Towards a Sustainable Model for Mining Companies

The announcement last week about the Clinton-Guistra Sustainable Growth Initiative got me thinking again about a recurring subject of interest- how to meet the challenge of sustainability in the mining and resource sector. The Clinton-Giustra Sustainable Growth Initiative, a plan to bring together mining companies to provide funds for sustainable third-world development is significant not just in that it has drawn partners such as Newmont and Teck Cominco, who have made commitments to contribute to the initiative, and that Mr. Guistra has pledged $100M plus half his income from the resource sector for the rest of his life towards the endeavor, but that it may be another step in shifting the model for mining enterprises towards adopting sustainable development as a core business objective.

A year-and-a-half ago, I was given an assignment as part of my MBA coursework on defining a sustainability strategy for a company in a challenging sector: Gold Mining. As a resource-based and extractive industry, mining is inherently damaging to the natural environment. Gold, while a key component in electronics, fillings etc., is almost completely driven by the market for gold jewelry, either for investment or cultural/decorative purposes. Furthermore, key areas in gold mining today are places such as South Africa, South America, Indonesia- places which have both endemic socio-economic problems, and where the largely European and North American controlled mining companies do not have a great record in terms of upholding human rights.

It was in looking at one of the most notorious players- Freeport-McMoran, where I got the idea for the solution. F-M was widely criticized in the late 90’s early 00’s for their role in supporting Indonesia’s government under Suharto. The Suharto regime has been recognized for its corruption, and the stories of crimes committed by this government against its people throughout its history of militarism and autocracy are egregious. Essentially, F-M was playing the game that mining companies play in order to operate in areas such as Indonesia- you buy your way in. F-M was giving piles of cash to the government for ’security services’ and other things- as well as making Suharto a ‘partner’ in the endeavor through a loan to purchase shares- which was subsequently forgiven.

While F-M’s operations in Indonesia, one of the most important areas in the world for copper and gold, do not exactly paint a rosy picture even today, things have improved. Suharto is out, and standards of living are increasing. F-M has realized that simply funneling cash into a corrupt government is not a recipe for sustainable business- rather putting this money to work to create infrastructure, education, health care, environmental management capacity, as well as creating local economic development through providing business loans, can align both corporate and sustainable development goals.

I realized through examining this shift that the model for the future is not through looking at mining companies as producing and selling ore, but as providing development services. Essentially, mining companies are leveraging their own capital and knowledge to transform part of a region’s natural capital (in the form of mineral ore) into liquid capital (cash). The goal of such an exercise should be to use this injection of capital to be a catalyst in transforming a third-world subsistence economy to a sustainable developed economy by establishing an economic platform that can support multi-sector and value-added industries. It is therefore incumbent on mining companies to make significant commitments to local communities in return for their license to operate.

The challenge, of course, is how to make this happen in a way that truly serves all stakeholders. Mining companies are often seen as pseudo-empires, and in the case of F-M, have the legacy of colonialism to thank for their license to operate, not a clear mandate from the local public. What type of policies and structures will enable maximum accountability? Joint ownership, profit sharing with local communities? What should be the role of government and NGOs in overseeing this process?

In terms of government oversight, the South-African government has been proactive in encouraging this type of relationship- enforcing minimum domestic ownership levels as well as employment and management quotas for black citizens. However, relying on government to provide regulation which ensures responsible business practices is the pitfall that Freeport-McMoran ran into. Mining companies themselves have to perceive sustainable development as strategically aligned with profit and the economic sustainability of their own enterprises, but do they have the capability to be accountable for those goals to all stakeholders?

Clinton, Guistra, and others are banking on the partnership formula between companies and NGOs as a solution to this problem.  An NGO such as the Clinton Foundation can ensure credibility and some degree of accountability and oversight. The multilateral nature of the initiative establishes a benchmark for sustainable practices and reduces the potential for individual interests clouding the objectives of the whole. While it may be optimistic to think that this could represent a strategic shift for resource companies around the globe, it could signal the beginning of a new mindset that could allow further evolution of sustainable strategy in this sector.

The Blood Diamond

A new movie starring Leonardo DiCaprio is set to release in December, and will focus on the conflict in Sierra Leone in the late nineties. The period saw the use of “blood diamonds” to finance warfare. The diamond industry is purportedly very anxious about the potential bad press this movie could cause, and asserts that blood diamonds have been “virtually eradicated”, though the World Diamond Council states that the percentage of conflict-funding diamonds has been reduced from 4% during the war in Sierra Leone to 1% (Source: The Globe and Mail). A 75% reduction is good, but wouldn’t seem to be the same as “eradicated”.

One thing I find interesting is the movement into the mainstream not only of documentary type films on a range of social and environmental issues, but the movement of these underlying themes into mainstream dramas and thrillers. While Hollywood has long been fond of dramatically resurrecting historical events in order to comment on present day scenarios, it has been relatively uncommon to use these vehicles to shed light on more recent events. If this sort of thing is to become “fashionable entertainment”, then maybe we are on our way to recognizing the attributes of social conscience as fashionable as well.

As for the protests of the diamond industry, this is a false threat. If the industry has been so successful in countering blood diamonds, and if the real worry is only that consumers will be ignorant about the initiatives that the diamond industry has undertaken, then the real problem is the failure to leverage these practices as a marketing tool. If “clean” diamonds can’t be marketed as a superior product, then what hope do we really have of completely eliminating conflict diamonds from the marketplace?

De Beers is one of the companies who is worried about reduced demand for diamonds as a result of the film. However, companies such as De Beers should recognize that the real threat lies in the presence of conflict diamonds in the first place, and that only through calling public attention to the issue can companies who are able to provide a “socially conscious” product leverage a competitive advantage by creating categorical demand for their products. Diamond companies who can’t provide a socially and environmentally sustainable product should face tough pressure from consumers. Those who can should get onside and compete.