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Sustainability Investments as a Risk Mitigation StrategyWorld Mines Ministries Forum
Toronto, Canada
March 1, 2008
Kariann Aarup
Rio Tinto Alcan
2
Rio Tinto Alcan Today
3
Our Business Strategy
• Be an industry shaper
• Be a developer of choice
• Maximise value for all our stakeholders, and
• Double our value over the next 5 years
4
5
Shifting Operational Context
• Shifts in our own asset base
– To meet our growth targets, B&A is expanding into new &
challenging markets where risks are high
• Changing external realities
– Increased shareholder/stakeholder activism – NGOs, SRIs,
institutional investors
– Increased connection between grassroots NGOs &
international movements
– Increased competition due to globalization
• differentiation in today’s commodity markets not based on price
but being the company of choice globally
– Increased regulatory standards & international expectations
6
Shifting External Realities
0
500
1,000
1,500
2,000
2,500
3,000
1940 1950 1960 1970 1980 1990 2000 2010
The stakeholder landscape is changing rapidly…… and companies are increasingly scrutinized on sustainability matters
296
194
121127145
6467223925
4823
4641232124
Incidences of the phrases “Mining” and “Social Responsibility” in the same article
Number of NGOs in consultative status with UNESCO
Number of blogs, Millions
1990 91 92 93 94 95 96 97 98 992000 01 02 03 04 05 2006
Number of documents on company web site containing phrases such as…
Sustainable development
Social responsibility
Community development
Environment
Community relations
Human rights
Corruption
525
755
85
124
89
72
22
538
407
40
595
26
433
41
67
60
5
768
1
5
–0
5
10
15
20
25
30
35
2004 2005 20062003
Source:Google; Factiva; company Web sites
7
Potential Risks
• Investment risks
– Forced abandonment of existing operations
– Difficulty to access new deposits
• Financial risks
– Potential loss of a new project
• Reputational risks
– Local actions become global news almost immediately
• Operational risks
– Costs, safety standards, production volume, etc
– Stoppage or delays
• Political risks
– Civil unrest
• Market risks
8
Evidence of Risks A Few Headlines from the Mining Press
Mining operation seized & nationalized by Bolivian Gov’t.
Uzbek Government Revokes Oxus License
Kyrgyzstan President's attack sends Oxus shares crashing Uzbekistan seizes some Newmont mine assets
Expropriation of a mine by Zimbabwe Gov’t.
$1.5 billion project stopped in Trinidad – community protest
Sustainability at RTA B&A
10
A Sustainability Imperative
To improve financial return as well as to mitigate the potential
strategic threats posed by these new realities we embed
sustainability in our core business globally
“As proud as we are, many solutions remain ad hoc and reactive rather than systemic and proactive. I find that approach insufficient for the future.
We must close that gap by shifting toward what I call the principle of intended consequences, where sustainability is embraced as a matter of philosophy and practicality. ”
- RTA CEO Dick Evans
11
Sustainability Guiding Principles
RTA B&A will strive to:
1. Maximize value for all stakeholders by addressing local
sustainability issues that directly connect to its business
strategy and are in line with local, regional and national
development priorities.
2. Become a partner in multi-stakeholder processes instead of
being the principal actor in bi-lateral engagements.
3. Leverage partnership funding and expertise to ensure
sustainability projects are collaborative.
12
Sustainability Framework Aligning business strategy with development priorities
Local DevelopmentPriorities
Country Poverty Reduction Strategy /
MDGs
Regional DevelopmentPriorities
Site Operational Agenda
Site Strategic Agenda
B&A 5-Year Business PlanUN Global Compact /
MDGs / RTA The Way We Work
Multi-Stakeholder Engagement
Contribution to Local Development Plan
Action Plan/Indicators/Communication Plan
Governing Objective: Maximizing Value
13
Capacity Building of Local Officials
• Rio Tinto Alcan supported locally elected council members
to go through a World Bank capacity building training
program
14
A Strategic Shift In Thinking:to multi-stakeholder partnerships
Previous Model: RTA as Patron
Sustainability as philanthropy
Proposed Model:RTA as Co-Facilitator/ Co-Initiator/ Supporter
Sustainability as strategy
RT
A
Rio Tinto Alcan
Gove
rnm
ents
Co
mm
un
ities
Employees
Sh
are
ho
lde
rs
First Nations
Academia
Special Interests
Unions
Suppl
iers
Custom
ers
Local
Development Priorities
Special Interests
First Nations
Go
vern
men
ts
Dev. Agencies
Unions
Custom
ers
Co
mm
un
ity
Supp
liers
Academia
Emplo
yees
Shareholders
15
Multi-stakeholder partnership in Ghana
16
Sustainable InitiativesLeveraged partnership funding & expertise
17
Embedding Sustainability at an Existing Site
• Have a mandate from the top
• Raise sustainability awareness on site
– Cross functional workshop for management
• Start with the business strategic issues
• Understand the communities’ issues
• Know the local, regional and national development priorities
• Know the key stakeholders & establish relationships with
them
• Be transparent about the sustainability strategy and include
stakeholders in its development
– Develop & validate process jointly; monitor jointly
18
Supporting Site-level Sustainability
Embedding sustainability into:
• The 5-year business plan
• Operational monthly and quarterly reporting
• Major project reviews & evaluation
• Procurement: Responsible Supplier Initiative
• Communications: internal & external
Sustainability in Green-field Projects
20
Embedding Sustainability in Green-field Projects1. Integrate sustainability into planning templates & processes
2. Start in the earliest of pre-feasibility stages
3. Engage in potential PPP with government, World Bank, African
Development Bank, etc. in early stage of pre-feasibility
4. Include the entire initial project team
• Cultural sensitivity, sustainability and human rights training
5. Implement sustainability across all functional teams
6. Plan for community investments in early feasibility stages
• Build into project costs & think of as creating an environment conducive
for investing
7. Enhance the ESIA process
• Peace & Conflict, Human Rights and Health impact assessments
21
Potential Sustainability Risks for a Green-field Project
22
Actions Phase 1 Phase 2 Construction Operation Closure
1. Carry out local workforce qualification and
quantification study
2. Engage in early literacy, pre-employment
and vocational training actions.
