Nina Röhrbein examines the rights of indigenous people, an important issue as natural resources become scarcer, forcing exploration of the world’s remoter regions

When UK-listed Indian mining company Vedanta Resources hit the headlines in 2010, it was for all the wrong reasons. Several institutional investors, including European pension funds, reduced their shareholdings or excluded the company from their investment portfolios after failed engagements on concerns that Vedanta’s proposed bauxite mine in India’s Orissa region threatened the survival of indigenous peoples. In August 2010, India’s environment ministry revoked its licence.

By setting a precedent, this high-profile case gave the rights of indigenous peoples more prominence. However, they are not necessarily top priority for institutional investors.
“French investors are concerned about social issues such as labour rights, but they are not familiar with the rights of indigenous people,” says Anne-Catherine Husson-Traore, CEO at Novethic, the French research centre on socially responsible investment. “It is difficult for them to identify the risks and engagement is still in its infancy in France.”

Indeed, indigenous rights seem to be relevant to investors in countries, which are home to indigenous peoples such as Australia, Canada, Norway and South Africa. However, European interest has been noted from investors such as DnB NoR, Italian Etica and German institutional shareholders association, VIP.

According to the 2009 report ‘Indigenous rights: Risk and Opportunities for Investors’ by ESG research provider EIRIS, 250 companies in the FTSE All World Developed index have an exposure to indigenous rights, 17% of which have a high risk exposure.

The rights are a concern to companies in the extractive sector, involved in mining, oil and gas, forestry and paper or agricultural particularly palm oil production as these require access to land and resources usually located in remote areas where indigenous people live. Pharmaceutical companies could be affected with respect to access to medicines, while banks have become exposed to the negative publicity by financing environmentally and socially damaging projects.

There are ethical and material reasons why investors should pay attention to indigenous rights issues.

“Indigenous peoples are a distinct group with strong ties to the land that has suffered historic discrimination and cultural threats, which is why they may not benefit from what corporations bring to the table and may be disproportionately affected by the negative effects of projects,” says Irene Sosa, senior analyst at Sustainalytics. “Poor community relations can also have a financial impact, particularly in the natural resources sector where local communities can delay projects and licences can be withdrawn.”

There are regulatory as well as reputational risks and companies can be sued for damages or have their access to funding cut by the International Finance Corporation (IFC) or by banks following the Equator Principles.

The 2007 UN Declaration on the Rights of Indigenous Peoples, the ILO Indigenous and Tribal Peoples Convention 169 (ILO 169) and standards from the World Bank, Inter-American Bank and NGOs can serve as guidelines helping investors select their investee companies and undertake engagement. The IFC is reviewing its own performance standard for indigenous peoples in reference to free, prior, informed consent (FPIC). The 2007 UN declaration is more advanced than the ILO convention and focuses on FPIC, meaning that there has to be engagement on part of the company and the authorities to reach an agreement with indigenous peoples before a project can commence. This means indigenous peoples have, to a certain extent, the right to withhold consent to a project, in line with their right to self-determination.

“But lack of consent is unlikely when FPIC is applied properly, particularly when companies also offer jobs and training, as unemployment tends to be higher among indigenous peoples than in the rest of society,” explains Tulia Machado-Helland, ESG legal adviser at Storebrand Investments. “Even if they say no, they may change their minds in the future.” However, as a declaration is non-binding on states, it does not have the same power as the convention.

ILO169 focuses on a free consultation process instead. Conflicts may arise where states retain underground rights to minerals. Indigenous people living above them have to convince their governments to respect their right to be consulted.

“Vedanta highlighted the issue that companies ought to have the approval of the local indigenous communities too and cannot simply rely on governments to give them approval,” says Steven Heim, managing director at Boston Common Asset Management and chair of the advocacy sub-committee of the Social Investment Forum’s Indigenous Peoples’ Working Group (IPWG). “A recent UN permanent forum on indigenous issues concluded that there are few examples of good corporate behaviour. But the view is slowly changing from consultation ending in a transaction to more of a partnership/co-management approach where the company gets indigenous approval before each stage.”

The consent issue becomes a challenge when governments refuse to confer on indigenous groups consent or where they fail to acknowledge the existence of indigenous people.

“In those situations, we tell companies to work collaboratively with the community and run various aspects of the decision-making process by them to try to achieve broad support for the project,” says Aidan Davy, programme director at the International Council on Mining and Metals (ICMM), which has produced a step-by-step guide for companies on how to successfully manage their relationship with indigenous people. “If they are unable to secure broad support, we suggest they do not proceed with the project.”

If companies see signs of indigenous peoples living in voluntary isolation, some investors and human rights activists say they should adopt a precautionary principle and not advance into this particular area.

Investors should push companies at risk of breaching indigenous rights for a human rights policy that pays attention to the protection of indigenous rights, according to Sheila Stefani, senior research analyst at EIRIS. This means having a commitment towards FPIC and effective policies and management systems in place. It also means reporting evidence of the implementation of these policies and systems.

“For investors, it is about understanding where and how indigenous rights are at risk,” she says. “Investors should then engage to drive improvements in these areas.”

However, an overall human rights policy is not enough. “Sometimes we have to remind our clients that indigenous peoples have different rights than other local communities,” says Sosa. “Having a human rights policy does not necessarily mean companies respect indigenous rights.”

Calvert Investments has offered formal investment criteria explicitly addressing the rights and survival of indigenous people since 1999. They address whether companies support appropriate economic developments that respect indigenous interests. The asset manager engages with companies whose activities in some way affect indiginous peoples’ rights, avoiding companies with a pattern of violations.

“We are also concerned about culturally offensive or negative images that promote stereotyping of indigenous peoples for commercial purposes,” says Reed Montague, sustainability analyst at Calvert Investments and steering committee member of IPWG. “These offensive images are most commonly found in the media, or in products such as apparel, toys or video gaming.”

Storebrand tries to engage with companies but excludes them if they are involved in serious breaches of human rights, as there is a high risk of recurrence. Its first exclusion for breach of indigenous rights was in 2003. However, because the company in question started to improve its indigenous record it was re-instated in 2010.

Engagement on indigenous rights is all about mitigating risk, such as reputational risk, to reduce levels of investment risk in the portfolio. “Investors could also use the quality of policies and reporting on indigenous rights as a proxy on how well a company is run in terms of other ESG issues,” says Stefani.

“As investors we are interested in having a very diverse portfolio,” says Machado-Helland. “We want to lower our risk so we are interested in companies behaving in the right manner to enable us to diversify our portfolio more. It is not how much money you make by taking care of these issues, but how much money you save and the new business opportunities you may create by doing the right thing.”