Tailings Dams and Due Diligence: The Metrics – Part III
Determining due diligence metrics can be viewed as a relatively simple exercise or it can be quite an extensive exercise. As an important tenet though, if I can use a phrase borrowed from a training mentor from long ago, “You get the level of performance that you demonstrate you want”. Let’s analyse that.
As a Board, as a minimum, you have defined a level of ESG performance in a policy statement. How do you know your organisation is meeting that level? Do you take the word of your management or do you wait and see and react to negative performance? Or are you satisfied with an internal (non-independent) review? Are you prepared to have an independent review of your safety performance, your environmental performance, or any other performance? The stock exchange regulator now requires an independent audit of your financial “books” and a very public statement as to their accuracy. Will it be long before a similar independent audit of your ESG performance is legislated? Will you pre-empt this compliance requirement by engaging in independent audit before it becomes mandatory? Independent ESG audit and publication may be a key differentiator in the investment marketplace. Whichever process you choose, as a member of the Board, it is undeniably your responsibility to define the level of performance you are satisfied with. It is equally your responsibility to resource management and to support them to achieve that level of performance. However, it appears that it is becoming more the norm of late that Boards are comprised of a growing number of Directors who are without significant experience in an industrial environment. So an understanding of what is needed for acceptable safety systems is lacking. Similarly, but more so, for environmental management.
So the first big question the Board has to ask is how do we measure performance of our ESG systems on an annual basis? This is where the internal or external audit question needs to be asked. A process that is becoming increasingly more common is to “sign up” to an appropriate standard. You can have the international environmental management systems standard ISO 14001 to measure your environmental performance; the safety equivalent OHSAS 18001 (or the upcoming ISO 45001 – Occupational Health and Safety management systems – Requirements with guidance for use); or you can aggregate all of your risk management under ISO 31000 Risk Management standard. The use of external audit to an internationally recognised standard gives a significant standing in ESG governance. It allows a means of using external people to view your legal compliance and any movements towards best practice. It can be used in identifying organisations who are and who are not ISO certified; but it does not say whether Company A who is ISO and Company B who is not ISO has better systems and performance; that is, is less likely to see significant loss. It is important to note what an external ISO audit achieves. It measures your ESG systems and performance against an internationally acknowledged standard and, can, should certification be obtained and maintained, be used a means of being assured of legal compliance. But it does not of itself report performance above legal compliance. How do you then reduce risk even further and be able to publicise that? To lessen the probability of those incidents occurring that are considered rare to very rare when good systems are running effectively and be able to let your shareholders know.
In Part 2 of this series, I raised the issue of targets. I also discussed that simply targeting compliance to the relevant Acts and Regulations can lead to small under-achievements that may result in unacceptably negative outcomes that can leave you legally exposed. So where does a Board go for the answer to Due Diligence?
My answer to Due Diligence metrics is to set the bar much higher than simple legal compliance. I use the term “Striving for Excellence”. You have to design your safety and environmental management systems with the highest of targets whilst ensuring that all legal requirements are met. This takes work, but it makes your workforce proud! It requires significant resourcing and requires the focus and dedication of the Board to the development. It’s like the aspirational goal of a man on the moon by JFK. Get everyone working towards best practice; get all the information you can on how to achieve the goal; and turn all of those ideas, the energy and enthusiasm into design and operating standards, with resultant best practice performance.
An internal approach that I have experienced that was as close to a “Best Practice” standard as you could ever expect was at Western Mining Corporation (WMC), the then mining house controlling most of the nickel industry in Western Australia, the uranium project at Olympic Dam in South Australia, and the phosphate/fertiliser project at Phosphate Hill in Queensland. This standard was for the “Elimination of Fatalities” (EFT). The Elimination of Fatalities Taskforce was led by the then Chairman, Hugh Morgan. A development group from across the Operations covering workers, engineers and management was formed to develop clearly measurable activities that were needed to attempt to eliminate fatalities across WMC. These “standards” were developed to cover the 15 most likely scenarios/pathways that lead to fatalities in the mining and processing industry. Once developed, these standards were then used as a safety systems development tool, an annual audit tool, and importantly as a tool that the Board could then use in its endeavours to eliminate fatalities from its Operations. The Board could “see” each Operations progress towards the EFT standards and the eventual goal. The key success factors here were: the leadership by the Board, the across the workforce approach to development and deployment, and the acceptance by all of the target. The elimination of fatalities.
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Now development of such standards is an extensive process requiring considerable resourcing; is there an easier way? Now this is not an advertisement, but it can be seen as an acknowledgement. DNV GL has a systems development tool that goes through compliance towards best practice in safety and sustainability (ISRS). The International Safety Ratings System for safety or the International Sustainability Ratings System for integrated safety, environmental and sustainability. These systems can be used to develop your Operations through compliance towards best practice, and the audit tool can be used to ensure legal compliance and to achieve ISO certification. There are others. Peer review now becomes a powerful motivator!
Now, the issue of tailings dam due diligence. There is not a single ISO standard here, although there are many internationally developed guideline documents to help. The International Commission on Large Dams (ICOLD) has a plethora of guideline documents to source, but how do you turn these into design and operations standards across your Operations? How do you then ensure that these standards are being continually met? The Western Mining example is proof that it can be done but how do you plan for this development? Where do you start? Is there a guide?
Again, there is no “standard” here, but there is a way. In the Australian offshore petroleum industry there is a concept termed Safety Case (Offshore Petroleum and Greenhouse Gas Storage (Safety) Regulations 2009). It is a methodology where significant hazards are identified, then managed, from design through operations, so that the possibility of those significant hazards becoming significant loss are minimised or eliminated. The Safety Case is enmeshed within the Safety Management System with compliance being assessed by the regulator. An expansion of this approach with the required level of rigour can be applied to all of those hazards that are viewed as sufficiently significant to warrant the resources required. Fatalities, tailings dams, etc can have their risks reduced to approaching zero. If you integrate these new protocols under your ISO certified ESG banner, you then have a risk-prioritised best practice management system supported by independent external audit and a very powerful message from your ISO certification.
This approach is very new to most Boards. The concepts are new, some of the processes are new, but the challenge of ESG is historic, ever-present and on-going. It may be worthwhile to consider having a separate ESG risk sub-committee just as the Board has audit and remuneration sub-committees.
The transfer of management performance to the achievement of due diligence for the Board is an ongoing challenge, but it is also an opportunity. As the world moves towards a cleaner, greener and safer future, Boards that show such effective ESG due diligence can differentiate themselves. They become employers of choice; they can become preferred developers of governments; they can be seen as safe ESG investments.
I hope that investors and potential investors can understand the development process I have used for the Board of Directors and can see what you need to look for when thinking about your ESG values and whether your current or potential investment is meeting those values.
Merry Christmas to you all and let’s look forward to a New Year free from significant loss.
Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>