The role that investors can play in influencing company behaviour must not be underestimated. The way in which companies approach issues associated with human rights, community engagement and environmental sustainability has far reaching impacts on corporate profitability and shareholder value and is coming under increased scrutiny by investors.
Recent years have witnessed a great deal of policy action focusing on improving transparency and empowering shareholders to enforce their role as principals. These include, for instance, mandatory carbon reporting for businesses listed on the London Stock Exchange (LSE) and new accounting rules on non-financial disclosure for large public-interest entities within the EU.
In early March, a news piece by The Guardian highlighted the fact that SOCO’s exploration for oil in Virunga, Africa’s oldest national park and a World Heritage Site located in the Democratic Republic of Congo (DRC), raises tricky questions for investors.
Less than 1 percent of the Earth’s surface is set aside for World Heritage Sites. Virunga is one of these few special places, home to over 218 mammal and 706 bird species (PDF), including the iconic mountain gorilla. Lake Edward – currently SOCO’s key area of interest within Virunga – is home to unique fish species found nowhere else in the world.
Over 50,000 households depend on Lake Edward for their livelihood, including water supply. An IUCN study (PDF) on the values of freshwater fish stock in Africa noted that fishing is a major source of income for those living near water bodies in the DRC, particularly for the lowest income earners.
As explained in the independent Dalberg report (PDF), environmental protection and habitat conservation are complex issues. Exploration activities like seismic surveys and exploratory drilling have localized environmental impacts. Infrastructure building is likely to result in increased human immigration, as well as clearing of land and vegetation in adjacent areas, with impacts that extend beyond the specific oil concession sites.New access routes can be exploited by poachers and rebel groups, and waste and noise pollution can threaten many of the park resources.
Oil spills – not uncommon in the industry – have been linked to fish defects, threatening aquatic life in ways that may not appear for years. In the case of Lake Edward – part of Africa’s Great Lakes and one of the three that empty into the White Nile – an oil spill would have potentially catastrophic consequences with wider social and economic impacts across the continent.
Last month, the UK National Contact Point (NCP) under the OECD Guidelines for Multinational Enterprises has accepted for further examination allegations made in a formal WWF complaint of environmental, social and other breaches of the Guidelines. In the initial assessment (PDF) made public on 14 February 2014, our case was found to have raised “material and substantiated” issues warranting deeper scrutiny.
Material risks to investors
SOCO’s oil exploration in Virunga National Park exposes its shareholders to a number of different risks. First, there are significant reputational risks involved. As well as criticism from NGOs, the UK Foreign and Commonwealth Office (FCO) and the World Heritage Committee, as well as the German Bundestag and the Parliament Belgium, have stated their opposition to SOCO’s planned exploration programme.
Last month, the European Union Commissioner for Development – Andris Piebalgs – issued a declaration that called on relevant authorities and shareholders to do their utmost to ensure that SOCO upholds corporate social responsibility standards and the provisions of international treaties, such as the UNESCO World Heritage Convention.
SOCO currently lags behind peers including Shell, TOTAL and the International Council on Mining and Metals who have agreed not to undertake petroleum or mining exploration within natural World Heritage sites.
The decision to operate in a sensitive area also carries possible financial risks. Due to growing international opposition and increased investor scrutiny, as well as political instability within the DRC, SOCO could find itself being forced to write-off assets prematurely and unable to recoup the investment made.
There is some controversy around financial risk but one could argue that debt cost and availability may also be affected, and project co-financing may not materialise if they should require it. Oil exploration is a high risk and high cost industry. In the case of Virunga – and other pristine regions of the globe – investors should ask whether the significant risks outlined outweigh the potential uncertain economic benefits.
Finally, there are significant operational risks associated with oil exploration in a conflict zone. The experience in the Niger Delta, for instance, highlights the potential ongoing business disruptions and social issues arising from civil unrest and weak state institutions, and their links to oil spills and inadequate clean-up and remediation.
Historical evidence (PDF) also indicates that, rather than reducing poverty and inequality, oil has adverse social and economic effects and in many cases fuels conflicts. DRC’s troubled experience in the mining sector is a clear evidence of how precious resources can finance violence.
The same trend has been observed in other countries. For instance, research from the Dutch organisation PAX has shown that in Colombia coal extraction has financed the creation of armed paramilitary groups that have caused the deaths of thousands and led to the displacement of at least 60,000 people in the mining area of Cesar region. In Nigeria’s Niger Delta, a 2005 study (PDF) has found that the oil economy fuelled communal and ethnic tensions and underpinned the proliferation of arms.
Shareholder activism as a powerful tool for change
In light of these developments, prudent investors should challenge SOCO’s decision to explore in Virunga. At a time when extractive companies are undertaking not to explore or extract in World Heritage sites and financiers are excluding such projects from permitted loans, SOCO’s planned exploration in Virunga is a regressive step.
Over the past year, we have successfully engaged with investors worldwide to encourage active ownership practices that aim to keep Virunga national park free from oil exploration. Investors are well positioned to ask what specific actions and impact assessments are being carried out and critically evaluate the robustness of the answers they get. Their responsibility as shareholders should not be taken lightly when it comes to safeguarding one of the world’s most special places and its iconic species.
Virunga World Heritage Site and all other World Heritage Sites have to be off limits for any major extractive development.
What do you think about the situation in Virunga National Park? Leave us a comment.