LONDON (Reuters) - Pension funds should use the clout they have to persuade miners to consider environmental concerns and local people, as that could help boost investment returns from the sector, F&C Asset Management said on Wednesday.
The spotlight in recent weeks has fallen on safety as the world watches the plight of 33 Chilean miners trapped underground for some weeks now.
Karina Litvack, F&C's FCAM.L head of governance and sustainable investment, said companies that try to do the right thing with regard to safety, the environment and communities will in the end gain from strong, stable earnings growth.
But measuring the benefits is difficult.
"It is nearly impossible to quantify the value of 'the disaster that didn't happen'. That is the difficulty of proving the value of sustainable practices," Litvack said.
"Mining is now a much bigger proportion of client portfolios because of the commodities boom. In the last few years, the social and environmental concerns associated with mining have leapt to the top of the agenda."
That, Litvack said, is why the mining sector now tops the league, alongside oil and gas, in terms of requests for action on environmental concerns and the spillover to quality of life.
Often it is difficult to pinpoint where social conflict ends and pollution, public health or safety concerns begin.
But all these things, if not managed properly, stand in the way of successful operations and hit profitability.
"We have a lot of clients who are concerned about the potential human and environmental damage associated with mining," Litvack said.
"We have any number of professional and local authority pension funds with members who take an interest and are concerned about human and environmental damage."
Many mining firms around the world have faced disruptions due to poor community relations.
Litvack also gave examples of where F&C, which as at 31 March 2010 directly managed 101 billion pounds in assets, has intervened to press for better practice in the mining industry.
"Following wide-ranging problems with employment of security forces and management of local tensions at its mine in Grasberg, Indonesia, Freeport-McMoRan (FCX.N), has developed internal human rights policies and better systems for interacting with communities," she said.
"Anglo American's (AAL.L) chief executive in 2007 publicly linked executive pay and performance evaluations with safety performance; since then the company has experienced a 24 percent improvement in safety performance."
Freeport declined to comment on Grasberg.
Part of the challenge lies in deeply-rooted suspicions that have festered over centuries in places such as in central America, where the arrival of outsiders has been associated in the local collective memory with whole cultures being destroyed.
"When you have that kind of legacy, don't be surprised if people are distrustful," Litvack said.
"These companies are often run by engineers who focus on operational excellence, but can sometimes underestimate the importance of human issues."
It's not enough to hand over reams of technical data to an audience that fundamentally doesn't trust the people who have produced them, she said. "It requires a different level of engagement."
Anthropologists are now being employed by some mining firms to help resolve local people issues.
"A fascinating trend," Litvack said.
One source of conflict includes competition for land and water, which locals often depend on for farming.
Others are whether people will be made to relocate, and the arrival of outsiders looking for jobs and money. Politics is also another potential hazard.
"The political process can be a real wild card, while the judiciary is often not independent. Corruption is a big issue, and therefore a big area for us over the last decade has been transparency," Litvack said.
"Mining companies contribute millions and sometimes even billions, in tax and social investment."
The more open they are about these payments, the better.
"This forces a greater level of accountability on the part of political leaders and makes it more difficult for them to mismanage tax receipts, or worse, make off with the cash," Litvack said.
Editing by Sue Thomas