Analysis: Shocked by sacred sites blast, investors press mining firms to revamp heritage oversight

By Melanie Burton and Clara Denina

MELBOURNE/LONDON (Reuters) - Rio Tinto's destruction of sacred Indigenous rock shelters in Australia this year has dismayed and galvanised a swathe of investors who want big changes in how mining firms manage heritage issues and have begun to tell them so.

They have stepped up communication with mining companies both in volume and frequency, putting them on notice to improve accountability and risk management, according to Reuters interviews with two dozen major investors and corporate governance advisers.

Such engagement is nothing to be sneezed at, they add.

"(For) many of the most influential investors, a quiet conversation with the chair to make their expectations clear is enough. More transactional approaches are often unnecessary," said Susheela Peres da Costa, head of advisory at Regnan, an adviser on environment, social and governance (ESG) issues.

Regnan is part of the Pendal Group which has some A$94.8 billion(52.2 billion pounds)under management.

However, failure by miners to adequately address concerns could at some point lead to more direct shareholder actions, as has been seen with other ESG issues such as climate change and the use of coal, advisers said.

Those actions would generally come in three forms: efforts to influence the makeup of company boards, resolutions put forward at annual general meetings on cultural heritage issues and walking away from a firm by divesting.

"I think we will see that investors are going to be much more proactive in how they vote on directors and how they influence the shape of the boards," said Simon O’Connor, chief executive of the Responsible Investment Association Australasia, whose members manage more than A$9 trillion.

That influence was on display when Rio Tinto parted ways with its CEO and two deputies in September, bowing to a shareholder outcry over the blasting of the Juukan Gorge sites - which had been legal but ignored the wishes of Aboriginal owners - as well Rio's initial board-led review which found no one person was accountable.

In the wake of the blasts, Rio and fellow top iron ore miners BHP Group and Fortescue Metals Group have all reviewed their heritage management processes.

Rio, in particular, has increased its oversight and accountability to include reviews of its heritage management by board sustainability and audit committees and has said it will benchmark its progress.

BHP has said it has since introduced a requirement for more senior level approval before any site is harmed and has also stepped up its discussions with Indigenous groups.

Fortescue CEO Elizabeth Gaines told Reuters in a statement the company works on a "cultural heritage avoidance basis" and has avoided nearly 6,000 sites. Its audit committee, which reports to its board, is responsible for Aboriginal heritage matters.

STARTING WITH LETTERS

Institutional investors are increasingly focusing on ESG issues to mitigate risk for the long-term investments they hold.

Shareholder campaigns against the use of thermal coal for example, have led to more than 120 financial institutions restricting related financing, insurance or investment, according to the Institute for Energy Economics and Financial Analysis.

The first salvo by investors has often been the humble letter, and investors in miners are now seeking more information about their dealings with Indigenous peoples and the standards they employ.

Last month, the boards of 78 global mining companies received one such letter from a large group of institutional investors worth $10.2 trillion that includes the likes of the Church of England Pensions board and the Australian Council of Superannuation Investors.

Many are taking action on their own. HESTA, an Australian superannuation fund with A$2 billion invested in the mining industry, has written to 14 miners in which it has holdings. Details it is seeking include how management communicates with Indigenous peoples and how they practice obtaining consent.

While HESTA's head of impact, Mary Delahunty, told a parliamentary inquiry that divesting was a last resort, at least one prominent fund manager has already gone there.

Ausbil, which had A$11.1 billion under management as of June, cut its Rio holdings to zero in August, its head of ESG research Mans Carlsson-Sweeny has said, citing failed internal governance procedures. Rio had featured in the fund's top 10 holdings just a month earlier.

Corporate advisers say one area of focus in heritage issues is likely to be how boards get independent information.

Boards will need access to information that bypasses management, said Daniel Smith, a governance advisor with CGI Glass Lewis. To that end, a specialist heritage advisor reporting directly to the board could be appointed, or a board could have an ESG subcommittee responsible for stakeholder management including of traditional owners, he said.

Many mining companies have yet to appoint chief sustainability officers to manage ESG exposure, said Henning Gloystein at risk consultancy Eurasia Group.

He added that companies which have executive bonuses directly tied to clear, measurable ESG outcomes also assess better on ESG metrics.

(1 British pound = 1.8154 Australian dollars)

(Reporting by Melanie Burton in Melbourne and Clara Denina in London; Additional reporting by Helen Reid in Johannesburg, Zandi Shabalala, Simon Jessop and Sinead Cruise in London; Editing by Edwina Gibbs)