Reputational Risk Inseparable from Environmental Risk

Last week I found myself reading a 2001 release from Lloyds about the results of a survey of risk managers ranking the issues that keep them up at night.

Corporate reputation and shareholder value are the key factors companies are taking into account when determining their risk assessment policies, according to a survey of 200 risk managers conducted this week by Lloyd ‘s of London and Insurance Day, a London-based insurance trade publication, at the RIMS 2001 convention in Atlanta, USA.

Preventing environmental damage ranked as businesses’ least significant criterion for risk assessment.

When asked to define the importance of specific risks to their organisations with respect to impact, likelihood, manageability, risks involving loss of reputation and technological problems topped the list. Environmental risks received the largest “least significant” rating.

The disconnect is astounding. A dozen years of philanthropic activity, CSR and sustainability reporting, millions of dollars spent on advertising what a good corporate citizen you are will be wiped out with one badly handled environmental crisis.

Reputational risk is inseparable from environmental risk.

On March 11th 2009, a cargo ship called the Pacific Adventurer, owned by Swire Shipping, charged on through a cyclone off the coast of Brisbane, Queensland, on its way to Newcastle. The ship was rolled and dropped more than 30 containers of Amonium Nitrate into a protected marine zone. As the containers dropped off the side of the ship, they struck the hull, tearing a couple of holes, sending more than 270,000 litres of oil onto the shores of previously pristine coastline from Moreton Island through to Sunshine Beach. A full 60km long oil spill, that took months to clean up. Oil is still appearing on the beaches today.

It was Queensland’s worst marine environmental disaster, and it brought the local fishing industry to its knees.

Swire stepped up immediately and said it would pay for the clean up. But when pushed some weeks later as the damages bill continued to climb, statements from the company were more grey than black and white, insisting it only ever promised to meet its legal obligations for the clean-up, limiting the expenditure to a mere $14m. Public and political pressure was brought to bear and the company ultimately agreed to pay a smidge over $20m – a long way from the total cost of clean up and long-term impact to the environment, tourism and fishing industries. See the full story here: Esse Quam Videri.

The fact is a corporation invariably will not do more than the law requires and the laws are too lax. Sadly, if we want companies to foot the bill for their environmental destruction – or rather if we would like them to take better care and have fewer environmental accidents – we should be setting in place legislation that makes the cost of potential damages prohibitive. Until such time as the fine meets the crime, we will continue to see companies treat the environment with contempt. Because it is cheaper to do so, than not.

This is a fact not limited to Australia. It is evident everywhere, from North America to New Guinea.

Grabbing the headlines at the moment is the Gulf oil spill. In the deadliest offshore rig explosion in the United States since 1968, BP Plc, which leased the floating rig Deepwater Horizon from Transocean to drill an exploratory well in the Gulf of Mexico, failed to put out the blaze by using remote-operated vehicles to shut off the oil flow with valves on the sea floor. The rig burned for a day before it sank and 11 men were killed.

Bloomberg reports Deepwater Horizon cost US$365 million to build, according to RigZone, but has a replacement value of about US$500 million to US$750 million, according to Michael Price, chief executive officer of Bermuda-based Platinum Underwriters Holdings Ltd.

While BP is publicly stating it will pay for the clean up, court documents suggest it will be claiming liability to be capped under the Oil Spill Liability Fund which sets the upper limit at US$75 million for damages that might be claimed by individuals, companies or governments.

The fund was set up by Congress in 1986 but not financed until after the Exxon Valdez ran aground in Alaska in 1989. In exchange for the limits on liability, the Oil Pollution Act of 1990 imposed a tax on oil companies, currently 8 cents for every barrel they produce in the US or import.

So while BP might pay to contain the oil spill, the losses to industry and long-term environmental fallout is ignored. Congress is scrambling to amend the laws, but with dozens of lawsuits already filed, they may be too late.

To add to the dismay of Gulf residents, Transocean filed a motion in court last week requesting its liability be limited to US$27 million under the 160-year-old Limitation of Shipowners’ Liability Act (used by the owners of the Titanic), because, “the amount of the claims that are reasonably anticipated to arise from the events in question are expected to greatly exceed the amount and value of Transocean’s interest in the oil rig following its sinking.”

Oh boo hoo.

