BHP boss’ call to arms on ESG ratings
Peter Ker and James Thomson - AFR March 3, 2022
BHP chief executive Mike Henry says investors are relying on inconsistent and inadequate systems to rank companies’ environmental, social and governance (ESG) credentials, raising the risk that investment dollars will be put into the wrong hands.
Independent ESG ratings are increasingly relied on by proxy advisers, institutional investors and companies to guide everything from investment choices to executive pay, spawning an industry of ESG ratings agencies with varying methodologies.
Mr Henry expressed concern about a lack of alignment across those methodologies and called for the resources industry to work with investors and the ESG industry to ensure ratings systems were robust and were not penalising companies such as BHP that disturb the environment in the search for metals needed for decarbonisation.
In an exclusive interview ahead of The Australian Financial Business Summit, Mr Henry called for “clearer standards” and an increase in “the capability and quality of the ratings agencies”.
“I think there is more that could be being done, certainly more so than just algorithms that scoop data off the newsfeed or the internet."
Mike Henry: “There’s a mix of standards and lack of adequate alignment out there among different stakeholder groups as to what ‘good’ looks like.” Arsineh Houspian
“There could be more conversations taking place, more willingness to engage on certain ratings.
“There’s a mix of standards and lack of adequate alignment out there among different stakeholder groups as to what ‘good’ looks like.
“I have a huge amount of empathy for shareholders who are faced with that and then don’t quite know which ones to believe or which way to proceed.”
A common complaint in the mining sector is that ESG rankings are overly influenced by algorithms that capture media reports of perceived environmental, political or cultural controversies, rather than undertaking detailed investigations to judge whether those controversies are significant.
Mr Henry said it was unreasonable to expect ESG ratings agencies to visit and assess every mine owned by every company. But he said improvement was possible.
“You fix the problem by leaders in capital markets, leaders in the resources sector, leaders from other actors, coming together more effectively to define those standards,” said Mr Henry, who spoke to BOSS ahead of this summit to be held in Sydney on March 8 and March 9.
For much of last year, one agency, Sustainalytics, ranked BHP and Rio as “high” risk companies, putting the big miners in the second highest of the agency’s five ESG risk categories.
The comparison with Rio was a source of frustration for many at BHP, given Rio had at the time suspended its South African mineral sands business because of community violence, and was grappling with community opposition in Serbia while trying to repair its reputation in Australia after destroying cultural heritage at Juukan Gorge in 2020.
BHP’s own encounter with a cultural heritage controversy – a rockfall near a WA iron ore mine in 2021 – sparked less outcry from the Banjima traditional owners and the public, and Sustainalytics improved BHP’s ranking to “medium” risk in January.
While the upgrade gave BHP bragging rights over Rio, Sustainalytics still believes BHP lags rival diversified miner Anglo American on ESG, despite Anglo suffering more workplace fatalities than BHP over the past three years and having greater exposure to developing nations in Africa.
Some lithium mining executives have also been disappointed to see Australian producers of the battery mineral – such as Pilbara Minerals and Liontown – slapped with higher risk ESG rankings by Sustainalytics than thermal coal exporters like Whitehaven and Glencore.
Sustainalytics did not respond to requests for comment this week, but the comparison between lithium and coal miners is understood to reflect that climate change is just one aspect of ESG, with rankings also affected by factors such as water stewardship, community relations, cultural heritage and diversity ratios.
Mr Henry said the world would need twice as much copper in the next 30 years as it consumed in the past 30 years, while growth in nickel demand would be quadruple the levels seen over the past three decades.
With much of that extra demand set to be met by lower-grade resources, Mr Henry said the scale of mining activity required to decarbonise the world could be much greater than many anticipated.
He said investors and mining companies had to work together to ensure this could be done without creating other environmental problems.
“What the world should want is for companies to be developing that [nickel and copper] production that have very high ESG standards,” he said.
“If that is not the case then there’s high risk we are going to have negative impacts in terms of water stewardship, biodiversity and communities.
“There would be a whole host of other things that are unintended consequences of meeting the world’s need for decarbonisation.”
The comments come as BHP and Rio struggle to secure community support for a copper mine in the US state of Arizona and as Serbia threatens to cancel Rio’s right to build a lithium mine in the Jadar Valley.
BHP has no plans to follow Rio’s example by commissioning an external consultant like former sex discrimination commissioner Elizabeth Broderick to conduct an assessment of its workplace culture.
“We know this stuff happens in the company; we are absolutely committed to eliminating it,” said Mr Henry.
“We called this out back in 2016 when we put in place our gender balance by 2025 workforce ambition. At the same time we embarked on a very significant program of shifting culture.
“In 2018 we started a respectful behaviours campaign within the company that continues to this day.
“In 2020 we put in place an independent investigations body to follow up on incidents associated with this stuff.
“Then last year we stood up a fully independent, fully staffed, 24/7, worldwide support body that supports victims of sexual assault and harassment.
“But we have got further to go ... we are fiercely committed to addressing this behaviour in the BHP and the industry more broadly.”