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Exodus of Rio Tinto executives exemplifies rising social risk for mining sector

Top executives have resigned from mining behemoth Rio Tinto, indicating that worldwide political upheaval around racial and cultural issues is increasing social risk for the global natural resource sector amid rising focus on environmental, social and governance issues.

Rio Tinto undertook blasting at the Juukan Gorge caves in the Pilbara region of Western Australia in May, destroying a 46,000-year-old Aboriginal heritage site believed to host ancient artifacts of human existence. The decision to demolish the caves as the mining company targeted US$135 million worth of iron ore swamped it in controversy, prompting a national parliamentary probe into the blast and efforts to enact new penalties for the misuse of heritage sites in Western Australia. The misstep also earned the ire of investors including an Australian Indigenous land council and the Church of England's pensions board.

After a company board review and executive bonus cut proved insufficient to squelch shareholder frustrations, Rio Tinto announced Sept. 10 the resignations of CEO Jean-Sébastien Jacques, Chief Executive for Iron Ore Chris Salisbury, and Group Executive for Corporate Relations Simone Niven.

"What happened at Juukan was wrong and we are determined to ensure that the destruction of a heritage site of such exceptional archaeological and cultural significance never occurs again at a Rio Tinto operation," Chairman Simon Thompson said in the statement.

The coronavirus pandemic has bolstered the importance of ESG factors in investors' minds, and environmentalists and human rights advocates have warned that global mining companies and manufacturers face increasing reputational risks from a failure to improve human rights-related due diligence within minerals supply chains.

S&P Global Ratings analyst Minh Hoang related the scandal facing Rio Tinto to the mountain of global social unrest after the May 25 death of George Floyd while in police custody in the U.S., which occurred one day before the blast at the Juukan Gorge caves. It was "within this environment" that Rio Tinto "attracted international opprobrium" and "investor unhappiness," Hoang wrote in a Sept. 9 note.

"Rio Tinto's issue in the Pilbara this year brought to the fore a 'cultural' aspect of ESG that had previously received less attention," Hoang stated, noting the ramifications for the destruction of the ancient site led BHP Group and Fortescue Metals Group Ltd. to suspend similar plans to excavate Indigenous heritage sites in Australia. The situation highlights the fact that social risk factors can extend beyond legal obligations, Hoang noted.

"ESG issues are not always clear-cut as to what the consequences could be for a company. But the world is watching in a way it probably wasn't before the George Floyd tragedy," Hoang stated. "More pertinently in the case of major resources companies, it means investors are watching closely."

READ MORE: Sign up for our weekly ESG newsletter here, read our latest coverage of environmental, social and governance issues here and listen to our ESG podcast on SoundCloud, Spotify and Apple podcasts.

JPMorgan Cazenove analysts struck a similar tone in a Sept. 11 note responding to the company announcement, declaring the leadership changes at Rio Tinto demonstrated that all components of ESG are top of mind for investors in global mining companies.

Though Jacques led Rio Tinto to make significant progress on transitioning to a cleaner energy portfolio and enacting climate change-focused initiatives, future leadership at the company "will require substantial repair with traditional landowners in Australia and other Australian stakeholders and shareholders," the JPMorgan Cazenove analysts wrote. "Clearly this is front and centre, and needs to be repaired, in our view."

Nicholas Boyd-Mathews, chief investment officer with specialized global resources fund manager Eden Partners, told S&P Global Market Intelligence that the resignation of Rio Tinto's senior management was "symptomatic of the change in landscape for global resources companies with regard to ESG issues." Companies must do more than simply comply with regulations and will be scrutinized beyond "ticking the boxes," Boyd-Mathews said.

The resignation of Rio Tinto's top executive may quell shareholder pressures facing the company, according to a Sept. 11 statement by Irina Surdu, an associate professor of international business strategy at the University of Warwick whose research has focused on corporate scandal. However, Surdu said the CEO was "a suitable scapegoat and a quick fix to an act of significant corporate wrongdoing" and the departure is unlikely to impact the reputation of the company in the long term.

"When [corporations'] irresponsible behavior is disclosed to the media, quick solutions such as scapegoating enable them to go back to business as usual," Surdu said. "To assume that the company will receive more than a slap on the wrist is naive and wishful thinking."