BP executives told a congressional hearing Tuesday that Transocean was responsible for the failure of a key giant valve system. Transocean CEO Steven Newman, denied responsibility, saying: “All offshore oil and gas production projects begin and end with the operator,” but then passed the buck to Halliburton, claiming the US oil services company was responsible for the cement work that failed to seal the exploratory well.

Writing on the blog, http://gulfoilspillcompensation.com, Brian O’Neill, one of the attorneys that represented 32,000 Alaskans after the Exxon Valdez spill has some words of wisdom for the residents of the Gulf states, and others.

In 1989, Exxon Executive Don Cornett told residents of Cordova, Alaska: “You have had some good luck, and you don’t realize it.  You have Exxon, and we do business straight.  We will consider whatever it takes to keep you whole.”

Cornett’s straight-shooting company proceeded to fight paying damages for nearly 20 years.  In 2008, it succeeded — the Supreme Court cut punitive damages from $2.5 billion to $500 million.

Even as the spill’s long-term impact on beaches, herring, whales, sea otters and other wildlife became apparent, Exxon used its scientists to run a counteroffensive, claiming that the spill had no negative long-term effects on anything. This type of propaganda offensive can go on for years, and the danger is that the public and the courts will eventually buy it.  State and local governments and fishermen’s groups on the Gulf Coast will need reputable scientists to study the spill’s effects and work tirelessly to get the truth out.

Companies will only do as much or as little as the legislation requires, and the US and Australia have significantly tighter laws and a more rights aware and litigious society than a country like Indonesia or New Guinea – both of which have been on the receiving end of some horrific environmental devastation by mining companies.

And while the BP Gulf of Mexico oil spill steals the headlines with the very visible presence of oil, it is only one of many environmentally devastating activities that are current and ongoing as a result of laws that are too lax in their controls and too light in their punishment. That this is true is in itself a reputational risk to corporations like Placer Dome, Newmont Mining Corporation, Ramu Nickel, Highlands Pacific and Lihir Gold, all beneficiaries of legislative largesse.

And well may these public companies worry about their reputational risk, because their environmental risks are potentially greater than BPs with their fervent indulgence in Submarine Tailings Disposal (STD), also known as Deep Sea Tailing Placement (DSTP).

STD/DSTP is the dumping of toxic mine waste into the ocean, smothering all life on the sea floor, with lighter particles of heavy metals dispersing throughout the surrounding sea. This practice would never be allowed in Australia, was practiced but is now banned in North America and even China, but practiced by American, Canadian, Chinese and Australian companies in places that don’t have the legal structures of a Canada, a United States or Australia; like Papua New Guinea.

After wading through hundreds of documents I am exhausted and disheartened by the push from these companies to have STD/DSTP signed off as environmentally acceptable by government officials who are naively guided by these same companies in their framing of the laws. In fact, some of the documents provided by the corporations in their defense of this practice are from paid environmental consultants stating that STD/DSTP is safer and a better option than dumping the waste into freshwater rivers as was the practice until recently. Oh wait, that still happens at Ok Tedi and Grasberg and… just about everywhere in these developing nations.

But such a comparison is like comparing burning in hell for a hundred years vs 98 years – it is still burning in hell – just one is not quite as bad as the other, that we know of; we think, maybe perhaps, but we haven’t actually got any scientific evidence of that.

There is so much that we still do not even know about our oceans, the creatures, the cures or food therein, nor of the long-term impact of oceanic dispersal of heavy metals, how far they go or how many species of fish are affected, it is an extraordinary display of machismo to claim that this is an environmentally sound practice.

STD/DSTP is currently indulged in by Lihir Gold on Lihir Island, New Guinea, by Newmont Mining Corporation at Minahasa mine on the Indonesian island of Sulawesi, and was conducted by Placer Dome in the Philippines on the Island of Marinduque and at Misima Island in the coral sea of New Guinea, not far east of the tip of Australia’s Cape York.  Marinduque, Misima and Minahasa, as locations that were subjected to submarine tailings disposals, are examples of such extreme devastation and environmental disaster, it is incomprehensible that companies continue to conduct this form of mine waste disposal. These mines are now closed, but the legacy of the ocean outfall of heavy metals remains.

