Why the threat of being labelled ‘unethical’ has the potential to harm the industry
We have all noticed and perhaps participated in the rise of so-called ‘ethical investment funds’, which provide an optional avenue for encouragement of particular sectors, like solar cells, and avoidance of others, such as tobacco and ‘conflict diamonds’ and, of course, national corruption.
In the view of some, genetic modification of crops, intensive commercial aquaculture and medical drug design are also ethically doubtful. Any degree of risk to any group in the community, no matter how improbable or small, seems to draw criticism. There are many shades of grey in perceptions of unethical behaviour.
Superior returns and future growth potential are often also claimed for ethical investment funds on various criteria, but the main selling point is to do no harm to people or planet.
Many investors have the same priorities, but find less overtly self-righteous vehicles to achieve them, whilst conversely some ‘ethical investors’ also hold investments in large funds or conglomerates, which dilute or submerge frowned upon activities, but provide reliable and rewarding returns.
There is no doubt though that overtly unethical behaviour in key sectors does impact on global share markets and hence on the whole economy. Previous unethical practices in the banking industry catalysed the global financial crisis, so casual ‘unethical’ classification of major industries is not an approach that should be taken lightly.
It is the widening list of ‘unethical’ criteria that investors seek to avoid that should particularly concern the extractive industries, including mining and petroleum and the many sectors of the economy that they underwrite.
Mining in its broadest sense has always been beset with high risk, from the exploration stage onwards and an unknowability factor attached to the potential future prices for its products. Forecasting changes in demand, which can be cyclical or more fundamental and long-term in their nature, has proven to be even more perilous than getting budget deficits right.
This uncertainty can lead to short duration ‘super profits’ – remember the intended target of the Rudd Government – interspersed with very ordinary returns and sometimes ruinous losses.
This profile is compounded by the capital intensive nature of the industry. Punitive and multiple taxation of the profitable phases and limited write downs of capital and exploration outlays can be the nail in the coffin, even for well-run enterprises. And in some sovereign jurisdictions there still remains the threat of de facto expropriation.
Almost two decades ago, the industry recognised that sustainable development principles and the triple bottom line approach to their businesses were reasonable and essential expectations of the local and broader communities, embracing environmental and social wellbeing, as well as financial viability.
The overall response has been mainly praiseworthy in terms of actual outcomes. In addition to mitigating harm, the industry has improved the lives of many in the regions in which they operate, including employment and infrastructure in remote areas for disadvantaged sectors of the community and for indigenous people.
Improved extraction efficiencies and recycling recoveries are adding to the sustainability of metals usage. Much of the metals mined and the energy entrained in their processing no longer disappears, but reappears in other uses. Sustainability-enhancing technologies developed in Australia are world ranking and exported for wider global benefit, including mine site rehabilitation.
For many developing nations, and also for Australia as a developed country, resources activities are the main driver of their trade based economies. Although diversification is desirable, this will not be easy or come soon for most such nations.
Despite the current downturn in prices, the industrial and infrastructure needs of populous developing countries will continue to drive demand for commodities and help improve most people’s living standards.
Ethical investment and the national interest
Australia is one of the world’s great trading nations, with a pronounced concentration (and dependency) on Asia. What we trade is overwhelmingly based on our geology, our geography, our climate and our skills. We are fortunate to have a relatively small and well-educated population occupying an expansive continent.
Our exports are dominated by raw or lightly processed food products and mineral products, with little traditional manufacturing value adding involved. Our comparative labour and energy costs are now largely uncompetitive, even with some other developed economies, but there are ways forward in advanced manufacturing, which is niche and technology driven.
Supplementing our traditional exports are intellectually-based exports, including technology and know-how, much of which has been developed in or around the mining and agricultural sectors by Australian researchers.
