One year on: Review of progress by Vedanta … publications...Aluminium Company (BALCO), Hindustan Zinc Limited (HZL) and Vedanta Aluminium Ltd (VAL). It also has copper mines in Australia

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2012 Update

Two years on: Review of progress by Vedanta Resources on EIRIS’ ESG recommendations Executive summary

This paper reviews the progress made by Vedanta Resources (the Company) against seven recommendations proposed in 2010, concerning improving environmental, social and governance (ESG) performance. Progress has been made on five of them: four previously graded as ‘amber’ are now ‘light green’, and one previously graded ‘red’ is now graded as ‘amber’. Progress made is clearly set out in table form and also in additional explanatory text where relevant. This aims to give context to the recommendations and aid understanding for investors and for the Company. EIRIS has engaged intensively with Vedanta Resources and the paper makes use of documents provided by the Company, as well as information published by them. It also uses the latest report from the Scott Wilson process, an independent consultant which is tasked with reviewing the Company’s progress over a period of years on its own recommendations. Where there is overlap with the EIRIS recommendations EIRIS has used the relevant details in its assessment. A table at the end of the report maps out the overlap between the EIRIS and the Scott Wilson recommendations.

In addition, this paper includes significant developments over the last year, and a brief conclusion.

The key outstanding actions regarding the recommendations are:

publish rights-based policies on indigenous peoples and on security guards

disclose details of ESG risk training for all main board members and ensure all operating company boards have allocated responsibility for these issues and have been trained

create a link between board members’ remuneration and ESG performance

provide further details of how the Lanjigarh grievance mechanism complies with best practice. Provide a timeframe for implementation of the grievance mechanism standard globally

publish at least one relevant environmental and social impact assessment (ESIA) and publish its response to recommendations on its website

become a signatory to the Voluntary Principles on Security and Human Rights

publicly report on non-compliance and remedial actions in the Company’s next sustainability report.

Commissioned by Aviva Investors

July 2012

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Contents

Executive summary...................................................... 1

Introduction - background to this paper ...................... 2

Scott Wilson process .................................................... 3

Summary results .......................................................... 4

Significant developments since July 2011 .................... 5

News and NGO reports relating to the Company ......... 5

Company updates – Scott Wilson process .................... 7

Table 1: Progress made on the seven EIRIS recommendations ....................................................... 8

Additional explanation regarding recommendations . 14

Conclusion ................................................................. 18

Appendix 1: Table showing Scott Wilson’s assessments of progress (March 2012 report) compared with EIRIS’ seven recommendations ..................................................... 19

References ................................................................. 24

Introduction - background to this paper

Over a period of several years leading up to 2010, Vedanta Resources came under increasing international scrutiny regarding alleged environmental and social impacts at some operations, particularly concerning plans for a bauxite mine and the expansion of its Lanjigarh alumina refinery in Orissa.

In 2010 Aviva Investors started its engagement with Vedanta Resources and commissioned a briefing paper from EIRIS which analysed serious allegations against the Company and focused on internal controls, risk management and corporate governance. This paper, Improving Vedanta Resources’ governance of responsible business practices includes a set of seven recommendations to help the Company improve ESG performance and to aid shareholder engagement.1 A paper reviewing progress against EIRIS’ recommendations was produced in 2011: One year on: review of progress by Vedanta Resources on EIRIS’ ESG recommendations.2 This 2012 assessment builds on the 2011 update; it includes new information from the Company’s website and communications between EIRIS and the Company. Each recommendation is graded ‘red’, ‘amber’, ‘light green’ or ‘green’ based on an assessment of how the company has responded. ‘Light green’ is a new grade which signals that the Company has progressed from ‘amber’, but has not yet disclosed sufficient progress to meet requirements for a ‘green’ grade.