From New Scientist magazine, 11th November 2000:

Marvic Quindoza lived his short life in one of the fishing villages on the north side of the island of Marinduque in the Philippines. Two years ago, at the age of 13, he died from heavy-metal poisoning. Two other local children died within months of Marvic, and dozens more suffered stomach aches, fever, brittle bones and other symptoms linked to heavy metal poisoning. Researchers investigating the deaths found dangerously high levels of lead and cyanide in the children’s blood and in soil samples from the shores of Calancan Bay. The fishing communities of Marinduque blame wastes from a copper mine in the hills for the poisoning.

Imagine the load carried by a line of trucks parked bumper-to-bumper and stretching three times around the Earth. That is the volume of toxic, ground-up, waste rock piped into Calancan Bay between 1975 and 1991. An estimated 200 million tonnes of mine tailings have smothered coral reefs and sea grasses across 80 square kilometres of seabed, poisoned fish and created a causeway 7 kilometres long that is gradually being blown ashore by the wind. “The tailings in the bay are a continuing source of heavy metal contamination of the soil, air, biota and people of these fishing villages,” says Catherine Cournans, an anthropologist who studied the incident.

And the villagers’ problems don’t end there. In 1991 the mine operator and largest shareholder, Canadian mining giant Placer Dome, began storing the waste in an abandoned pit. Five years later, a seal burst releasing more than a million cubic metres of thick sludge into the nearby Boac river. Following all the bad publicity, the mine was finally closed. But the river remains clogged with acid sludge and all the fish have died. In 1997, Placer Dome sold its stake in the Filipino holding company of the mine, Marcopper, but retains responsibility for cleaning up the mess.

The Minahasa mine (owned by Newmont Mining Corporation) on the Indonesian island of Sulawesi discharges tailings into Buyat Bay just 80 metres down. Since it opened in 1996, people living around the bay have complained about mud and dead fish being washed up along the shoreline, empty fishing nets, and skin rashes among people exposed to the seawater. Toxicologist Rizal Rompas of Sam Ratulangi University in Manacle, Sulawesi, last year found heavy-metal contamination in fish and plankton. He blamed the mine discharges and warned that, contrary to the mine operator’s claims, toxic tailings were returning to the surface.

The article also quotes Stuart Jones of NSR Environmental Consultants in Victoria, Australia, which advises most STD/DSTP projects in Indonesia, New Guinea, New Caledonia, Philippines, Fiji, Solomon Islands, Cuba and Chile, who sums up the case for STD/DSTP: “The environmental effects of deep-ocean disposal are temporary-and there is no need, or liability, for long-term maintenance.”

That’s the advice of the environmental consultants (is that a new oxymoron?).

In September 2004, the New York Times reported on the growing legal battle confronting Newmont in Sulawesi.

For Newmont, the battle is only the latest round of troubles as the company, concerned by the more stringent rules for mining permits in the United States, seeks greater growth from operations overseas, where environmental groups and, increasingly, government officials charge that it employs practices not tolerated at home.

No definitive cause has been found for the illnesses among the villagers. Company executives, Newmont said in a statement, were “convinced that we are not polluting the waters of Buyat Bay or adversely affecting the health of the people in that area.”

The company denies all charges and says that it operates in full compliance with Indonesian  environmental standards.

Ocean disposal, says Rob McCandless of Environment Canada, saves mining companies a great deal of money that they would otherwise have to spend on tailings dams and tailings management, and he is disappointed that so many mining companies succeed in persuading third world governments to allow ocean disposal, which is banned in Canada.

As of the date of publication of the New Scientist article at the end of 2000, there were 26 deep-ocean disposal projects across Asia Pacific that were up and running or at the planning stage.

One of the first, begun in 1989, was on Misima Island, from a huge gold and silver mine  owned by Placer Dome. At Misima, the mine discharged up to 22,000 tonnes of tailings a day into the Solomon Sea at a depth of 112 metres.

The New Scientist article reported that a carpet of tailings up to 75 metres thick already covers 20 square kilometres of seabed, obliterating all life. Some organisms will eventually return but, as even NSR’s Stuart Jones concedes, “they will inhabit a much poorer ecosystem in which “hardbottom” habitats are gone for good. Even so, for mining engineers this is a small price to pay. They see Misima as a success story.”

