"If we operate a mine generating sustainable value for the communities we will have a competitive advantage"
To mark the tenth anniversary edition of the Esade-PwC Program for Board Members, the Centre for Corporate Governance (CCG) is launching a new space for conversation with key personalities of the world of boards of directors. Presented by the Director of Esade Madrid and the CCG, Mario Lara, it will be a place for focusing on the most pressing issues for the board of today.
The guest in this first episode of the podcast is Rosa García Piñeiro, Vice-President for Sustainability at the Alcoa Group and President of the Alcoa Foundation. Piñeiro is also an independent member of several boards of directors, including that of Acerinox, where she has also chaired the Sustainability Committee since 2020. She is also a board member for Ence Energía & Celulosa.
In this post we offer a summarized version of the interview, which was originally conducted in Spanish and can be listened to here.
The world is up against a threefold emergency: health, climate and war. Political leaders such as Emmanuel Macron warn that the end of abundance is nigh. In your experience in the electricity-intensive industrial sector, how is this tackled by boards, and in what areas is it most relevant?
The warning is self-evident. We’re seeing the very negative effects of the war on Europe’s whole industrial fabric, on energy prices, for example. It’s a fact. As for boards of directors, naturally there is concern. We’re at a time of change of hitherto unprecedented speed. We need to adapt to this change, which in some cases I’d call ‘disruption’ rather than ‘volatility’, given the magnitude of the changes. Right now, boards are focusing their attention on the short term, that is, the energy crisis and guaranteeing supplies; how this is impacting operating costs and competitiveness in international markets... But they’re also taking a much more tangible approach on long-term issues like climate change, particularly its physical risks, which are already having a direct impact on the profit and loss account. At Ence we have a plant in Pontevedra that’s been closed since the beginning of July because of the drought.
Governments, public institutions, companies, investors and public opinion in general coincide on the need to advance in the sustainability of the planet. However, benchmark figures in the investment sphere are relaxing their standards on the climate change front due to the war situation. How are boards of directors acting in the face of this second challenge? Is there really concern about standards?
Undoubtedly, there is concern. To start with, the issue of sustainable transformation is in itself a problem of definition. The change involved in sustainability is so broad that it may even lead to immobility or inefficiency. The board’s first task is to pin down what sustainable transformation means in the company’s specific context and from the viewpoint of its strategy. The company has to have a business strategy and the purpose of sustainable transformation is to look at that strategy through a sustainability lens with the aim of understanding this new environment. It serves the company to understand its weaknesses and opportunities.
Do our products serve society? Do our products help to overcome challenges facing today’s society such as climate change or the war? Are our products better than those of our competitors? What are our weaknesses regarding the market, talent, the supply chain? The board of directors has to help to get the shot on target and ensure that sustainability concepts help to leverage corporate strategy and make it successful.
High environmental impact mining is an important part of the electricity-intensive industrial sector. One of the responsibilities of a board member who works in this sector must be commitment to regenerate the planet. Not just not harming the planet, but ensuring that business models generate profit and in turn cause at least positive impacts. Can companies in these sectors be profitable and at the same time capable of regenerating the planet? Is it possible to exploit mining resources and also be regenerative with the planet?
The answer has to be yes. There is no other way it can be. And why? Because all these natural resources are necessary for the energy transition, for sustainable transition. We need to extract all these minerals in order to make batteries, for new electric vehicles, to improve energy efficiency, for renewable energies... So natural resources and their extraction will still be necessary in the future. Nevertheless, I totally agree with you and it’s one of the main points for companies today, especially in the extractive sector. They have to be capable of proving that they make a positive contribution to society. It’s no longer a matter of ‘we’re going to create jobs, we’re going to pay taxes’, but rather how to share the value generated with the communities who suffer the presence of these companies.
These social models are incipient in many fields, but absolutely fundamental for securing a competitive advantage for the company. If I’m capable of showing that by operating a mine in any country I create sustainable value in the long term for my host communities, if I’m capable of contributing to an improvement in their quality of life and using the land only temporarily and restoring it to its original state, we will be giving that company a competitive advantage because it’s going to have access to resources in the future and those resources are going to enable the shareholders to generate additional value in the long run. So, from my point of view, the answer is yes, definitely, yes, it can be done, and we’re doing it.
Getting back to boards of directors, the proposal for a new European Union directive on sustainability establishes due diligence obligations for companies, both with regard to sustainability and in guaranteeing respect for human rights and the environment throughout their supply chain. How are boards acting to ensure this compliance and mitigate the corporate risk at some point of the chain? In your experience, what critical aspects should be considered by boards in the performance of their duties in order to do things right in this area too?