Investor engagement

In response to investors’ engagement activities, the Company has responded by appointing a Chief Sustainability Officer, by commissioning independent reviews and by setting up its Sustainability Framework. Aviva Investors’ engagement with the Company over the last year includes multiple meetings and hosting an investor round table prior to

the July 2011 AGM. Aviva Investors stated that: ‘The company demonstrated some modest progress and we welcomed the increased quality and frequency of dialogue with the company’. Although Aviva Investors improved their vote on the annual report and accounts from ‘against’ to ‘abstain’, they opposed the remuneration report and the re-election of the chairman of the health, safety and environment committee.3

Other on-going engagements include that of a group of investors led by Hermes Equity Ownership Services, through the Principles for Responsible Investment (PRI) network. This group of investors includes, amongst others, F&C Asset Management, BlackRock and Legal & General Investment Management Ltd. This group continues to have discussions with senior management and board representatives. The group states that: ‘The company has been receptive to address many of the investors’ concerns.’ However, they

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point out: ‘Most importantly the investors want to gain confidence that the company is not merely setting up management structures and procedures but that the board and particularly the audit committee pro-actively identify, assess and address reputational and financial risks’.4

Scott Wilson process

Scott Wilson Ltd (now URS Scott Wilson) was appointed as the bank lenders’ Independent Environmental and Social Consultant (IESC) by Standard Chartered in September 2010. The terms of reference were to review the Company’s approach to sustainable development and to assess the social and environmental issues in relation to Vedanta Aluminium Limited’s (VAL) Lanjigarh refinery and its proposed expansion. The lenders require Vedanta Resources to provide Implementation Progress Reports every six months, until the IESC determines that implementation of the recommendations is materially complete and all highlighted issues are substantially mitigated.

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Summary results

Recommendation EIRIS Assessment July 2011

EIRIS Assessment June 2012

1 Board level oversight Amber Light green 2 Board responsibility and training Amber Amber 3 Remuneration link to ESG performance Amber Light green 4 Grievance mechanisms Amber Amber 5 Risk management Red Light green 6 International norms Amber Light green 7 Monitoring compliance Amber Light green

The seven EIRIS recommendations

1. Board level oversight: Widen the remit of the health, safety and environment (HSE) committee

to make clear that it includes all ESG issues. The committee should have responsibility for

oversight of the development of human rights and indigenous rights policies. The committee

should ensure that the Company publishes rights-based policies on indigenous peoples and on

security guards that are explicitly based on UN guidelines. The committee should have

oversight of stakeholder engagement generally. Additional members skilled in these areas

should be recruited. It should report to the audit committee on risks.

2. Board responsibility and training: Train and allocate responsibility at board level on the full

range of the Company’s ESG risks.

3. Remuneration link to ESG performance: Create a transparent link between both board

directors’ and senior executives’ remuneration and ESG performance, starting with pollution,

safety and community.

4. Grievance mechanisms: Set up complaints/grievance mechanisms at all operations.

5. Risk management: Improve risk management systems available to the board including: a) set

up a panel of external experts to assess the Orissa operations against international norms

relating to human rights, indigenous rights and the environment and b) commission

independent environmental and human rights impact assessments, publish these and commit

to issuing a public response to the recommendations.

6. International norms: Support voluntary self-regulation standards, such as the OECD Guidelines

for Multinational Enterprises, UN Global Compact, the Extractive Industries Transparency

Initiative (EITI), the International Council on Mining and Metals (ICMM) and the Voluntary

Principles on Security and Human Rights.

7. Monitoring compliance: Strengthen systems for monitoring compliance with ESG policies.

Publicly report on any non-compliance and remedial action taken.