Investment examplesPotential value creation and protection potential
Phase 1 & 2
• Annual salary of HR manager: 500,000$
• Training program costs: 1,500,000$
• Total: 2,000,000$
If no sustainability investments are made in workforce
skills development, the costs associated to the project
of hiring expatriate or foreign labour:
– Construction workers (expat or foreign):
42.96M$/year
– Operational phase employees (expat or
foreign): 21.48M$/year
Investing in workforce skills development can create a tremendous amount of value as well as reduce costs. These investments also contribute to increasing the general living standards of local populations.
Workforce Skills Development
23
Actions Phase 1 Phase 2 Construction Operations Closure
1. Develop and Implement Community Engagement Strategy
2. Build a program for local, regional and national capacity development to manage revenues (royalties) in collaboration with local NGOs
Investment examplesPotential value creation and protection potential
Phase 1 & 2
• Salary & benefits for a community relations manager: 300,000$
• Partnership with a local provider/NGO: 300,000$
• Total: 600,000$
Based on 20 case studies:
•Projects cancelled before started: Probability: 3%; Max 100% of Project NPV lost
•Projects prematurely closed or sold: Probability: 6%; Min 44% and Max 57% of Project NPV lost
•Projects disrupted or delayed: Probability: 12%; Min 6 months and Max 2 years of Project NPV lost
•Projects expropriated: Probability: 6%; Max 100% of Project NPV lost
Community investment is a key component for value protection and creation. These investments also decrease the likelihood of negative impacts due to community protests, work stoppage and site closure.
Local Community Development
24
Value creation & protection in sustainability investments
Overview of Costs-Benefits of green field project sustainability investments
• Average NPV of sustainability in this project is US$200 Million • Maximum possible value of
US$460 Million.• Minimum possible value of
US$122 Million.• The sustainability
investment protects value in all cases.
Tangible Benefits:
Value Created & Protected
Intangible
Benefits
• Reputation • Community Engagement • Developing local
economies• Local Industrial
Diversification • Attraction and retention of
employees• Improved productivity• Contribution to Millennium
Development Goals• Achievement of B&A
Sustainability Vision
Minimum Sustainability Investments
Phase I US$ XXXX
Phase II US$ XXXX
Construction US$ XXXX
Operations US$ XXXX
25
Investment Risk Mitigation
• Decrease risk of stoppage, closure, community protest
– We have multi-stakeholder, open processes to deal with any community issues that arise
– Local communities are our strongest advocates because we support their priorities and their governance structures
• RTA seen as the developer of choice by governments & communities
– Our sustainability reputation precedes us when we explore for new mineral reserves
– Our competitive advantage is our sustainability approach
26
Reputational Risk Mitigation
• Decrease the potential for bad press & NGO activism
– We are seen as a leading corporate citizen that engages
in local sustainability issues and wider societal debates
and invests in the resilience of our host communities
– We are partnered with NGOs and we are transparent in
our actions
– We engage with the NGOs likely to be in opposition to
us from the outset and establish a dialogue
– Partner NGOs are our best spokespeople
27
Operational Risk Mitigation
• Increased productivity
– Reduced absenteeism
• Healthier workforce & families
– Increased skilled labour
• Reduced health & safety incidents
• Reduction of work stoppage potential
28
Financial Risk Mitigation
• Reduce CAPEX
– Leverage local government funding to share in
infrastructure development
• Reduce OPEX
– Reduced costs through hiring local labor and
establishing local procurement policies
• Reduce financial risk
– PPP established from the outset
29
Mitigating the Uncontrollable Risks
“If any function can mitigate against the uncontrollable risks,
sustainability can” – so say our finance team
30
Sustainability is an integral part of our business strategy.
Sustainability is like an insurance policy.
Back up slides
32
The B&A Sustainability Vision
ENVIRONMENTAL FOOTPRINT SOCIETAL FOOTPRINT
We embrace the sustainability challenges we face. We will harness our capacity for innovation, become the supplier & project developer of choice by decreasing our footprint on the planet and leaving environmental and social conditions that will create value for all stakeholders
We manage mining, processing, residue storage and rehabilitation such that we reduce the impact of our operations on the environment and seek to be restorative
We engage with our stakeholders in such a way that we create and support social, economic and political conditions that enhance people’s ability to meet their fundamental needs
33
Redefining Success
“In today’s trust-starved climate, our
market-driven system is under
attack ...large parts of the
population feel that business has
become detached from society, that
business interests are no longer
aligned with societal interests ...The
only way to respond to this new
wave of anti-business sentiment is
for business to take the lead and to
reposition itself clearly and
convincingly as part of society.”
--Klaus Schwab, Executive Chairman, World Economic
Forum
Newsweek, February 2003