the waters filled in

what now separates them: 150km of the Torres Strait.

 

Despite being endowed with enviable mineral stores, economic and political

exploitation has left New Guinea housing many of the poorest people on earth –

particularly in the western half of West Papua.

 

As it moved towards independence from the Dutch, the international community

neglected West Papua in order to realise a business deal between US mining company

Freeport-McMoRan Copper & Gold [“Freeport”] and Suharto – at the time a general in

the Indonesian army.

 

The deal granted a jointly owned company, PT Freeport Indonesia

[“Freeport-Indonesia”], full rights to prospect a ‘mountain of ore’ now known as the

Grasberg complex. In return, Indonesia would derive significant tax revenues and

fees, as well as a minority 9.36 per cent shareholding.

 

Observing the Grasberg mine via Google

Earth<http://maps.google.com/maps/ms?msid=200136630909885886335.00048de44d75a4ffb416d&msa=0>,

one sees a scar on the earth like no other: located four thousand metres above

sea-level, open-pit (above ground) mining has bored a hole through the top of the

mountain a kilometre wide. What they’re digging for is more than US$40 billion worth

of copper and gold.  Every day, the operation discharges 230,000 tonnes of tailings

(waste rock) into the Aghawagon River below.  This process is expected to continue

for a further six years, at which point, exploration will go underground until

there’s no value left. Freeport estimates they’ll be done by 2041.

 

Now recognised as one of the most corrupt and tyrannical leaders in history,

President Suharto renewed Freeport-Indonesia’s exclusive mining rights in 1991 for a

further 30 years with an option of two ten year extensions. The licence included an

option to prospect another 2.6 million-hectares, as far as the Papua New Guinea

border.

 

Enter Rio Tinto

 

In February 1995, Rio Tinto announced deals that secured access to Grasberg. First,

they agreed to invest US$500 million of new capital in Freeport for a 12 per cent

stake in the US mining business.

 

Second, Rio Tinto agreed to finance a US$184 million expansion of the Grasberg mine.

In return, they received 40 per cent of post-1995 production revenue that exceeded

certain output targets, and from 2021 a 40 per cent stake in all production. in

addition, Rio Tinto would receive 40 per cent of all production from new excavations

elsewhere within West Papua.

 

By October 1995, an independent US government agency had cancelled Freeport’s

international political risk insurance. The insurer, Overseas Private Investment

Corporation, specifically cited the Grasberg mine operation as contravening the

Foreign Assistance Act of 1961, which required that “overseas investment projects do

not pose unreasonable or major environmental hazards or cause the degradation of

tropical forests”.

 

“Freeport was incurring annual costs of $5 million for government-provided security

… and fluctuating annual costs reaching $12 million for unarmed, in-house

security”

 

 

As Suharto’s reign came to an end, an increasing number of West Papuans also began

to campaign against the environmental and social impact of Grasberg. Papuan leaders

brought the matter before the US Federal District Court in April 1996 and later the

Subcommittee on International Operations and Human Rights of the US House of

Representatives in May 1999.

 

Then, in August 2002, two American teachers and an Indonesian employed by

Freeport-Indonesia were murdered at the Grasberg mine complex. Following one rebel’s

admission that he was a business partner of the Indonesian military, a revelation

that might violate the Foreign Corrupt Practices Act, it was later revealed that

Freeport was incurring annual costs of $5 million for government-provided security

of the Grasberg complex and staff, and fluctuating annual costs reaching $12 million

for unarmed, in-house security costs.

 

On 23 March 2004, Rio Tinto announced it had sold its 11.9 percent shareholding in

Freeport. Rio Tinto made a $518 million profit. Citing no environmental or social

reasons, Rio Tinto’s then chief executive Leigh Clifford reassured shareholders that

“the sale of [Freeport] does not affect the terms of the joint venture nor the

management of the Grasberg mine” and that through “our significant direct interest

in Grasberg, we will continue to benefit from our relationship with Freeport”.

 

Rio Tinto remained committed to the mining of Grasberg, and would continue

overseeing its management through various operating and technical committees.