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Significant developments since July 2011 Vedanta Resources is a diversified metals and mining group, headquartered in the UK but operating mainly in India. Operations in India include Sterlite Industries, Sesa Goa, Madras Aluminium Company (MALCO), Bharat Aluminium Company (BALCO), Hindustan Zinc Limited (HZL) and Vedanta Aluminium Ltd (VAL). It also has copper mines in Australia and Zambia.5 EIRIS has monitored news and NGO reports, along with new information from the Company regarding its roll-out of the Sustainability Framework. News sources used from Dow Jones/Factiva included major Indian press, such as The Economic Times, The Hindu and The Times of India. International media sources used included The Guardian, The Wall Street Journal Asia and Dow Jones Commodities Service. NGO websites used included Amnesty International and Survival International. News and NGO reports relating to the Company

Allegations relating to ESG issues continue to pose a reputational risk for the Company. With regard to the Vedanta Aluminium (VAL) Lanjigarh site, both the refinery expansion and proposed mine remain stalled; indigenous protests continue locally. Issues around human rights and pollution continue to be highlighted by international NGOs.

June 2012 – Environment Minister asks Goa State Pollution Control Board (GSPCB) to inspect Sesa Goa’s Codli mine due to complains of pollution in river.6

June 2012 – 2 contract workers killed and 13 injured at Hindustan Zinc plant in Rajasthan.7

May 2012 – Amnesty International allege on-going pollution affects community near VAL and that

expansion of site should not be allowed until abuses addressed.8

May 2012 – British Safety Council award withdrawn due to: ‘fatality at the VAL site in April and in connection with earlier occurrences’. The Royal Society for the Prevention of Accidents (RoSPA) also suspend award.9

30 April 2012 – Project engineer dies in fire in guesthouse at VAL site, caused by electrical short circuit.10

April 2012 - Appeal to Supreme Court to overturn 2010 ruling rejecting proposed bauxite mine is adjourned with no date set.11

April 2012 - Authorities shut down mine owned by Sesa Goa for allegedly polluting in Advalpal village.12

April 2012 - Sesa Goa trucks carrying ore allegedly violated requirement to minimise dust pollution and accidents.13

March 2012 - Company proposed restructuring called ‘anti-Indian shareholder structuring’ by shareholder activists. These activists criticised the restructuring for transferring corporate governance risks to the Indian companies. Proposal for two operating entities: Sesa Sterlite in India and Konkola Copper Mines in Zambia. Alleged that risks associated with VAL would be transferred from Vedanta shareholders to shareholders of Sterlite and Sesa Goa.14

March 2012 – National advertising campaign ‘Creating Happiness’, based on three thousand community centres providing childcare programmes, is criticised in articles in The Economic Times and Moneylife. They report that

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two Bollywood celebrities opted out of involvement with the campaign.15

21 January 2012 – Local community protesters arrested for using access road.16

January 2012 – Amnesty International alleges pollution from red mud pond overflowing in monsoon. The state pollution body denies this.17

January 2012 – Final clearance of the Cairn India acquisition, which transfers control of India’s largest offshore oilfield to Vedanta. The Home Ministry had approved the deal but raised environmental, regulatory and human rights issues. The oil ministry claimed these issues were not relevant to the deal.18

January 2012 – Cairn India (majority owned by Vedanta) experiences delays in construction of pipeline due to land compensation issues; three members of public killed in traffic accidents involving trucks driven by contractors.19

November 2011 – Allegation that Sesa Goa extracted more than fifty percent over its permitted limit in 2009. The Company denies this. Allegation that Sesa mine in North Goa violates permits regarding height of overburden. The Company denies this.20

November 2011 (and November 2010) – Konkola Copper Mines ordered to compensate residents for allegedly polluting river (source of domestic water).21

27 September 2011 – Near Lanjigarh, allegation that thousands of local people attend anti-Company rally at Muniguda.22

September 2011 – Expansion of refinery at Lanjigarh: Orissa High Court backed the Ministry of Environment and Forests’ decision and requires Vedanta to start the process for environmental clearance anew. Court records that: ‘by the company’s admission it was evident that nearly half the work on the refinery had been completed even before it got the requisite clearance, which is in violation of the law.’23

September 2011 – At Lanjigarh, a large number of tribal and dalit representatives from fifty villages allegedly sought to demolish conveyor belt pillars built to carry bauxite ore.24

