Analysis: Bench Marks may interrogate SDRs of other firms after Lonmin findings
Johannesburg - Bench Marks Foundation, an independent NGO owned by the churches in South Africa, is considering undertaking in-depth analyses of the sustainable development reports (SDRs) of other major mining companies following its unprecedented analysis of nine years of Lonmin’s SDRs.
Such an exercise would not only be of considerable benefit to stakeholders in mining companies, it would significantly enhance general awareness of sustainability issues at all levels in the investment chain, from pension fund member to trustee and, eventually, to the pension fund manager who makes the decision on whether or not to invest.
Bench Marks’ Lonmin report and a recent report on the pension fund industry’s dismal commitment to socially responsible investment reveal that 20 years after the first King code on corporate governance there has been little change in the all-consuming focus on short-term profits and share price by corporate executives and institutional investors.
The Lonmin exercise revealed a considerable gap between what management believes it is doing to promote sustainable development and the experience of communities that are often the target of these development actions.
More distressingly, the Bench Marks report highlighted inconsistencies between Lonmin’s reporting from one year to the next as well as the extreme difficulty in determining precisely what, if any, action has been taken with regard to key social and environmental issues.
Thus, despite much talk about the need to provide accommodation, Bench Marks finally realised, after conducting an in-depth search of all nine SDRs, that Lonmin built no houses between 2000 and 2012.
The NGO expressed considerable frustration around the reporting of the use of contract labour and the level of wages paid to contract labourers. Lonmin’s SDRs indicated that since 2002 between 20 percent and 25 percent of the total workforce has been contracted.
Former chief executive Ian Farmer claimed that 7 000 full-time employees and contractors “left” the company in 2009. But this contradicts information in the SDRs, which suggests the reduction was only 1 605.
This may be a difference of interpretation but it does raise questions about how useful the SDRs are if they are that difficult to interpret.
Finally, Bench Marks notes: “We are informed that the number of part-time and full-time contract workers of various kinds was under-reported before 2009.”
The details on environmental degradation raise questions about the government’s ability to effectively oversee the mining industry. Lonmin, like other companies, frequently repeats its “zero impact” environmental objective. Unfortunately, its steadily increasing emissions are accommodated by the government’s willingness to adjust upwards the permitted levels of emissions.
Lonmin included the results of a community perception study in its first SDR, contained in its 2004 annual report. It described the feedback as “disappointing”, which it attributed to “poor communication with community members”. It abandoned these continuously “disappointing” perception studies in 2010.
While the details of Bench Marks’ report are important, and are likely to be subjected to challenge by Lonmin, they are not as important as the fact that Bench Marks has taken Lonmin’s SDRs seriously enough to interrogate them.
The disturbing reality is that executives in any company, including in the pension fund industry, responsible for sustainability and ESG (environmental, social, governance) issues tend to be confined to silos where they develop excellent theoretical approaches but have limited impact on corporate operations or investment decisions.
This tendency to pay only lip service to socially responsible investing was recently highlighted in a research report by EY (formerly Ernst & Young) and the Institute of Directors (IoD) on the implementation of the Code for Responsible Investing in South Africa (Crisa).
EY found that although a majority of fund managers and investment consultants claimed to apply Crisa’s recommendations relating to responsible investment, in most cases the application was of such poor quality that it was pointless.
On the Lonmin matter, IoD executive director Ansie Ramahlo noted: “Sustainability reports that are done simply as a reputation-building exercise perpetuate the notion that business performance is measured in terms of financial profit and social and environmental considerations are merely ancillary.
“The events at Marikana have clearly shown that these aspects are, in fact, all intertwined and hence the need for reporting that integrates all these aspects.
“We will make progress on these issues only if companies recognise that stakeholders’ interests should be considered for their own sake and not necessarily on how it will affect shareholders’ return.”
Bench Marks realises there are people at Lonmin who take sustainability issues seriously. It was these people who, in the 2011 annual report, presciently warned shareholders of a possible “unstable workforce that severely disrupts operations” and also that “poor community relations due to internal and external factors could result in civil unrest”.
The NGO’s concern is that these people do not have sufficient control over budgets and are overpowered by executives who are focused on the current financial reporting period and the share price.
The lack of ESG engagement by the investment community reinforces this focus. In the past 12 months, after hitting a low when violence at Lonmin’s Marikana operations cost the lives of 44 people, the mine’s share price has gained 32 percent on the back of the outlook for platinum.
In the past week since Bench Marks released its critical report questioning Lonmin’s commitment to sustainability, the Lonmin share price has edged higher to close on Friday at R51.50.
The performance of Lonmin’s share price highlights the fact that investors are concerned only with the outlook for the platinum price and Lonmin’s ability to dig the stuff out of the ground during the current financial reporting period.
It is evident that the controversial environmental and social conditions in which Lonmin operates are of no concern to investors. Not even, it seems, to investors who are investing on behalf of pension funds that are expected to take a long-term perspective.
As Bernard Swanepoel, Village Main Reef’s chief executive, told last week’s Bench Marks Foundation conference, investors in South Africa are not concerned about social and environmental issues. “Unless it is going to hurt investor returns, investors don’t care,” he said, adding: “The incentive system is so perverse… the risk-reward equation is so skewed.”
Fortunately, a few investors are taking it seriously. At the Lonmin annual general meeting earlier this year the Public Investment Corporation (PIC) voted against four, and abstained from two, of the 18 resolutions.
Critically, it voted against the re-election of Len Konar, who chairs the audit and risk committee. “The PIC felt that the committee should have been more proactive on the social risks, which the company raised in its previous annual reports, in order to prevent the Marikana tragedy,” explained the PIC.
Element Investment Managers voted against six resolutions, including Konar’s re-election, and abstained from one.
As Swanepoel also said at last week’s conference, the mining industry is too important for a solution to the sustainability challenges raised by Bench Marks not to be found. He urged all the players, from communities and the government to investors and companies, to seek a joint solution.
A constructive engagement between Lonmin and Bench Marks on the findings of the report would be a good start. - Business Report