 

Alarmingly, as recently as 2008, fundamental human rights violations such as the

“torture, excessive use of force and unlawful killings by police and security

forces” have been confirmed by the United Nations Special Representative of the

Secretary General on Human Rights Defenders, Amnesty International, and United

Nations Committee against Torture.

 

“There is no alternative to our reliance on the Indonesian military and police”,

Freeport chairman James Moffett wrote to the New York Times in 2005. “The need for

this security, the support provided for such security, and the procedures governing

such support, as well as decisions regarding our relationships with the Indonesian

government and its security institutions, are ordinary business activities.”

 

 

Al Jazeera’s Step Vaessen reports on the most recent dispute which has paralysed the

Grasberg mine

 

 

Norway’s stance on ‘ordinary business activities’

 

Ordinary business activities got both Rio Tinto and Freeport blacklisted.

 

First, Freeport. In October 2005, the Norwegian government began five months of

deliberations over the company’s “extensive, long-term and irreversible”

environmental damage at the Grasberg complex. Entering into dialogue with the

company in December, the Norwegians found that Freeport’s response gave little

evidence otherwise. Instead, the company’s response criticised the use of “outdated

information or biased reports issued by non-governmental organisations that are

anti-mining or have a political agenda”. And so, in February 2006, Freeport became

the first company that the Norwegians blacklisted for environmental reasons.

Although public disclosures of investment decisions are rarely made public, the

Norwegians released a detailed 32-page recommendation

report<http://www.regjeringen.no/pages/1956975/F%20Recommendation%20Final.pdf> after

the shares were sold in June 2006.

 

Second, Rio Tinto. In December 2007, the Norwegians began eight months of

deliberations over “severe environmental damage” resulting from the Freeport joint

venture in West Papua.

 

And so, as with Freeport, the Norwegians made the decision to divest from Rio Tinto

in February 2008 – due to the “unacceptable risk that the Fund, through continued

ownership in the company, would contribute to ongoing and future severe

environmental damage”. Referring to the earlier Freeport report, in September 2008,

the Norwegians published an additional 10-page recommendation

report<http://www.regjeringen.no/pages/2105350/Recommendation%20RT%20final.pdf> on

the Rio Tinto sale.

For the Norwegians, it wasn’t so much about what had been done in the past; it was

what Rio Tinto and Freeport were going to do next.

 

Rio Tinto said that it was “surprised and disappointed” in the Norwegians’ decision

and that it had a “non-controlling” interest in the mine. Following years of signals

from the international community, knowledge of the Freeport divestment in 2006, and

months of dialogue over the matter, this is not so. As 12 per cent shareholders in

Freeport between 1996 and 2004, Rio Tinto enjoyed proportional representation on the

company’s board as well as input through various operating and technical committees

specific to Grasberg. For example, Rio Tinto’s chief executive between 2000 until

2007 was also a director of Freeport betwene 2000 and 2004.

In depth

 

 

More from NAJ Taylor:

 

 

 

The Blacklisting of Rio

Tinto<http://english.aljazeera.net/indepth/opinion/2011/08/2011823133628702154.html>

 

 

 

West Papua: A history of

exploitation<http://english.aljazeera.net/indepth/opinion/2011/08/201182814172453998.html>

 

 

 

Mining companies funded Indonesian

abuses<http://english.aljazeera.net/indepth/opinion/2011/08/2011828142858857222.html>

 

 

 

WikiLeaks’ obvious

truth<http://english.aljazeera.net/indepth/opinion/2011/09/201194111425467738.html>

 

 

 

Australia reneging on cluster mine

ban?<http://english.aljazeera.net/indepth/opinion/2011/04/20114410351647319.html>

 

 

 

‘Ethical divestment’

 

Curiously, a letter to the Norwegians from chief executive Tom Albanese claims that

Rio Tinto had “not been asked by the Ministry to discuss its concerns prior to the

sale”. Citing the sustainable fashion in which Rio Tinto supplies diamonds and gold

to Tiffany, Albanese reassured the

Norwegians<http://www.riotinto.com/media/news_12469.asp> that the company makes a

point of “carefully selecting our partners to be organisations with comparable

standards to our own in environmental performance, as well as other areas such as

community relations and human rights”. A company with good governance wouldn’t have

gone into business with Freeport, let alone a business deal in which Suharto had a

stake.