September 2011 – Sterlite Industries Tuticorin plant ordered closed by Madras High Court on pollution grounds. In October Supreme Court stayed the immediate closure. Local pollution control board said the Company was within permissible limits, but had not complied with report on failure to meet norms on solid waste disposal.25

April 2011 – Survival International alleged reports of arrests during religious festival. Company denies this.26

April 2011 – Authorities imposed banning order on foreign nationals; Company allegedly asked state government to restrict entry of foreign NGOs to area.27

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Company updates – Scott Wilson process

In the last year the Company has been working, through the Scott Wilson process, to report on its progress on implementing its Sustainability Framework. This includes publishing policies and developing a series of technical standards and guidance documents for internal use. The Company has made a certain number of these internal documents available to EIRIS for use in this paper, in order to aid the assessment against the recommendations. The Scott Wilson (SW) reports review progress at corporate, company-wide and Lanjigarh-site levels; EIRIS’ seven recommendations also work according to these three levels. For SW the ‘overarching corporate level sustainability function’ has ‘the aim of improving coordination across the Group in regard to new projects and their associated environmental and social impacts’. The company level assesses how sustainability policies and systems ‘are implemented across the organisation’s structure, both in India and overseas, with particular regard to new projects, their environmental and social impact and appropriate mitigation’. With regard to Lanjigarh specifically, SW makes recommendations for the on-going refinery operations and also recommendations in the event of the extension to the refinery and the proposed bauxite mine going ahead.28 The Company has published Scott Wilson’s (SW) original report on its website together with the subsequent six-monthly evaluation reports reviewing the Company’s progress on implementing SW’s recommendations. Where the SW recommendations are aligned at least partially with EIRIS’ recommendations, EIRIS highlights their evaluations from the March 2012 report in the table at Appendix 1.29 EIRIS indicates how far the SW recommendations are aligned with the EIRIS recommendations and what further information is needed to meet EIRIS’ indicators. In Table 1 below, progress against

the seven recommendations is given. This is followed by more detailed textual analysis of the assessments where required, including comparison with the SW March 2012 report.

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Table 1: Progress made on the seven EIRIS recommendations

Recommendation Vedanta’s progress on sub-indicators and on recommendation overall Sub-indicator assessment

Overall assessment

Recommendation 1:

Widen the remit of the HSE committee to make clear that it includes all ESG issues.

GREEN In a letter (7 July 2012) the Chief Sustainability Officer has confirmed that: ‘The Sustainability Committee is chaired by Mr. Naresh Chandra, a non executive director of the Board and includes Mr. MS Mehta, our Group CEO and Mr. Janakaraj, the CEO of KCM as its members. All subsidiary CEOs have a standing invitation and I act as secretary in my capacity as Chief Sustainability Officer’.

IMPROVED - LIGHT GREEN

It should have responsibility for oversight of the development of human rights and indigenous rights policies (based on international norms).

GREEN The committee has responsibility and the new human rights policy published on the Company website does explicitly support the Universal Declaration of Human Rights.

Publish rights-based policies on indigenous peoples and on security guards explicitly based on UN guidelines.

AMBER In order to meet this sub-indicator in full, the policy should include explicit wording on a) indigenous peoples and b) security guards. This means a published security guards policy explicitly based on UN guidelines (Basic Principles on the Use of Force and Firearms by Law Enforcement Officials and Code of Conduct for Law Enforcement Officials). The indigenous peoples’ policy must be rights-based; this means a published policy explicitly based on respecting the rights of indigenous peoples. Regarding use of the term ‘indigenous peoples’ the Company has verbally stated to EIRIS that they are moving towards using the term in their technical standards (not

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Overall assessment

published). The Company has verbally stated that it does not plan to publish such a policy statement. NOTE: in order to progress to a ‘light green’ grade for recommendation 1, the Company would need to disclose such policies to EIRIS; for a ‘green’ grade, the Company would need to publish them. However, if it is reported that protests by indigenous peoples are continuing, this could impact on the award of a ‘green’ grade.

The committee should have oversight of stakeholder engagement generally.

