An accident waiting to happen

The Brazilian mining corporation Vale has been the focus of public attention since the collapse of a dam at one of its mines. Vale had already been already excluded from Union Investment’s sustainability-oriented funds due to similar incidents in the past. The company had been put on the Union Investment-wide exclusion list after it failed to signal any willingness to improve following engagement dialogues. This means that it is excluded from all products actively managed by Union Investment.

The disaster occurred on 25 January, not far from the small Brazilian town of Brumadinho. The dam in front of a holding basin at the Corrego do Feijao iron ore mine collapsed, sending twelve million cubic metres of toxic sludge cascading down the valley. The mud buried everything in its path, including – tragically – the mining company’s canteen. The number of fatalities steadily rose in the days that followed. At the latest count, at least 200 people had lost their lives and around 100 were still missing. It is uncertain whether they will ever be found beneath the mud.

In addition to the human cost, the capital markets also reacted strongly. Vale’s shares fell by around a fifth on the next trading day, wiping €13 billion off the company’s value. The government froze the company’s accounts to secure funds for possible compensation claims. Questions of guilt remain unanswered. One thing we do know is that the dam had been checked by the German inspection company TÜV SÜD just a few months earlier, and the company’s own internal procedures had apparently not revealed any major problems. We will have to wait for the final results of the ongoing investigations to find out whether Vale acted negligently but there is mounting evidence that, despite initial denials, Vale may have been informed about possible defects in the dam before the accident.

Ad-hoc meeting of the ESG committee

As soon as news of the dam collapse in Brumadinho reached Union Investment, the ESG committee convened for an ad-hoc meeting to review the case. It quickly established that none of the sustainability funds contained any Vale securities, because the company had been excluded from this portfolio for several years. The conventional funds contained only very small holdings of the company’s shares, partly because its low ESG score acted as a warning signal for the teams focused on corporate fundamentals. The question of possible negligence still has not been definitively answered. Nonetheless, Union Investment sought contact with the company to establish how such mistakes can be avoided in future and how Vale can regain investors’ trust.

The issuer’s exclusion from the sustainability-oriented funds is due to its discreditable track record. In November 2015, a dam burst at the Mariana mine operated by Vale, resulting in 19 deaths. The share price plummeted and the mine still remains closed today. The accident caused immense environmental damage and an entire village had to be relocated.

Problems not taken seriously

Contacts with the company after that incident failed to persuade the fund managers that there would be no similar accidents in the future – and their judgement was proven correct by the tragic and immensely damaging events of January. Vale had always emphasised that the 2015 dam burst occurred at a mine that was operated as a joint venture with another company, BHP Billiton, and that the Brazilians did not have sole control of the complex. Jennifer Paffen, an ESG analyst at Union Investment, had talks with the Vale management in 2018: “In our discussions, the company’s representatives were unable to cite any specific measures that would help to prevent such an incident from happening again in future.” There were no credible descriptions of systemic changes to the risk management procedures. The company managers seemed far more concerned with shifting the responsibility for the dam breach to its joint venture partner. Further aggravating factors included other environmental offences and inadequate communication and cooperation with the local population, who had not been involved in the company’s various projects. The company seemed to take Union Investment’s concerns lightly: “Vale communicated in a way that did not match the severity of the problems being addressed. There were no signs of any in-depth analysis of existing areas of concern. Fatally, as we now know.” The catastrophe that occurred in January proves that the sustainability team made the right decision. The subsequent fall in share price did not have any impact on the sustainability portfolios.

Maintaining dialogue

But the story does not end there. Union Investment believes in dialogue with companies, regardless of whether its funds are actively invested in them or not. So in February – in accordance with the decision of the ESG committee – a letter was sent to the Vale management team, who responded with an offer of talks. However, the success of the engagement has been limited: so far there has apparently been no significant improvement in the risk management of the dams, nor has there been any productive cooperation on prevention, either within the company itself or in relevant industry associations. There is also growing evidence to suggest that Vale suspected there were defects in the dam even before the breach, and that it was therefore possibly negligent in failing to prevent an accident.

The dialogue and the resulting analyses show that structural inadequacies were among the causes of the dam burst and that no adequate measures have since been put in place to prevent, so far as is possible, a future occurrence. The risks far outweigh any potential upside; there can be no question of investment in this paper, both from a sustainability perspective and for reputational reasons. The collapse of the dam is a serious breach of the principles of the UN Global Compact, to which Union Investment is a signatory. As a result of this assessment, the issuer has been placed on the Union Investment-wide exclusion list. This means that it is excluded from all products actively managed by Union Investment.

Unless otherwise noted, all Information and illustrations are as at 31 May 2019