Tertiary education and training, mainly in the form of overseas students studying in Australia, has also proven to be a very strong contributor to our ‘exports’ and is underwritten largely by the expertise of our institutions, notably our world ranking universities. This relative strength is broadly based across the sector, not just with the elite Group of Eight. As a good example, the University of South Australia rates 35th in the world in universities under 50 years of age, according to the Times Higher Education rankings. Although not yet 25 years old as a ‘Dawkins University’, its ultimate ancestry goes back well into the 19th century with the School of Mines. Now about a quarter of its students hail from outside Australia.
Even in this sector, there are complaints about the ethics of educating students from overseas, supposedly displacing young Australians in universities, and about some of the research that is seen to assist particular industries or to support contrarian thinking in some areas.
Ethical energy quandaries
How then do the expanding definitions of ‘unethical investments’ gel with national interest for Australia? For some time now, various investment funds have included uranium mining in the unwelcome category, mirroring the negative image of the nuclear cycle commonly expressed in the broader community.
There are more myths than realities associated with these connotations and it is encouraging indeed that the South Australian Government has called a Royal Commission to examine the issues for the state, including waste disposal and nuclear power. Without anticipating the outcome, one must admire this Labor government for showing the rare leadership needed to reconsider their earlier positions on the basis of evidence from the enquiry.
Australia is the third largest producer of uranium in the world, and has the world’s single greatest uranium resources closely tied in with the Olympic Dam copper-gold deposit. It is surely in the national interest to carefully consider the ethical status of uranium and its mining product, the feared but feebly radioactive yellowcake.
But the most recent and aggressive application of resource extraction ethics lies in the widespread view that carbon dioxide generated by burning fossil fuels is adversely changing global climate. For most people, a significant risk has been established, even if that risk is not quite a scientific certainty or likely to precipitate an immediate global cataclysm.
The use of coal is therefore a special conundrum for Australia, in that it produces the greatest unit emissions of carbon dioxide of the commercial electricity generators, especially in the case of lignite. Black coal for metallurgical and thermal use together constitute Australia’s second or third largest value export and coal still generates three quarters of our domestic electricity.
Without significant thermal base load generation and in the absence of nuclear power, we would not be able to effectively utilise the growing availability of intermittent solar and wind power. By all means, let us research large-scale energy storage and hybrid options, but we are not there yet in terms of the economic viability.
Surely then the increased use of natural gas with its lower emissions profile makes sense, at least as an interim option. New drilling and extraction technologies (although fracking is not new) have greatly increased accessible resources, which are needed urgently for users on the relatively heavily populated and agricultural east coast.
Concerns from landowners about water table damage from coal seam gas extraction are understandable, but there is little real research or track record to suggest that this risk is substantial or uncontrollable. Nonetheless, perceptions are preventing gas developments and the enabling technology is being branded as unethical.
The rights of landowners in Australia have long and clearly been confined to use of the surface and do not extend to mineral and energy resources, but landowners are and should be protected and compensated for damage to their livelihoods and living conditions, and in some instances these regulatory safeguards should be extended.
However, a de facto landowner veto, backed by physical impedance of access (for example Lock the Gate) to legally entitled resource operations constitutes a serious threat to investment in Australia. If some practices and land uses can be demonstrated to be genuinely deleterious, they should be – and largely are already – controlled by sound and enforceable government policy and regulation.
The energy quandary for Australia is therefore that increasingly its energy exports and electricity generation in particular are being labelled as ‘unethical’ activities, without any real substitutes in scale and time frame being identified. The companies that work in these sectors – and, by inference, the people who work for the companies –share the ‘unethical’ slur. Less often is the label applied to consumers, who are responsible for the demand of these products – which usually undergo several layers of processing before being marketed to the final customers.
There is a simplistic view that use of mineral and energy resources can be restricted by existing producers refusing supply – a sort of reverse cartel. The widespread geological availability of commodities like coal and uranium and iron ore simply mean that new suppliers in other countries will surface and that prices will rise and quality will fall, often raising more severe environmental and social challenges. ‘The stone age did not end because we ran out of stones’, but because humans developed better materials and technologies.
