Africa’s extractive sector should comply with global due diligence obligations

The African Mining Indaba that begins in Cape Town today comes less than a month after the Future Minerals Forum in Riyadh, Saudi Arabia, which this year hosted about 7,000 delegates — including two of the authors of this article. 

The forum brought together the global mining industry for a stock-take on the state of the sector, with a particular focus on the Middle East, Africa and Central Asia.  

During a keynote panel discussion at the forum Rio Tinto’s new chair, Dominic Barton, emphasised that one of the impediments to the mining sector’s growth potential is its public image. It is clear today that the social licence and environmental issues affecting the industry are impeding the green energy transition, which depends on access to critical minerals and rare earth elements. If a just energy transition is to be achieved, the industry must address the issues that affect its image. This requires support across the value chain.

The narrative at this year’s indaba should thus highlight the specific challenges that lie before Africa’s mining sector (and potential solutions to these challenges) as it seeks to capitalise on the surging demand for critical raw materials.

How is this to be done?

Many African countries, while rich in natural resources, have historically been reliant on foreign investment to develop their extractive industries, and remain so today. Too often countries and host communities have failed to achieve an equitable benefit from the exploitation of their natural resources. In the most egregious cases, this has resulted in retaliation against investors by host communities and states.

In 2021 the Karamoja province in Uganda, rich in gold, limestone and marble, saw a series of attacks on miners by indigenous cattle herders in retaliation against alleged misappropriation of land and contamination of water supplies. The law reform processes on which Tanzania, Zambia and the Democratic Republic of the Congo embarked in 2017 and 2018 provide an

even starker example, as their governments introduced sweeping legislative changes to their mineral law regimes that seriously affected the viability of existing and planned mining projects.

These examples have contributed to the perception that investment in the African mining sector is inevitably high risk, further damaging appetite for investment. Consequently, investors often seek greater incentives from host governments to mitigate these risks. Many African governments are disproportionately reliant on export revenues generated from the exploitation of their natural resources. This can make it difficult for them to reject investments, even on clearly unfavourable terms, increasing the risk of popular discontentment that may result in trouble for investors further down the line.

African mining jurisdictions now have an unmissable opportunity to break out of this spiral. Demand for critical raw materials is at a high as the world races to decarbonise and traditional fossil fuel importers seek to establish domestic renewable energy generation to achieve security of supply. The pace of investment and innovation in electric vehicles, batteries, electrification and renewable energy sources is now principally determined by the availability of the materials necessary for their large scale adoption. This gives mineral-rich African countries leverage to attract the investors that best align with their developmental objectives and define the terms of these investments.

A challenge faced by investors in the extractive industries is the expectation that the critical raw materials they supply should be responsibly sourced. This is because companies and governments cannot credibly claim to subscribe to or impose sustainable practices if, for example, the cobalt used in certain batteries comes from artisanal mines with an established history of human rights abuses. Not all investors are equally committed to this approach.

As stakeholders in the extractive industries ascribe a broad range of different meanings to the concepts of sustainable, responsible sourcing and processing, such “soft” pressures alone are unlikely to ensure that adequate sustainable practices are implemented. After the recent launch of a new global commission by the London Stock Exchange that will endeavour to raise mining sustainability standards by 2030, the position is likely to remain unchanged for the near future.

For the time being, the extent and effectiveness of investors’ regulatory obligations are likely to be a more reliable method of ensuring commitment to sound business practices and the development of host communities. Accordingly, African countries are advised to attract investors whose regulatory obligations most effectively comply with these principles.

The absence of uniform standards and the proliferation of numerous different environmental, social & governance (ESG) reporting provisions are some of the challenges in implementing sustainable practices within the global mining sector.

However, not all such provisions are equally authoritative and important to investors and stakeholders. For example, in February 2022 the European Commission adopted a proposal for a directive on corporate sustainability due diligence, which will

impose on companies operating in the EU (subject to revenue thresholds) an obligation to monitor and prevent, or mitigate, the potential adverse impacts on human rights and the environment of their operations, including in their direct and indirect global value chain.

This means such companies will be under an obligation to monitor not only the potentially adverse human rights and environmental impacts of their own operations, but also of companies that are part of their value chain and with which they have established business relationships, regardless of their location or place of incorporation. As a result, the regulatory standards imposed by these prescripts will in practice have an extraterritorial effect and will affect African mineral producers directly or indirectly doing business with companies with a material presence in the EU.

Challenge and opportunity

This presents both a challenge and an opportunity for Africa. The challenge is that the stringency of these regulatory requirements means downstream customers subjected to them are likely to be more risk averse when considering the provenance of their critical raw materials. As a result, mining investors are unlikely to invest in projects that could be credibly associated with human rights or environmental abuses. This will arguably help to restore the sector’s image.

The corollary of such a risk-averse approach is that extractive companies subject to the proposed regime are likely to be doubly vigilant in adopting international best practice to avoid incurring liability for infringement. They are also likely to place a premium on investing in projects with verifiable ESG credentials and will accordingly have an incentive to ensure their host communities receive an equitable economic benefit.

Here lies the opportunity: if African countries can foster a business and regulatory environment that aligns with the key due diligence obligations due to be imposed on investors and downstream customers, they are likely to attract high-quality investors on favourable terms while delivering tangible and equitable long-term benefits for their communities. This is exactly how mining in Africa can be a force for good.

• Leon is partner and Africa chair, Muller senior associate, and Svilanovic associate-designate, at international law firm Herbert Smith Freehills.

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