We would also expect the Board to shoulder accountability for the destruction of the caves given this points to a complete lack of Governance and Board oversight
Changes are welcome, but not enough
The Board’s initial decision to only impose financial penalties on senior management, and not dismiss any employees, was not good enough in our view and serves to highlight our concerns about how genuine Rio Tinto is in embedding traditional owners’ relationships within the company going forward.
We have welcomed the additional changes to management announced on 11 September 2020, including the departure of the CEO, Head of Iron Ore and Head of Corporate Affairs. However, we would also expect the Board to shoulder accountability for the destruction of the caves given this points to a complete lack of Governance and Board oversight.
The appointment of Simon McKeon, an existing Non-Executive Director, to the role of Senior Independent Director, Rio Tinto Ltd, to enhance Board engagement in Australia and work with stakeholders to deliver the changes set out in the Board Review, is a step in the right direction, but we still want to see a Board review and assessment of the Board’s competency and policies.
Our portfolio actions reflect the unanswered questions
Given Rio Tinto previously had a very good track record, especially in the 1990s, in dealing with indigenous groups, showing respect for the natural owners of the land and their sacred sites, we find it extraordinary that processes, Board and management oversight have all failed in this instance. This shows a change in culture and raises important unanswered questions about the Board and management structure.
Through this incident, Rio Tinto have not only severely damaged their reputation, but it has caused us to reassess and downgrade our proprietary MCA Management, Governance and Sustainability ratings. These ratings form an important part of our overall Quality assessment for the company, which we have downgraded from 3 to 4.
Changing these ratings reflect our belief that factors such as poor management or lack of governance can lead to an increased risk to the normalised earnings that our analysts have forecast. The lower the Quality, the higher the hurdle is to invest. The magnitude of the mismanagement and ongoing impact on the community warrants us to apply a ‘reg flag’ for very severe ESG impact on stakeholders.
Our ESG research directly impacts our individual security positions. As a result of these changes:
- We have exited our position in Rio Tinto in all Ethical Income portfolios as the ‘red flag’ means that it is now excluded from the ethically-screened investible universe.
- We have heavily reduced the target security position for Rio Tinto in Sustainable Equity strategy portfolios.
A close watch going forward
We are forward-looking in our approach to ESG, and do prefer to engage with and work with a company to promote positive change rather than simply screen out companies on past behaviour. As such, we will watch closely Rio Tinto’s new management appointees for improvements.
However, before we are able to lift the ‘red flag’ for our Ethical Income strategy, or improve our Quality rating, we will need to see greater traditional owner representation within management of Rio Tinto and more accountability to believe that management and the Board have a genuine intent to change the culture of Rio Tinto and embed traditional owner rights and heritage management in the DNA of the company.
We will also keenly monitor changes to the Aboriginal Heritage Act in WA, which should give indigenous people a voice and rights as regards future development of the Pilbara and impact on their land and sacred sites.
Regulatory information and risk warnings
Past performance is not a guide to future returns.
This information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
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