Published on 11 February 2019

CSR

Vale’s dam disaster in Brazil is one disaster too many

On 25 January, a Vale mining dam collapsed in Brumadinho, Brazil. The avalanche of mud waste caused hundreds of deaths, creating a human and environmental disaster for the mining giant.  The incident highlights the need to integrate social and environmental risks in the sector’s performance, especially amongst investors.

Rupture barrage Brumadinho Vale Bresil 25 janvier 2019 Douglas Magno AFP
On 25 January 2019, the collapse of a dam containing Vale's mining waste caused the death of hundreds of people and devastated the Minas Gerais region of Brazil.
@Douglas Magno/AFP

Images of the collapsed dam that devastated the Brazilian Brumadinho countryside have circulate the globe. The disaster caused the deaths of hundreds of people, most of whom were Vale employees, or employees of the company responsible for the dam. The heavy social and environmental consequences are shocking on several levels.

A catastrophe for Vale

The 2015 collapse of the Samarco dam, which caused irreparable damage to the environment and killed 19 people, was already shocking.  Now the collapse of the Corrego do Feijao dam in Brumadinho is considered a major setback for the mining giant, Vale. Unlike the Samarco dam that was co-owned with BHP, the Brumadinho dam was under their sole responsibility.

The direct economic impact of the disaster is "limited" according to Moody's, bearing in mind that the site accounts for less than 2% of the 390 million tonnes of iron ore produced by Vale each year. However, the rating agency expects the disaster "to raise environmental, administrative, criminal and civil liabilities, on top of serious reputational risk for the largest iron ore producer in the world”.

The first financial and legal consequences did not take long to emerge. A few days after the tragedy, Vale’s market value plummeted by 25% - a record drop.  In addition, nearly €3 billion were seized from its accounts to manage compensation for the tragedy. Three of its engineers are currently being held on remand, along with two others from Tüv Süd, the German company that issued the dam stability certificate in September 2018.

A Brazilian court has also ordered the closure of a dam based on another Vale model, and one of the largest in the region. With the closure and dismantling of dams similar to Brumadinho, Vale’s production is likely to drop, threatening to destabilize the market.

Towards better integration of social and environmental risks?

Will this recent disaster change Vale's production strategy? Until now, the company did not want to change its iron extraction methods that cause high levels of mining waste, despite the existence of cleaner but more expensive solutions. But this is not counting the cost of negative externalities like deforestation, dam surveillance or the human and environmental consequences of such catastrophes. These environmental and social risks are increasingly being scrutinized by corporate stakeholders, NGOs and investors.

After the 2015 tragedy, committed investors mobilized and continued to do so after the Brumadinho dam collapse. On 1 February, the Church of England pension fund, soon followed by all four Swedish government pension funds (AP1, AP2, AP3 and AP4) and Dutch APG, appealed to institutional investors to better regulate the sector. They proposed the creation of an independent global public classification system on the risks linked to mine waste from dams.

Secretary General for Sweden’s AP Funds’ Council on Ethics, John Howchin, said they have lost confidence in the sector’s ability to regulate itself on this issue, adding that measures would be taken by investors.

Brazilian government changes course

In Brazil, the Brumadinho disaster may also lead the government to reconsider its "environment vs. business" equation. During the presidential campaign, Jair Bolsonaro promised to open indigenous lands to mining and to relax environmental legislation that was considered limiting to economic activity.

Brazil has nearly 4,000 "high risk" dams, of which 205 include “mineral waste," according to the government. And the country does not have enough money to repair all these dams. After the Brumadinho tragedy, the government’s tone has changed. They have asked Vale for an explanation and they intend to reinforce dam safety standards, stating that it is now a question of "really punishing" those responsibles.

Nevertheless, it is often the application of Brazilian legislation that proves problematic, in particular the lack of human and financial resources given to the surveillance bodies and corruption amongst members of parliament, elected representatives and industrial leaders.

Béatrice Héraud @beatriceheraud


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