Connecting Energy Transition and Indigenous Rights

Rosa van den Beemt shares her views on the pressing social issues institutional investors need to consider with the transition to a low carbon economy.
November 2021
Rosa van den Beemt

Rosa van den Beemt

Vice President, Responsible Investment Analyst
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Rosa van den Beemt, Vice President, Responsible Investment, shares her views on the pressing social issues institutional investors need to consider with the transition to a low carbon economy, including critical questions to ask investee companies.

The “S” Factor

To reach the goals of the international Paris Agreement by 2050, efforts need to ramp up globally to rapidly expand investment – and deployment – of clean energy technologies. However, like any environmental, social and governance (ESG) consideration, assessing the energy transition through one narrow lens will not yield optimal results: results on E are inextricably linked to how the S is approached. As an institutional investor in the current climate, what are the major social issues to be considered prior to investment in the energy transition? Many of us as investors have made commitments to decarbonize portfolios, but what are the direct consequences of this shift?

In Canada, self-identified Indigenous people constitute about 3.5% of the workforce, but they make up approximately 6% of employed Canadians in extractives, which includes oil and gas, mining and pipeline transportation. Indigenous peoples are also on the frontlines of experiencing the negative effects of climate change, protecting close to 80% of the planet’s biodiversity and own, occupy or use 25% of the world’s landmass. As such, we need to consider the effect on, and create partnerships with, Indigenous people when we transition away from fossil fuels and expand renewable energy efforts.

It is critical to engage on building a just transition, and ensure the broader energy strategy aligns with the UN Declaration for the Rights of Indigenous Peoples. Unfortunately, the renewable energy industry scored – on average – less than 1 out of 6 points on their commitments to respect the rights of Indigenous Peoples and affected communities, according to the Business and Human Rights Center’s Renewable Energy & Human Rights Benchmark.

Ensuring a Just – and Successful – Transition

To accomplish a just transition, there need to be processes in place to ensure that workforces in general are not left behind, including Indigenous workers. For certain energy projects there may also be benefit agreements in place with indigenous communities that need to be considered. However, the energy transition also posits an enormous opportunity for economic indigenous reconciliation through partnerships in renewable energy, including shared equity ownership – working collectively towards a regenerative economy.

As a first step, BMO Global Asset Management expects companies to commit to upholding the free, prior and informed consent (FPIC) of Indigenous communities when it comes to conducting operations on or near their land. According to the International Energy Agency’s Net Zero by 2050 roadmap, the energy transition requires substantial quantities of critical minerals like copper, cobalt and rare earths metals. This means that the land-intensive mining footprint will massively expand, and FPIC will become increasingly relevant for institutional investors. Not only does it mitigate business risk, it can also identify prospects for mutual benefit.

For example, a best practice that is emerging in Canada is the creation of partnerships whereby the Indigenous community owns a direct equity stake in the project, reinforcing economic reconciliation and establishing improved social contracts that form the foundation of an enduring relationship. While most companies have basic FPIC commitments in place, we’ve been actively engaged to ensure that these policy frameworks translate into continuous practice on the ground and are not simply a tick-the-box exercise at a policy level. How often is FPIC reviewed? What is the contingency plan if FPIC isn’t granted?

Delving Deeper into Best Practices

In fact, much of our research was actually prompted by the controversy surrounding mining giant Rio Tinto, when Juukan Gorge in Australia – a 46,000-year-old Aboriginal cultural heritage site – was destroyed last year as part of an iron ore exploration project. While there were various existing agreements with Indigenous communities, they provided inadequate protection, and many investors were shocked at the outcome. Prior to the event, everything on paper looked in order, but there were clearly red flags that we now understand, which could apply to other companies as well.

Though our research is still in progress, we’ve engaged directly with Rio Tinto on not only reconciling with the Aboriginal community, but also on determining what better systems can be implemented for the future. 

Taking those lessons forward, we have been directly engaging with companies in the energy, mining and renewable sectors to encourage more transparency around the implementation of respect for Indigenous rights – from human rights due diligence processes to impact assessments at the site or project level. In addition, we have created a practical list of questions that institutions can use to delve deeper to understand how investee companies in the extractives and energy industries enact FPIC both on the ground and respect the principle throughout business lines of responsibility:

  1. How are concerns from affected communities escalated to the top, and does senior management and the board have responsibility for and oversight of indigenous relationships?
  2. What type of expert advice does the board and senior management take into account to inform them of good practice, such as an external advisory committee consisting of indigenous representatives?
  3. How does the company identify indigenous persons and how does it discern what constitutes customary, ancestry, or collective land, territories, cultural heritage and resources in each project area?
  4. How often is FPIC reviewed and renewed? What is the company’s contingency plan if FPIC wasn’t granted, or would the company still proceed as usual assuming FPIC is a soft requirement? Once agreements between the company and communities or titleholders are signed, how does the company ensure there is ongoing project-based consultation and consent?
  5. What does the company and the community define as consent, and with whom has consent been secured? Are there any groups (neighbouring, or otherwise) which have not consented?
  6. Do the contracts contain any elements that would prohibit titleholders from speaking out publicly in cases of discontent?
  7. Is the company able to provide transparency into contracts with indigenous communities or disclose them in full, and if not, why? (i.e. a good reason would be that the indigenous communities do not want contracts to be made public)
  8. Can the company provide insight into grievance cases and the actions it has taken to provide remedy?
  9. How does the company work with the local authority to respect indigenous rights when lands are not officially titled to the local indigenous groups?
  10. How does the company incorporate benefits-sharing with communities explicitly into its projects?

Not One Without the Other

Corporate engagement can be a long process, but where unsatisfactory answers are uncovered, there are several tools available to institutional investors to address gaps, including pointing businesses to current best practice, creating a timeline for specific goals and voting against management, if necessary.

For the investment industry as a whole to strive for a successful energy transition, it requires taking the “S” in ESG just as seriously as decarbonization itself. We cannot achieve the Paris Climate Accords targets without closely collaborating with all the stakeholders, workforces and communities involved. This can only be done through active consultation with Indigenous workers, providing solutions that align with both parties. If, for example, an oil and gas company is considering diversifying its portfolio through renewable energy investment, it should ask: are there opportunities for Indigenous communities where we have existing partnerships to be involved?  With close to 300 Indigenous communities off-grid and experiencing energy poverty, community equity in renewable energy projects is a way to effect real change.

To learn more about FPIC, and assessing the “S” in ESG from a broader perspective, please contact your Regional BMO Asset Management Institutional Sales & Service Representative.

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