Social license is still a vague concept, but it showed its face yesterday in the most recent development in a major coal port expansion in Australia. The port expansion could be a boon for Australia’s coal sector, but it could also harm the nearby Great Barrier Reef, a national gem and World Heritage Site.

That turned out to be a problem for major financial backer Deutsche Bank (NYSE:DB). Reuters reported last week that the financial institution pulled out of the controversial expansion project on the grounds that UNESCO and the Australian government have come to different conclusions regarding the reef’s safety. According to the news outlet, Deutsche Bank Co-chief Executive Juergen Fitschen said, “[a]s we have seen, there is currently no consensus between UNESCO and the Australian government regarding the expansion of Abbot Point in the vicinity of the Great Barrier Reef. Our policy requires such a consensus at the least … [w]e therefore would not consider applications for the financing of an expansion any further.”

Environmentalists, tour operators and others opposing the coal project attended the company’s meeting to make their voices heard. The critics targeted Deutsche Bank because of its involvement in refinancing the existing Abbot Point port, Reuters said.

The battle over the port has continued for months — since January, when the Australian government approved a plan to facilitate the coal port’s construction by dumping 3 million cubic meters of dredged material near the reef, the public has fought tooth and nail against the project.

According to ABC News, Martijn Wilder, head of law firm Baker & McKenzie’s Global Environmental Markets practice, stated, ”I don’t think it has come as a surprise … given we’ve seen a growing trend or pressure put on financial institutions in regard to approving developments or investments that have a climate or environmental impact. We’ve seen this historically in the case of what happened with ANZ and the pulp mill in Tasmania, we’re seeing it with pressure being put on investors in the Keystone pipeline in the US. As a result of that I think a lot of investors are being put under a lot of pressure.”

Coal miners optimistic

Adani Enterprises (NSE:ADANIENT) won approval for a large coal mine in Australia’s Galilee Basin on May 8, one that could have the “the potential to be the largest coal mine in Australia and one of the largest in the world,” Reuters quotes Queensland Deputy Premier Jeff Seeny as saying in a statement. Along with GVK Hancock, Adani is depending on the port at Abbot Point to export thermal coal mined from Galilee. Adani Chairman Gautam Adani said that the company “remain[s] committed to delivering the multi-billion dollar project” despite vehement social opposition.

Of Deutsche Bank’s recent decision, GVK Hancock spokesman Josh Euler told Reuters, “[t]his doesn’t impact our proposed projects in any way,” while Adani did not provide a comment for the news outlet.

Similarly, Mary Steele from port operator North Queensland Bulk Ports claimed there is scientific evidence that the port expansion would be environmentally sustainable, accusing critics of fear mongering. She stated that those in opposition are increasing “investor risk through creating uncertainty and a heightened perception of risks over coal investments.” According to The Wall Street Journal, supporters say the opening of the port would result in over AU$28 million in valuable coal development projects for the country.

Questions and criticism

However, according to UNESCO, the risk for the Great Barrier Reef is very real. An RT News article published on May 1 notes that the organization criticized the decision made by Australia’s government and has called for it to look at the plan again. UNESCO believes that less impactful methods of disposing material may exist, and is not convinced that the government completed a full and thorough analysis of the process.

Furthermore, environmentalists and reef tourist operators have criticized the economics of the project, claiming that thermal coal prices are too low to make the project viable.

The Wall Street Journal points out that UNESCO’s condemnation of the decision by the Australian government is not legally binding, but that it would be an embarrassment for the country to lose World Heritage Site status for the beloved reef. The organization will make a final decision regarding the reef’s status at a June meeting in Qatar, as per the publication.

Better to ask permission than forgiveness

An article from The Vancouver Sun recently explored the emergence of social license as a key factor in the value of mining and commodities operations. The author spoke with Thibaut Millet, Ernst and Young’s associate partner for climate change and sustainability services, who identified social license as an important driver of financial performance. In a nutshell, Millet stressed the importance of creating “value for stakeholders as well as shareholders,” while others noted that social license goes beyond legal requirements.

WWF Australia spokesman Richard Leck told RT News, “UNESCO’S concern is shared by thousands of Australians and hundreds of leading scientists, and we call on the federal government to ban dumping of dredge in the Great Barrier Reef World Heritage area prior to the World Heritage Committee meeting in June.” Though the Abbot Point operator and major coal miners have received government approval — with 190 conditions attached to the Adani mine — it’s clear that the chance of endangering the treasured reef is a sticking point that has created very real opposition.

It was enough to give Deutsche Bank qualms about its involvement in the project, at least. Though the coal sector is a valuable part of Australia’s economy, the bank’s exit from the story at Abbot Point illustrates the importance of considering social license when investing in mining projects.

 

Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned.

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