Fallout for Rio Tinto

The equivalent of going nuclear in governance is clearing out a company’s leadership. This week investors managed to detonate a bomb under Rio Tinto when the chief executive, Jean-Sébastien Jacques, resigned over the destruction of Aboriginal cultural sites in Australia. Two other senior executives are also set to leave the company.

Calls for the CEO’s departure emerged in early August after Rio Tinto destroyed caves at Juukan Gorge, a site used as shelter by Aboriginal people for thousands of years. Reports suggest the company was aware of their significance. The caves were destroyed as part of an expansion of iron ore mining operations.

The episode demonstrates that the shift in ESG issues has incorporated culturally significant locations and companies that exploit natural resources cannot assume they have free rein. The days when multinationals could ride out any public backlash appear to be over.

US vs ESG

In Washington, current debate centres around an effort to impose further regulation on proxy advisers. The latest episode comes after the US Department of Labor (DoL) proposed new rules viewed by many as undermining the ability of proxy advisers to vote on any issue other than financials. In other words, no voting on ESG topics.

The reaction has been emphatic. Writing for the Harvard Law School governance blog, Brian Tomlinson of Chief Executives for Corporate Purpose, a pressure group, says: “The proposed rule is unnecessary and represents a confused understanding of ESG and its role in mainstream investment analysis.” He adds: “The rule does not address the imperative of long-term value creation and the key insights ESG provides for assessing long-term corporate resilience.”

The drive for ESG performance and sustainability remains a contested issue in the US. Time may be running out for the planet while politicians, regulators, investors and business leaders resolve their differences.

An unsustainable trend

ESG remains a concern here in Europe too, despite the generally more sympathetic approach to the topic. The European Commission has, in recent reports, worried that companies remain too “short term” in their thinking, and the mindset is an obstacle to implementing the UN’s Sustainable Development Goals and the Paris Agreement on climate.

This week, ecoDa, the European association for institutes of directors, and Mazars, the business advisers, issued a joint report looking at the road to a “wholehearted” adoption of sustainability by business. There is progress but also a host of problems, including a lack of standard definition of sustainability; a trend towards a “tick-box” approach for many; sustainability being treated as a separate issue to core business strategy; poor quality reporting; a lack of commitment from fund managers; and a lack of agreed benchmarks.

Boards are also a problem, they conclude.

“In businesses where sustainability is seen as separate from the core strategy, the board’s emphasis tends to be on short-term financial performance, leaving sustainability considerations without much attention at the board level,” the report says.

Risks and rights

Climate risk is an issue highlighted by research published this week by KPMG. Only 8% of boards, the firm says, have a fully-fledged climate risk plan. That’s a worry, and one underlined by Board Agenda’s own survey at the beginning of the year which found in a list of nine risks to address, boards generally placed climate last.

And while big corporates may be slow in coming to terms with tackling climate change, despite its permanent position in news headlines, companies do appear to be buying into another sustainability issue.

This week it emerged that 26 household name companies—among them Adidas, Nestlé and Aldi—have signed a letter in support of the European Union introducing mandatory human rights due diligence.

“Mandatory human rights and environmental due diligence is key to ensure that efforts by companies that respect people and the planet, both during and post Covid-19 recovery, are not undercut by the lack of a uniform standard of conduct applying to all business actors,” they write.

Big Three?

Lastly, audit and auditors are never far from a discussion of corporate governance. A report this week from academics at the Melbourne Centre for Corporate Governance Regulation suggest the Big Four in Australia is really a Big Three because Deloitte has so little of the audit market. The firm has a 6.9% share of the ASX 300 and 1.5% of the ASX 20, Australia’s largest firms.

Researchers Ian Gow and Thomas Barry suggest this may mean a deepening of competition problems in the audit market. Though lagging in audit, Deloitte is second overall in the Big Four stakes, buoyed up by revenues from advisory services.

“A concern for regulators and users of financial statements would be that its weak position in auditing is a result of strategic choices,” they write. “If a Big Four firm audits a company, its ability to offer advisory services is limited by auditor independence requirements. If one of the Big Four were choosing advisory work over auditing, then competition might be even less than it appears.”