Equities

Ethical Concerns Loom Over Rio Tinto's Environmental Practices

Norway's $1.6 trillion wealth fund considers divesting from Rio Tinto over environmental concerns, potentially impacting its $2.7 billion stake.

By Athena Xu

4/3, 14:38 EDT
Rio Tinto Plc
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Key Takeaway

  • Norway's $1.6 trillion wealth fund may divest from Rio Tinto, valued at $2.7 billion, over environmental concerns in the Amazon.
  • The Council on Ethics' review underscores the increasing weight of ESG practices in investment decisions.
  • Potential divestment could significantly impact Rio Tinto's market valuation and influence broader market sentiment towards ethical investing.

Ethical Scrutiny Intensifies

The Council on Ethics, an independent advisory body to Norway's $1.6 trillion sovereign-wealth fund, is currently evaluating Rio Tinto's environmental practices, particularly its alleged involvement in deforestation activities within the Brazilian Amazon. This scrutiny stems from Rio Tinto's 22% ownership in Mineração Rio do Norte (MRN), Brazil's largest bauxite producer. The council's role is to ensure investments by Norges Bank Investment Management, the fund's operator, align with strict ethical guidelines. Since 2015, every recommendation related to environmental concerns has been adopted by the fund, underscoring the gravity of the council's ongoing assessment.

Environmental Concerns Loom

Rio Tinto, the world's second-largest miner by market value, faces potential exclusion from the fund due to its environmental footprint. The focus is on deforestation and the company's association with MRN. This is not the first instance of ethical scrutiny for Rio Tinto; in 2008, Norway divested from the company over environmental damage concerns related to the Grasberg mine in Indonesia, only to reinstate it in 2019 after Rio Tinto divested its stake in the mine. The current situation highlights the increasing importance of environmental, social, and corporate governance (ESG) practices in investment decisions.

Potential Divestment Impact

A potential divestment by Norway's wealth fund, which held a 2.24% stake in Rio Tinto valued at approximately $2.7 billion as of the end of the last year, could significantly impact the company's market valuation and reputation. Norges Bank Investment Management's decisions are closely watched by other sovereign-wealth funds and large investors, potentially influencing broader market sentiment. The fund's divestment from Glencore in 2020 over thermal coal production concerns further illustrates the influence of ethical investment standards on the industry.

Reputation on the Line

Rio Tinto's environmental and social governance (ESG) practices are under intense scrutiny, especially following the 2020 incident involving the destruction of ancient rock shelters in Australia. The company has since endeavored to improve its ESG practices and restore trust with affected communities. However, the ongoing assessment by the Norwegian fund's ethics adviser highlights the persistent challenges Rio Tinto faces in aligning its operations with global ethical standards. South32, another mining company, is also under review, indicating a broader industry trend towards heightened environmental and social scrutiny.