Business and biodiversity

Kerry ten Kate, director of investor responsibility at Insight Investment, discusses the need for the extractive and utility sectors to start paying attention to biodiversity

The Heads of State attending the World Summit on Sustainable Development in Johannesburg in August 2002 identified biodiversity as one of five priority issues and set a global target of significantly reducing its loss by 2010. Extractive and utility companies have an important role to play if this target is to be achieved, and a cast-iron business case for making their contribution.

The future viability and profitability of extractives and utilities companies depends in large part on their ability to access land and the hydrocarbons and minerals beneath it. To do so, they will increasingly need to demonstrate high environmental and social standards, including clear commitments on biodiversity. Since biodiversity raises important challenges in terms of sustainable development and long-term shareholder value, it is important for investors to take it into account in their evaluation of corporate practice.

The business case

Growing resource scarcity, increasing development pressures on biodiversity and escalating public concern pose a strategic threat to extractive and utility companies. Mature oil and gas reserves are seeing production declining at 5-10%/year, and the economic life of mines, and oil and gas reserves are typically around three decades.

Vital access to land to exploit new sites may be denied these companies in the medium to long-term, with corresponding risks to revenues, unless they demonstrate high standards with respect to the conservation of biodiversity. In the short-term, companies that do not manage biodiversity effectively are also exposed to business risks: liabilities, damage to reputation and increased operating costs.

By contrast, companies are also recognising the opportunity presented by demonstration of best practice on biodiversity - namely that it facilitates permit and concession negotiations; produces faster earnings and considerable savings; confers the competitive advantage of favoured status as a partner; generates positive public relations; and motivates staff and other stakeholders.

Society's avowed goals of environmental conservation and resource extraction to feed growing consumer demand are not easy to reconcile. Sustainable development poses significant challenges, both at the level of government policy and corporate strategy. The most significant impacts on biodiversity are often not within companies' sole control, but arise from the secondary impacts triggered by companies' operations, such as inward migration to development sites by economic migrants and habitat conversion made possible by new roads that follow the pipelines or access routes.

Many decisions involve apparent trade-offs between development and biodiversity conservation. Local communities may push for new roads to support development, while environmental interests may best be served by decommissioning access routes. Transparent and democratic governance and decision-making - both by governments and by companies - are key to resolve these challenges, as are proper consultation and effective partnerships.

What investors would like to see

Extractive and utility companies are responsible for managing the risks and opportunities associated with biodiversity to protect shareholder value and contribute to sustainable development. The table above summarises the key issues about biodiversity on which investors are likely to seek assurance from these companies, and the corporate policies, management tools and reports that would offer the evidence that these issues are being properly managed.

Findings to date

Participants in Insight seminars on biodiversity have described the importance of having a policy statement on biodiversity that sets clear objectives as the basis for integrating the company's commitments into management systems. A fundamental sequential set of principles, which could form the basis of biodiversity policies, saw broad agreement.

First, companies should endeavour to avoid any damage to biodiversity. If damage is unavoidable, they should seek to minimise and mitigate it, then compensate for the residual harm, offsetting it and making a positive contribution, to the extent possible, through conservation measures.

So it is perhaps rather surprising that, in a preliminary survey of 20 oil and gas, mining and mineral, and utility companies, Insight found that nine either made no mention of biodiversity or only made a passing reference to it in their public documents.

Only two of the 20 companies (Anglo American and Shell) have specific biodiversity policies. Rio Tinto is developing one and RMC, for instance, has a goal related to conservation of habitats in its environment policy. Two other companies (BG Group and BP) have board-approved position statements on their approach to operating in sensitive sites.

Only four companies, or parts of companies - Anglo American, BP, Northumbrian Water and Severn Trent Water - have company-level biodiversity strategies and four others are developing them.

While seven companies refer to the fact that they have developed one or more biodiversity action plan (BAP), and several have some site management plans that may contain a component on ecology or biodiversity, 11 make no reference to BAPs for any of their sites. Only three - Anglo American, BP and Shell - appear to commit to BAPs for all sites with a significant impact or where there are high levels of biodiversity.

There is comparatively little disclosure on companies' approach to sensitive sites and where they are operating in them. Companies do not set themselves clear indicators for their performance on biodiversity and reporting is patchy. While there is considerable room for improvement, there are encouraging examples of good practice on some aspects of biodiversity management in several extractive and utility companies. For instance, Anglo American has a board-approved policy statement requiring active stewardship of biodiversity. This is supported by a set of strategic guidelines and a requirement that all the companies' businesses with a significant or potentially significant impact on biodiversity must develop and implement BAPs.

Several other companies have in place one or more of the components described in the table above. In the weeks leading up to the Durban World Parks Congress, the 15 members of the International Council of Mining and Metals (ICMM) and Shell committed - among other things - not to explore or exploit resources in World Heritage Sites: a welcome initial step on so-called sensitive sites.

The International Council of Mining and Metals is publishing a report on best practice principles and reporting criteria on biodiversity, as well as tackling conservation and land-use planning, including no-go areas. The Energy and Biodiversity Initiative (EBI) recently published its report, Integrating Biodiversity into Oil and Gas Development, and a useful set of associated guides and resources.

Inconsistent attitudes

Some extractive and utility companies have considerable expertise on biodiversity. However, commitments and performance are patchy, leaving companies exposed. Biodiversity presents, at minimum, an important communications challenge for companies.

Much practical work by companies on biodiversity is not communicated. Common, informal good practice is often not codified. Where such experience and internal practices exist, companies would benefit from clarifying them and making them public. Benefits include more rapid acquisition of permits, preferred partner status, and efficient operations.

Where good practice is not in place or cannot be demonstrated, companies are exposed to business risks such as reputational damage and the delays, costs and inefficiencies caused by disaffected communities and staff.

Insight Investment has launched a biodiversity and extractives programme, to work with extractive and utility companies to define standards of best practice with respect to biodiversity and encourage investment companies to comply with them.



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