At Misima, between 1988-1994, 53 million tonnes of toxic heavy metal waste in the form of soft waste rock and soil was dumped onto a near shore coral reef, killing the entire surrounding coral shelf. Constant breaks along the ocean outfall pipe leaked heavy metals into shallow waters, with frequent localised fish kills putting a stop to the subsistence fisheries of the indigenous population. In August 2004, a large number of fish were found dead in Milne Bay due to cyanide poisoning.

Plume shearing at the Misima mine, where the tailings leave the pipe, happened at a 112-meter depth, and also at depths between 150 and 1,000 meters. Deepwater snapper, an edible species of fish, swim between 100-300 meters depth, so metals in the tailings that shear off may be absorbed by the snapper and passed up the food chain to people.

The mine, located on a mountain in the middle of the small island, also polluted the creeks which were the key sources of freshwater for the island’s inhabitants. Creeks and rivers in the south remain contaminated, with a total one third of the island directly and negatively impacted by the mine.

According to the Submarine Tailings Disposal Toolkit, a document produced by Mining Watch Canada and Project Underground while the mine was still in operation:

In the case of Placer Dome’s Misima gold mine the tailings contain residual cyanide from the gold extraction process. Before being released into the sea the tailings are first diluted on shore with seven parts of seawater to one part tailing in a “mixing tank” to reduce the concentration of cyanide and other contaminants. Even after this dilution, the tailings contain such high levels of cyanide that they do not meet Papua New Guinea’s “water quality criteria for seawater.”

Placer Dome was then granted a very large area in the sea around the outfall of the pipe, called a “mixing zone,” within which the seawater is polluted with cyanide and other chemicals at levels not otherwise allowed by Papua New Guinea. This “mixing zone” in the sea extends 42 meters above the end of the pipe (which is at a 112 meter depth), and 488 meters below the pipe. The mixing zone is about 2.5 km wide at the top, tapering down to about a kilometer wide at the bottom.

In addition to available cyanide, at the boundaries of the mixing zone, copper levels exceeded United States Environmental Protection Agency (USEPA) criteria, and lead levels exceeded Australian and USEPA criteria for total metal analysis.

The tailings pipe at Misima broke in 1997, at 55 meters depth, and again, in 2001, at 13 meters depth. It took Placer Dome six months before the pipe was fixed in 1997. Placer did not fix the pipe break of December 2001 until February 20, 2002. During each of these pipe breaks at sea, cyanide and metal enriched tailings particles were pumped into the shallow, oxygenated, euphotic zone that is abundant with sea life.

Misima Mine is often held up as a model of how an “ideal” STD/DSTP system should work.

The following background has been provided to me by Mt Hagen-based Nonggorr William Lawyers, acting for local landowners against the Ramu Nickel project in Madang Province, New Guinea.

In early 1999, Ramu Nickel Ltd (a subsidiary of Highlands Pacific Ltd) lodged an application for a Special Mining lease for the Ramu Nickel project and lodged the Ramu Nickel Environmental Plan 1999 for this project with the Department of Environment and Conservation, Papua New Guinea. The Special Mining Lease (SML) was granted July 26th 2000, however Highlands Pacific lacked the funds to develop the mine, and sought joint venture funding.

In 2004, the China Metallurgical Construction Company (MCC) a Chinese State-owned steel company agreed to fully finance the operations, including rights to construct, operate and secure off take arrangements for the proposed Ramu Nickel mine.

A Joint Venture Agreement and also a Mining Development Contract was signed between MCC, Ramu Nickel Limited and the Independent State of Papua New Guinea in 2005 and the SML was transferred from Ramu Nickel Limited to MCC late 2005.

The construction of the mine commenced in 2008. When operational, the Ramu Nickel mine will be a series of open cut mine pits and a beneficiation plant to produce ore slurry at Kurumbrukari in Madang Province. A slurry pipeline approximately 134km long will transport the ore slurry from the Kurubrukari mine site eastwards to the refinery plant at Basamuk Bay on the Rai Coast. The refinery plant will produce nickel metal and a cobalt salt product using acid pressure leaching technology.

According to the Ramu Nickel Environmental Plan 1999, 5 million tonnes of hot tailings will be dumped into Astrolabe Bay each year for the life of the mine which is estimated at 20 years, totaling 100 million tonnes of toxic tailings. The tailings will consist of mainly sediment and fines with high levels of heavy metals such as manganese, chromium, nickel and mercury, with high levels of ammonia and sulphuric acid. Waste rock and soil will be dumped directly into the sea at Basamuk Bay during the construction and life of the mine, as well as raw sewerage from 2500 people for 30 months.

