Risk Management

Norwegians Added Rio Tinto to Blacklist

The government pension fund cites poor environmental performance in Singapore as the reason for being thrown out of the fund.
Stephen TaubSeptember 9, 2008

A Norwegian sovereign wealth fund has banned Rio Tinto from its portfolio because the mining company reportedly is not environmentally responsible.

Norway’s Ministry of Finance said its government pension fund cannot invest in the international mining group because its Grasberg mine in Indonesia — which it owns in a joint venture with U.S.-based Freeport McMoRan Copper & Gold Inc.— has severely damaged the environmental. Further, the government claims that there are no indications that Rio Tinto’s practices will be changed in the future, or that measures will be taken to significantly reduce the damage to nature and the environment.

The recommendation, which came from the pension fund’s Council on Ethics, is in large part based on the decision in 2006 to ban Freeport McMoRan from the fund’s investment universe. Freeport McMoRan was excluded from the pension portfolio because “continued investment in the company was deemed to entail an unacceptable risk of contributing to severe environmental damage,” according to the Ministry. The council asserted that it is likely that Rio Tinto “contributes materially” to Freeport’s operation of the Grasberg mine in Indonesia.

Widely known as an “oil fund,” the portfolio is valued at $380 billion and invests under ethical guidelines set by the government, noted the annual report. In the past it has excluded companies producing nuclear arms or cluster munitions, and groups deemed to have caused environmental damage or abused human or workers’ rights, according to the report.

Separately, a 2007 annual report prepared by the Council of Ethics cited 25 companies, including Boeing, Lockheed Martin, Raytheon, and Wal-Mart, have been banned from the fund under recommendations by the Council.

According to the Norwegian group, the Grasberg mine discharges very large amounts of tailings directly into a natural river system — approximately 226,000 or more per day. The discharges will be increasing in the future as mining operations expand, asserted the council.

Moreover, the council purports a high risk of acid rock drainage from the company’s waste rock and tailings dumps, that it claims will cause lasting ground and water contamination. “The mine is deemed to remain profitable until 2041, which must be expected to result in severe long-term environmental damage in the area,” it said in a statement.

“Our immediate response is one of surprise and disappointment,” said Rio Tinto spokesman Nick Cobban in London, according to Reuters. “We have an exemplary record in environmental matters, world leading in fact, and they are given the very highest priority in everything we do.” A call to Rio Tinto by CFO.com, made after close of business, was not immediately returned.

The divestment was initially requested by the Ministry in a letter dated April 28, 2008. The divestment of securities has now been completed, it stated.

In a separate announcement, the Ministry of Finance said it decided not to exclude Monsanto Co. from the portfolio of the government pension fund after determining that Norges Bank’s active ownership activities in Monsanto have contributed to a significant reduction in the use of child labor in the company’s hybrid cotton seed production in India.

However, the Norwegians added: “Norges Bank can still play an important role in achieving further improvements.” Norges Bank is Norway’s central bank.

In November 2006, the Council on Ethics recommended that the Ministry of Finance should exclude Monsanto Co. from the investment portfolio of the GPFG. The Council then held the view that continued investment in the company would entail an unacceptable risk of contributing to the worst forms of child labor.

The Ministry of Finance said it decided, based on plans presented by Norges Bank in the spring of 2007, that it would be appropriate to pursue an active ownership strategy for a limited period of time to establish whether this might reduce the risk of contributing to “grossly unethical conduct.”