 

There has been some criticism of the Norwegians’ divestment within the investment

community. Much of it centres on four issues. First, ethical divestments remove the

opportunity for dialogue to influence the practices of companies, especially when

the sale represented only one per cent of Rio Tinto’s value. Second, the decision

contravenes investment theory. By reducing the number of companies in which to

invest, one interferes with the efficient market and thereby constrains the

financial returns available to it. Third, investors should focus on increasing

shareholder value rather than adopting value-based positions – there are no sin

stocks, only leaders and laggards. Fourth, the Norwegians are largely investing

monies earned from the country’s vast oil reserves, so how can they claim to be so

ethical?

 

But in annual sustainable development reports, both Rio Tinto and Freeport position

themselves as socially responsible businesses. Freeport considered itself a pioneer

in recognising the land rights of the Amungme and Kamoro people, paving the way to

compensation and dialogue since 1974 and an updated Memorandum of Understanding in

2000. Fourteen “invalid and unsubstantiated” land rights claims were made against

the company globally in their 2008

report<http://www.fcx.com/envir/wtsd/pdf-wtsd/2008/WTSD_2008.pdf> and that steps are

being taken to process such claims better in future.

 

And we are told that Rio Tinto and Freeport set aside one per cent of net revenues

from the Grasberg complex, which has enabled the indigenous Amungme and Kamoro

people “to become equity participants in the mine” since 1996. But we find that the

indigenous people are told, “the river upstream will largely recover naturally”. The

language of ethics has been hijacked such that what is claimed is not what is

actually happening.

 

“Striving to be ethical is a noble achievement in itself, especially when lured with

the financial fruits of rampant capitalism.”

 

 

In June 2008, the Norwegians called for public input into the country’s ethical

guidelines. In his submission to the Norwegian government, pioneering shareholder

activist Robert A G Monks sets the tone with the line: “There’s a fine saying that

one should not blame Columbus because he was not Magellan.” Indeed, acting and

striving to be ethical is a noble achievement in itself, especially when lured with

the financial fruits of rampant capitalism.

 

The blacklisting of Rio Tinto is not an exemplar of capitalism. There are, to be

sure, many equally compelling stories of what can go wrong when blinded by the

relentless pursuit of wealth. But what the story of the Grasberg complex does teach

us is that the global financial crisis was not caused by the limits of “extreme

capitalism”, as former Australian Prime Minister Kevin Rudd

suggested<http://www.themonthly.com.au/monthly-essays-kevin-rudd-global-financial-crisis–1421>

his government could control, but the rampant and uncontrollable nature of

capitalism itself. Nearly all of Australia’s financial institutions invest in Rio

Tinto, and the federal government’s $60bn Future Fund does not make many any

disclosures about its investments. The government decides what is a “good

investment”, and in the absence of transparency and accountability, Australians can

only trust that what the government is doing is ethical.

 

Within days of the Norwegians’ announcement, reports of homemade mortar bombs being

fired at the gates of the Grasberg complex rippled through the world news media. For

now, that was West Papua’s response. Given that both Rio Tinto and Freeport have yet

to reply adequately, we hope that the silence will be broken by other stakeholders

who value what’s important here: the Amungme and Kamoro people, who just wanted

their land but are left with this “red river”.

 

This is an extract of a chapter from the book, Evolutions in Sustainable Investing:

Strategies, Funds and Thought Leadership, to be published by

Wiley<http://au.wiley.com/WileyCDA/WileyTitle/productCd-0470888490.html> in December

2011.

 

NAJ Taylor is a PhD candidate<http://www.najtaylor.com/> in the School of Political

Science and International Studies at the University of Queensland, and author of

This Blog Harms<http://thisblogharms.com/>.

 

Follow him on Twitter: @najtaylor<http://twitter.com/#%21/najtaylor>

 

The views expressed in this article are the author’s own and do not necessarily

reflect Al Jazeera’s editorial policy.

 

 

 

 

 

 

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