NORWAY - The Norwegian Government Pension Fund - Global has withdrawn NOK4.85bn (€604m) investment from Rio Tinto over concerns it is causing "severe environmental damage" through a joint mining operation in Indonesia.

The decision to disinvest from the mining company follows a recommendation from the Norwegian Council of Ethics, which had already excluded Freeport McMoRan Copper&Gold Inc - Rio Tinto's partner in the Grasberg mining operation - in 2006.

Kristin Halvorsen, the Norwegian minister of finance, said the exclusion of a company from the pension fund "reflects our unwillingness to run an unacceptable risk of contributing to grossly unethical conduct".

She said: "The Council on Ethics has concluded that Rio Tinto is directly involved, through its participation in the Grasberg mine in Indonesia, in the severe environmental damage caused by that mining operation."

Rio Tinto became a joint venture partner with Freeport to expand the Grasberg mine in 1996 - investing over $1bn (€700m) in the project - and the exclusion of the mining company is "in a large part" based on the earlier recommendation against Freeport.

However, the Council also assessed the environmental impact of the mining activities, and concluded Rio Tinto " cooperated closely with Freeport in the areas of mine management and operations, technology and analyses, including environmental impact reports". 

The problem is the Grasberg mine discharges approximately 230,000 tonnes or more of tailings directly into a natural river system every day, and it is expected the discharges will increase in the future as the mine expands.

Norway claimed there is also a high risk that acid rock drainage from the company's waste rock and tailings dumps will cause lasting ground and water contamination, and because the mine is deemed to remain profitable until 2041, it is expected to result in "severe long-term environmental damage in the area".

Because Rio Tinto has a considerable share of the mine's production, and this will increase significantly after 2021, the Council inferred it has a long-term interest in the mine.

The Council claims is already responsible for the "destruction of most aquatic life in the waters affected by the discharge" and for elevated levels of heavy metals in sediment which could enter the food chain and have significant long-term effects on eco-systems away from the discharge area.

In its defence to the Council, Rio Tinto claimed the discharge is not environmentally harmful and the environmental damage is not irreversible, as it argued there is an "engineered, managed system for deposition and control".
 
However, the Council of Ethics said the response presented "no new information" and did not provide a reason for a new environmental assessment of the operation.

Instead, the Council concluded "Rio Tinto, through its participation in the joint venture and part ownership in the Grasberg mine, through its capital supply to the expansion of the mine and exploration activities, through its influence on mine management and operations, and through its present and future share of production, is directly involved in the severe environmental damage caused by the mining operations".

The Ministry of Finance accepted the recommendation to exclude the company and on 28 April 2008 it requested Norges Bank divest its NOK4.419bn holdings in Rio Tinto plc, and NOK430m in Rio Tinto Ltd by the end of June 2008.

Halvorsen added: "There are no indications to the effect that the company's practises will be changed in future. The fund cannot hold ownership interests in such a company."

The Government Pension Fund - Global has been more successful in its active ownership processes with Monsanto Co, where it has contributed to a "significant reduction' in the use of child labour in the company's hybrid cotton seed production.

The Council of Ethics originally recommended exclusion of Monsanto in November 2006, however in spring 2007 the Ministry of Finance decided to pursue an active ownership strategy for a limited period to see if it would "reduce the risk of contributing to grossly unethical conduct".

New assessments of Monsanto by both the Council of Ethics and Norges Bank revealed there has been a significant reduction in the use of child labour, and that conditions will continue to improve.

Norges Bank, on behalf of the pension fund, has not only initiated dialogue with Monsanto to improve standards and monitoring procedures, it is also seeking to establish co-operation between several multinational companies in the hybrid cotton and vegetable seed production in India to develop a joint standard on the use of child labour.

The Council of Ethics stated in its report that the detected violations at Monsanto can be deemed as "the worst forms of child labour" which qualifies for exclusion from the fund, however it admitted the firm has "achieved considerable improvements within certain geographical areas".

In addition, it noted the role of Norges Bank in this improvement is of particular importance as no other investors are engaged with the company on these issues at present.

The Council added: "Given that the improvement efforts are further strengthened and the application extended so that these goals are met, and also that the sector-wide initiative succeeds in reducing the occurrence of child labour….the risk of future violations may be reduced to a level where the fund's investment in Monsanto no longer must be regarded as constituting a breach of the fund's Ethical Guidelines."

The Ministry of Finance is currently in the process of reviewing the ethical guidelines of the pension fund, with the consultation closing to responses on 15 September 2008. (See earlier IPE.com article: Norway consults on ethical pension guidelines)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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