By Zhang Dingyuan, Ge Xiaomei, Xia Tiemu, Li Jiada and Hou Jiahao
CMOC, China Molybdenum, which is listed in the Hong Kong stock exchange market, is a flagship Chinese mining company, and its cobalt production accounts for 14% of the global cobalt production. Its cobalt mining supply comes almost entirely from its Tenke Fungurume Mining (TFM) in Democratic Republic of the Congo (DRC) and ranks second among DRC cobalt and copper mining enterprises, second only to Glencore. The ESG risk in DRC is deeply rooted in the context of a conflict social economic scenario. Therefore, this paper mainly studied five environmental, social and governance (ESG) risks of CMOC in TFM area in the south of DRC with a conflicting background. It is worth noting that CMOC already has management systems and policies in all aspects of ESG in TFM. However, in the long term, it might still encounter various external uncertain risks in Conflict mineral area, so it is necessary for CMOC to constantly improve the mechanism for different unexpected risks in the long run and put all the measures into practice.
- Operational risk of labor management: CMOC has not established a good mechanism to deal with operational risk of employee strikes. CMOC employees also face safety risks at the mines, when disputes occurred with artisanal miners.
- Environmental risk of tailings: CMOC has a basic tailings management framework, but there is still a gap compared with industry leaders. In addition, CMOC has loopholes in extreme weather assessment and management after tailings are closed. This may increase the risk of tailings failure.
- Market Risk from Downstream Companies: In the short term, CMOC has the ability to meet the requirements of due diligence from downstream companies. However, in the long term, CMOC does not demonstrate enough preparation to deal with the decreasing demand of cobalt and more complex due diligence.
- Governance Risk: business ethics is one material governance risk for mining industry. Our analysis found evidence of CMOC having relatively comprehensive and mature governance mechanisms to prevent corruption.
Heightened risk of employee unrest and safety despite existing labor policies
CMOC’s third-party audited Social Responsibility report suggested the company is in full compliance with international and domestic standards on issues such as labor rights. However, report on the supply chain of cobalt and copper in DRC by OECD in 2019 found that the overall situation of mining industry in DRC is not optimistic. CMOC might not be an exception to this as well.
In March 2020, in order to protect the TFM area from COVID-19, China Molybdenum forced miners to isolate and work in the mining area for 2 months without seeing their families, so the miners went on one-day strike.
The strike indicates that CMOC may not be equipped with comprehensive mechanism to manage operational risk of employee unrest. CMOC did not coordinate well enough with employees when accidents occurred, such as they may fail to respond to employees’ demands that led to the strike. CMOC has mentioned establishing and maintaining a complaint mechanism at each site to address complaints from employees and other stakeholders. Despite the complaint mechanism in place, such incident still happened and disrupted its mining operations, which resulted in additional operational cost for the company.
Another highlight under this point is CMOC’s embarrassing relationship with artisanal small mining (ASM). DRC’s mining law has legal mining areas for ASM, but according to the feedback from the DRC government and relevant organizations, the number of areas around TFM where ASM population can mine is so small that is unable to provide livelihood to all local ASM population. In order to make a living, the local ASM population can only mine in unapproved and unregulated areas or enter the concession mining area without authorization. This makes the relationship between the concession area and ASM tense. As a result, the staff and security personnel in TFM areas are passively working in an unsafe working environment. It is difficult for enterprises to avoid these risks in Conflict Minerals area. However, according to the due diligence guidelines of OECD, if possible, enterprises can provide local security forces with recommendations to establish more up-to-standard policing functions, which can reduce the above risks.
Limited management of tailing dams given heightened environmental risks
Dam failure is the greatest risk for tailing management. A dam failure can have negative environmental impacts, such as the pollution of surface or groundwater, air, and soil; the release of hazardous materials; or the destruction of environmentally sensitive areas. Two main causes account for 80% of all dam failures: (1) “overtopping” or (2) quality issues. In order to assess the company’s vulnerability to these issues, MSCI identified several factors that increase these risks. Although the systemic risks of mining industry and the specific risks associated with the geographic location are the main reasons for the failure of tailings, the quality issues are often mainly caused by the failure of governance and risk management.
CMOC has basic tailings treatment policies, tailings management methods and third-party audit mechanisms. In the sustainability report, the corresponding waste discharge data will also be disclosed. This shows that CMOC can identify the risks of tailings in the environment and community relations and take corresponding actions. However, compared with Glencore’s tailings treatment mechanism, CMOC also exposed many defects. First of all, CMOC did not disclose specific management policies, and there is no comparison with international general standards, which may cast doubt on the effectiveness of the policies. Second, unlike Glencore, CMOC does not disclose specific data on each tailing in the report or website. In addition, CMOC’s TDST project has not been carried out in China, which may indicate that systematic tailings management is still not implemented in all CMOC mines. Moreover, CMOC also did not assess the risk of extreme weather for tailings management and ignored related management measures after the tailings were closed.
Company Greenhouse gas (GHG) emission
Emissions of greenhouse gases caused by mining is about 5% of the source of total global greenhouse gases. Emissions may bring other risks and extra cost to the Mining companies. Mining companies will meet with the law restrictions and other challenges about climate change, and the infrastructure cost in vulnerable areas will increase. Furthermore, in some areas more emission of greenhouse gases means more carbon credits that companies have to purchase from the market.