The Ramu Nickel Environmental Plan 1999 was prepared by NSR Environmental Consultants Pty Ltd (NSR), the same Australian company that has advised on 25 other ocean disposal projects throughout the Pacific – always in favour of STD/DSTP.

Because of concerns as to the environmental effects of these tailings and waste disposal, in late 2000 the Evangelical Lutheran Church of Papua New Guinea commissioned the Mineral Policy Institute to undertake an independent review of aspects of the Ramu Nickel Environmental Plan which includes an STD/DSTP.

The Mineral Policy Institute study entitled Environmental Risks associated with Submarine Tailings Discharge in Astrolabe Bay, Madang Province, Papua New Guinea, is extracted below.

The direct disposal of mine tailings into the ocean has been practised in parts of the northern hemisphere for over 50 years. It is only in the last 25 years with the increase in environmental awareness and closer regulation, that mining companies have attempted to place tailings at depths below the well-mixed surface zone to mitigate adverse environmental effects.

In practice it is inevitable that STD operations will have adverse effects in the receiving environment (US Bureau of Mines, 1994). All STD operations around the world cause increases in suspended sediment, trace metals and residual milling reagent concentrations in the receiving waters. These components of the tailings can detrimentally affect or alter benthic invertebrates and fish, pelagic zooplankton and fish, and the phytoplankton and microbiota on which these animals rely.

Previous experience in the region with STD has shown that substantial quantities of tailings can separate from the primary tailings flow. This always occurs at the outfall site where the tailings generate turbulence in the water body, and usually occurs at discontinuities in the ocean water density profile.

These ‘plumes’ of tailings disperse horizontally along these discontinuities. At Misima a significant quantity of tailings material has been found to separate from the descending density current and spread out horizontally. Although this metal-rich sediment remains trapped by thermal stratification below 150m depth, it extends to a distance of 5km from the outfall (NSR, 1997b). There is every reason to suspect that this phenomenon will occur at the Astrolabe Bay STD site.

And every reason to suspect that Ramu Nickel will do as much damage as allowed by the weak environmental legislation of Papua New Guinea.

According to documents seeking to place an injunction on the Ramu Nickel mine proceeding with its STD/DSTP by Nonggorr William Lawyers, filed early this year in the National Court of Justice in Madang, Papua New Guinea, claims of landholder agreement and environmental impacts have been misrepresented by the company. The local law firm won an injunction in March this year halting Ramu Nickel from blasting coral reefs to lay the STD/DSTP pipeline.

Speaking to the Radio Australia April 15th 2010, after Ramu Nickel failed in its appeal against the injunction, Greg Anderson, executive director of the Papua New Guinea Chamber of Mines and Petroleum said the decision is disappointing.

“Definitely these court cases are driven from outside the country, somebody has to be funding this court action, so obviously it’s of huge concern,” he said.

So Greg, how many billions of dollars profit per year are expatriated out of Papua New Guinea into foreign coffers, while locals are paid in some cases less than AU$1 each in compensation for the destruction of their lands, their fisheries, their health and social structure? If that isn’t of huge concern to YOU, it should be. It is to me.

Perhaps it is time the US, Canadian and Australian governments stepped in with tighter legislation governing the actions of its corporate citizens abroad. Or perhaps it is time that you, the investor, make it known what you believe to be an acceptable, or unacceptable standard of corporate citizenry and environmental impact.

Does this behaviour in third world countries of the companies Placer Dome, Newmont, Highlands Pacific and Lihir – companies you invest in – impact your opinion of them? Do you agree their environmental record influences their corporate reputation?

© 2010, editor. All rights reserved.

Tags: Australian, BP oil spill, corporate behaviour, corporate social responsibility (CSR), corruption, CSR & Sustainability, environment, environmental devastation, Exxon Valdez, Highlands Pacific, Lihir Gold, Misima, New Guinea, Newmont Mining, oil spill, Ok Tedi, Papua, Placer Dome, PNG Chamber Mines, Ramu Nickel, Reputation Management, reputational risk, response matters, Rio Tinto, social responsibility, STD/DSTP, submarine tailings disposal, Transocean

Category: CSR & Sustainability, Reputation Management