This is a key point for boards that is already being addressed this year and is going to be really important in 2023. It’s a new vulnerability to which no company is immune. And why? Well, because the main change is that the company is held responsible for guaranteeing due diligence on human rights and the environment in its whole supply chain. And what does that mean in real life? That any citizen in any country in the world can bring a lawsuit against a Spanish company anywhere in the world on the basis of this European directive that will be passed next year and that will then be transposed into national legislation.
It’s a big challenge that demands very significant changes in the business model. We have to start to ask ourselves questions on this issue: How exposed are we? In what countries, in what supply chains do we have a significant risk? Are there alternatives? This is linked to security of supply, which we know was a disaster for the car industry over the last two years. Do we need to make process changes to be more flexible when it comes to having access to raw materials with less risk? And then, what is the governance and what is the visibility? In this whole field there’s a huge amount of work to be done and also it’s very important to think about cross-sector partnerships.
This involves a paradigm shift. Companies are used to working in isolation and this change towards having control and understanding of the value chain is going to be so costly that the only way to make it affordable financially and in terms of the company’s competitiveness is through partnerships, either within the sector or among different sectors. It’s a new economy that is going to appear and we need to be prepared to capitalize on the advantages it will bring.
Stakeholder capitalism is a concept that, although it’s not new, is gaining strength. How should boards of directors interact with stakeholder groups? How should their needs and specific interests be brought into the boardroom?
This is a really important issue and, in my opinion, one of those that has changed most in the last few years. Until recently it was basically the shareholders and the customers who held some power over the company. And what’s changed? I think in general society is calling for a greater say, and we see this more clearly after the pandemic. A very large part of society has no power of decision, yet suffers the impact of decisions made by companies. And we’ve seen it this year particularly in connection with climate change. The droughts in Europe, the fires, water shortages affecting transport, floods...
The fact that these groups suffer the consequences and have no voice is no longer admissible. Activism arises, and so does another movement that’s very important: the drive to incorporate sustainability into the financial world. Investors have an obligation to state the environmental risks of their portfolio of assets. Issues like diversity, the protection of vulnerable groups or Black Lives Matter in America or the Gilets jaunes in France suddenly form part of the discussion in any board.
So, what’s the job of the board here? It’s to understand who the relevant stakeholders really are for that particular company, for the firm’s social license to operate. A board isn’t going to meet all the stakeholders, but it does have to understand who the main ones are, who can have a relevant impact on the company’s activity and its strategy, and how to make sure that it maintains a good overview of their concerns and that it is really responding to those concerns and isn’t exposing itself to being the target of some campaign of activism that would have a negative impact on its reputation or its business.
COP27 is going to be held soon in Egypt. The African continent has probably the largest number of countries that are vulnerable to the climate emergency and inequality, and it’s one of the main continents when it comes to raw material extraction. What can we expect from this summit and how do you think it will affect the electricity-intensive industrial sector, which is so dependent on what is decided there? How will these companies adapt to the measures taken at COP27?
That’s a good question. I think it’s more unpredictable than any other. What will the outcome be? Politically I think expectations are low. Talk continues on the funding of the transition, governance, countries’ commitments and so on... But I think it’s going to focus more on moderation and bilateral relations. Climate change has in a way become one of the core topics of geopolitical strategy. In any bilateral agreement between the USA and Europe, between Europe and China or whatever, we find the carbon footprint of the products, climate change commitments and so on. What’s more, as Europe is starting to raise human rights issues, suddenly climate change, which used to be a point of controversy, is now the sweet spot, because it’s much easier to negotiate with China on climate change than on human rights, for example.
From the viewpoint of civil society I think climate change is going to be directed towards a much more holistic vision, much more related to how it impacts ecosystem services, biodiversity, people’s quality of life... Up to now we’ve been talking about the TCFD (Task Force on Climate-related Financial Disclosures) and now discussion is starting to veer towards the TNFD (Task Force on Nature-related Financial Disclosures). In other words, we’re getting companies not only to talk about climate change in financial terms, but also to talk about natural resources and the impacts on nature in financial terms. I think that’s going to be one of the main issues dealt with in Egypt. And also COP 15, which is the equivalent COP on biodiversity, will be held at the beginning of December in Canada.
In addition, on a financial level I think it’s going to be very interesting because there is going to be discussion, or there ought to be, about transparency, the financial impacts of climate change and disclosure. And here we’re alert to what the US regulator determines regarding the obligation to apply this type of disclosures in their transparency requirements for listed companies in the US.
And lastly, for industry the key issue is how the transition is funded. We’ve all made our decarbonization plans. We all know how to get to net zero by 2050. But the million-dollar question is: Who pays for the transition?