LIGHT GREEN In order to meet this in full the Company would need to provide details of the Lanjigarh plan, and how it is working in practice. The Company has disclosed details of its stakeholder engagement plan, which includes mandatory requirements for local community consultation, including with indigenous peoples, based on best practice and engagement with NGOs, both local and international.

Additional members skilled in these areas should be recruited.

GREEN

The Chief Sustainability Officer was recruited with international experience. The Company verbally stated on 16 July 2012 that a new independent board member was recruited, with CSR experience.

It should report to the Audit Committee on risks.

LIGHT GREEN The Sustainability Chairman, Mr Chandra, also sits on the Audit Committee. In order to meet this recommendation in full, the Company would need to disclose details of how this process of reporting is formally managed.

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Overall assessment

Recommendation 2: Train and allocate responsibility at board level on ESG risks.

AMBER Responsibility lies with Mr Chandra, the senior non-executive director. Note: in order to progress to a ‘light green’ grade, the Company would need to disclose details of training of all Vedanta Resources main board members; for a ‘green’ grade, all operating company boards would need to have allocated responsibility and to have been trained.

REMAINS AMBER

Recommendation 3:

Create a link between both board directors’ and senior executives’ remuneration and ESG performance.

LIGHT GREEN In a letter (7 July 2012) the Company states: ‘We have finalized performance contracts for all the CEOs and their first line reports which include KPIs for sustainability as well as operating performance and growth. We have also extended the annual performance pay scheme for our entry level professional population which includes sustainability KPIs and thus facilitated high performance culture with due focus on sustainability’. The Company has provided the following details to EIRIS: "Across the group, the operating company senior management receives bonuses contingent on performance in the areas of Sustainability. The key parameters that make up this bonus are as follows: Fatalities, lost time injury rate, maintenance of OHSAS 18001 certification, maintenance of ISO14001 certification, completion of health medical for required staff, specific water consumption, specific energy consumption, solid waste management, maintaining environmental monitoring parameters within prescribed limits, risk management, coordination and liaison with external agencies." In order to progress to a ‘green’ grade, the system would need to include board members.

IMPROVED - LIGHT GREEN

Recommendation 4: Set up complaints/grievance mechanisms at all operations

AMBER In a letter (7 July 2012) the Company states: ‘As part of our sustainability framework, we have developed a technical standard for grievance mechanisms for external

REMAINS AMBER

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Overall assessment

community members. This is implemented at Lanjigarh and at new projects. At existing facilities each plant already has community relations personnel who act as a bridge to local communities over and above the statutory mechanisms available to deal with any complaints’. The Company also states that the framework containing the technical standards: ‘is now subject to internal assurance procedures the results of which are reviewed by senior management.’ The Company has provided details of this technical standard based on best practice. Note: in order to progress to a ‘light green’ grade the Company would need to provide details of how the requirements of the technical standard are applied in Lanjigarh; for a ‘green’ grade, the Company would need to provide the timeframe for implementation globally.

Recommendation 5: Improve risk management systems available to the Board:

set up a panel of external experts to assess the Orissa operations against international norms

LIGHT GREEN The ERM’s Independent Environmental and Social Performance Review (February 2012) counts towards this indicator. However, its remit is limited to the operational refinery, so it does not cover the proposed expansion of the refinery or the proposed bauxite mine. In order to progress to a ‘green’ grade for this sub-indicator, the Company would need to provide details regarding external expert advice on the expansion and mining plans.

IMPROVED – LIGHT GREEN

commission independent environmental and human rights impact assessments, publish these and commit

LIGHT GREEN This grading is based on the Scott Wilson process of assessing impacts at Lanjigarh, and some details on these and the Company responses that have been published on the

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Overall assessment

to issuing a public response to any recommendations.

Company website. The Company stated verbally to EIRIS that it will carry out ESIAs for new projects to IFC standards and it will publish them. For a ‘green’ grade, the Company would need to publish at least one relevant ESIA and also to have published its response to recommendations on its website.