In comparison to CMOC with Glencore of emission of greenhouse gassing, according to the sustainability reports of two companies and important subsidiary companies, CMOC’s total emissions and types of pollutants are less than those of Glencore. Also,CMOC claimed that there is no excess discharge record recognized. The operation of CMOC in the listed factories and the subsidiary companies met the Integrated Emission Standard of Air Pollutant (GB 16297-1996).
In terms of actions, CMOC strictly follows the《Environmental protection of the people’s Republic of China》，《Law of the People’s Republic of China on the Prevention and Control of Atmospheric Pollution》, and actively responds to the policy of energy conservation and emissions reduction, implement the clean production, use natural gas and electricity to substitute coal and gas which greatly decrease the emission of burning exhaust pollutants.
CMOC has a standard system for GHG emissions, and its administration on air pollutant has been improved during these years. We found evidence that no excess emissions have made by CMOC and its subsidiary companies. The updated policies and actions in CMOC’s official annual report also demonstrated company’s efforts to manage the emission.
Market Risk from Downstream Companies
In the short term, cobalt suppliers are facing increasing compliance risk from downstream companies. Nowadays, batteries are the most common application of cobalt, nearly 44% of cobalt was manufactured into batteries in 2019, especially in mobile devices and electric cars. Since social issues such like child and slave labor in cobalt mining, primarily in DRC, have gained much attention, main players in these two industries seek clean and ethical supply chains by conducting stricter due diligence. For instances, Tesla and Apple claimed that its due diligence process aligns with OECD guidelines, while Volkswagen stated that it adopted RMI (Responsible Mining Initiative) guidelines to assess supply chains. Therefore, the results of supply chain investigations will directly influence their lists of suppliers
CMOC had issued relevant policies and conducted self-check correspondingly. In 2019 sustainability report of CMOC, it disclosed the due diligence methods and rules used, which are basically consistent with the standards implemented by downstream companies. In addition, CMOC claims that it will never purchase third-party sourced minerals to eliminate hand-mined cobalt. As such, CMOC currently meets the supply chain requirements of downstream companies.
However, according to the due diligence of the Congo region issued by the OECD, the Congolese army’s actions by the CMOC to protect minerals will cause controversy. This negative incident will not only cause reputational risks but may also violate the relevant requirements of due diligence. Currently, CMOC’s cobalt mines are only distributed in the Congo region. As a conflict zone, the supply chain in the Congo region is widely suspected, which may urge downstream companies to purchase cobalt from other areas.
In the long run, cobalt may be included in the list of conflict minerals. For example, the EU is considering incorporating cobalt into conflict mineral regulation. If so, cobalt mining companies will face more frequent and detailed due diligence. Moreover, downstream customers who use cobalt as a raw material for batteries are gradually moving away from cobalt or using recycled cobalt from scrap products. In details, Tesla and Apple asserted that they will secure new supplies of recycled cobalt for use in future products and gradually eliminate cobalt completely from their cells; Volkswagen contended the share of cobalt in its products will be reduced from 12%-14% to 5% within next 3-5 years.
Despite the gradual reduction of cobalt demand, CMOC did not disclose relevant risk response mechanisms. Therefore, CMOC may likely face more complex long-term risks as downstream companies gradually shift away from using cobalt mined from conflict regions, though the company is compliant with supply chain due diligence policies of major customers
Risk of Business Ethics and Mitigating Mechanisms
Corruption and lack of transparency are the two major challenges against ethical business in mining industry. There are reports showing that many mining enterprises in DR Congo had misconduct behaviors including corruption to maintain business operation. In 2014, Global Witness reported a case of secret deal of 45,000,000 USD between Glencore and Lora Enterprise about mining in Congo. Therefore, this report recognizes that business ethics is a major part of governance of mining enterprises.
The code of business ethics of the CMOC includes Be safe, Lead responsibility, and Live respectfully and other principles of ethical business. More importantly, the CMOC carried out Speak-up Project to encourage its employees to report the conducts against its codes. In comparison with other mining enterprises like Huayou Cobalt, a Chinese enterprise, the CMOC also enjoys a more reliable, legitimate and convenient reporting system to guarantee the implementation of the above codes of conduct. A virtual reporting box could be easily found on the official website and every ethics bullet point has its own channel for the reporter to report in detail. No personal information will be left if the reporters choose to report anonymously and they receive a unique Report Key to follow up their report, while letters and phone calls are the only two ways to report irregularities of Huayou Cobalt.
In comparison with other companies in mining sector, the Anti-Corruption Policy of the CMOC is more comprehensive and detailed. In the gifts, travel, and entertainment section, the policy makes it clear that there are a list of General Prohibitions and gifts, travel and entertainment may be ways of bribe, while Glencore, one of the biggest mining enterprises based in Switzerland, only instructs its employees to record their permitted gifts, travels and entertainment without stating which are permitted. When it comes to charitable and political contributions, the CMOC’s regulation is rather clear-cut which forbids making contributions in the name of individuals, which is allowed by Glencore. Both enterprises have regulations on the due diligence on the third-party business partners since risks associate with third parties also lead to bribery and other forms of corruption, but the CMOC also emphasizes that the due diligence reviews should be updated at least every two years. Many other mining enterprises such as Huayou Cobalt do not have their anti-corruption policies, or none of them are published on the official website.