Perhaps we may be approaching the lithium battery era or the time of tantalum, but the need for traditional metals for infrastructure and consumer demands will also not diminish for a long time to come. Huge increases in steel use for infrastructure will require more zinc to protect it from corrosion, and the expansion of motor vehicle production and use in developing countries will require more lead acid SLI batteries. The Bronze Age may be long past, but tin has found an essential use for solders in the booming electronics industry. These metals are increasingly hard to find.
In South Australia, with the large majority of the nation’s copper production and known resources, the government is actively promoting the return of the copper age, as was seen at the Copper Summit in Adelaide recently. The rosy outlook for copper derives from its very high electrical conductivity and ductility, which is required for the ever increasing use of electronic devices and even the generation of renewable energy and its transmission from multiple dispersed wind and solar sites.
Is digging dodgy?
For some, there seems to be a justification to consider any form of mining unethical, although the accusers are content to extensively utilise its products on a personal level and share the benefits of the wealth it generates.
Even public institutions have joined this bandwagon; for example the Australian National University (ANU) late last year determined that it would divest from its very substantial investment fund a number of companies deemed by a consultant to be unethical in some way. Although the focus was supposed to be on coal-based emissions, the outcome was that companies covering most sectors of the extractive industries, from gold to petroleum, were ‘named and shamed’ and sold off. Perversely, investments in companies with very large coal mining components were retained.
Other influential public institutions, such as the University of Sydney and the Anglican Church, have followed suit, but in more measured and targeted terms. Most recently the Norwegian Government Pension Fund has black banned coal investments, which does play to their national economy, as it is heavily based on oil and gas.
Organisations have every right to make their own investment decisions on whatever basis they choose, albeit hopefully through proper governance structures that protect against unrepresentative activism by vocal minorities. It should be of wider concern that so many decisions to exclude will be made far more on thinly-veiled ideological grounds than on truly ethical or practical considerations.
Caution is wise when it can so easily be a matter of ‘he who casts the first stone does more harm than he who digs it up’.
The right response – ethical practice
The thrust so far has been to alert investors and companies to the growing challenge the extractive industry now has in combating its labelling as ‘unethical’.
Of course, the industry is far from undifferentiated and the responses required will not be all the same, but the binding theme should surely be the economic and social benefits it brings, especially here in Australia. But none of that will matter if its actual performance in the sustainability sphere falters or is poorly communicated. Unfortunately, as with any activity or collective, there will always be some outliers of deliberate or unintended poor performance, even ‘outrages’.
Perhaps most importantly, companies in the mining industry must avoid giving ammunition to those for whom any form of resource extraction has negative ethical connotations. Environmental failings and cavalier treatment of indigenous people are well accepted ‘must avoids’, but the spotlight is now also on relations with rural landowners, many of whom have actual priorities quite different from commercial agriculture, and on marketing practices and the payment of fair taxes for accessing the mineral and energy resources owned by the people through their governments.
It has been independently verified that the industry actually does pay a very large amount in direct company taxation of profits and from production-linked royalties. For example, BHP Billiton is Australia’s largest taxpayer and the sector, on latest figures, paid out almost half its declared profits in Australia in combined taxation. The sector also generates major employment and taxation revenue from related supply, support and value add activities.
In the furore surrounding the mining tax dispute with the Rudd Government, the industry was able to get this message across to the community. That same community would feel duped if it is perceived that the industry has been engaged in excesses of transfer pricing to minimise its taxable profits in Australia.
The reaction would be understandably more severe than that expected for Google or Apple for example, because mining profits are so obviously generated from the Australian people’s resources with Australian expertise and labour.
It will be vital that industry, and especially its leading corporations, are not perceived to embrace any business practices that leave it open to ‘unethical’ labelling, which would seriously erode the many benefits of the sector and provide credibility for its detractors.