Recommendation 6:

Support voluntary self-regulation standards, such as the OECD Guidelines for Multinational Enterprises, UN Global Compact, EITI, ICMM, and the Voluntary Principles on Security and Human Rights.

LIGHT GREEN The Company is now a signatory of the UN Global Compact, has a published policy on the Universal Declaration of Human Rights and is involved in an EITI project in Zambia. The Company has disclosed to EIRIS a document mapping its Sustainability Framework to the IFC Performance Standards and the ICMM Principles. In order to progress to a ‘green’ grade, the Company would need to be a signatory to the Voluntary Principles on Security and Human Rights. The Company has stated verbally to EIRIS that it does not have a plan to become a signatory to the Voluntary Principles, although its security training, technical standards and guidance are based upon them.


Recommendation 7: Strengthen systems for monitoring compliance with ESG policies.

LIGHT GREEN The Company has made progress on this, especially regarding the environment, health and safety and anti-bribery. In a letter (7 July 2012) the Company states: ‘We have developed the Vedanta Sustainability Framework which is consistent with IFC, ICMM and UNGC principles and a mapping document was created which confirms that the framework is fully aligned to IFC, ICMM and UNGC standards’. The Company also states: ‘All subsidiary companies have mature management systems in place and 29 out of our 33 major sites are certified to ISO 9001, 14001 and OHSAS 18001. They have each mapped their management systems against the Vedanta Frameworks and are closing any gaps found. The sustainability assurance process has been launched to ensure


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Overall assessment

compliance across the group’. The Company has provided details of its self-assessment workbook, which includes human rights and indigenous rights. This workbook is audited and will give rise to an improvement plan to rectify gaps.

publicly report on any non-compliance and remedial actions taken.

Note: In order to progress to a ‘green’ grade, the Company needs to publicly report on non-compliance and remedial actions in its next sustainability report.

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Additional explanation regarding recommendations

EIRIS recommendation 1 – light green overall The committee should ensure that the Company publishes rights-based policies on indigenous peoples and on security guards, which are explicitly based on UN guidelines. As noted in the summary table, in order to meet this sub-indicator the Company would need to publish a security guards policy explicitly based on UN guidelines and a rights-based indigenous peoples policy.

Regarding security and human rights, the Company has verbally stated that it does not currently have plans to publish such a security guards policy, although it does make use of the Voluntary Principles on Security & Human Rights (Voluntary Principles) in its training and technical standards/guidance documents. The Voluntary Principles are based on UN standards.

The Company has disclosed its Technical Standard – Security Management to EIRIS. This document includes stipulations relating to human rights, which are also indicators used by the Voluntary Principles. They include, for example, the need for due diligence of security providers, training in the use of force and encouragement of public security forces to abide by these requirements. However, the document does not reference the UN Guidelines specifically and it is not published.

Regarding indigenous peoples, the Company’s human rights policy states: ‘Vedanta will strive to: …Respect and preserve the culture and heritage of the local communities including socially vulnerable groups which are impacted by our operations and work towards developing a constructive relationship with such groups and local communities, seeking broad-based support for our operations’.30

However, ‘socially vulnerable groups’ is too broad a term to count as an explicit rights-based policy on indigenous peoples. The Company has stated verbally to EIRIS that, as

an Indian company, it is unlikely to publish a policy on indigenous peoples, given the specific Indian context of scheduled tribes. However, India itself endorsed the Declaration on the Rights of Indigenous Peoples in 2007.31 Additionally, companies operating in India have published such policies. For example, Cairn Energy, which retains a 22% stake in Cairn India, state that they will ‘strive to… Respect the rights of indigenous peoples in all countries in which we operate.’32

On the subject of indigenous peoples, SW’s recommendations lend support to EIRIS’ emphasis on a rights-based policy. SW recommendation 2.5.20 on vulnerable social groups, calls on the Company to: ‘Adopt a specific policy in relation to engagement with and assistance for social groups that may be vulnerable to change and communicate this to all stakeholders via its website.’ SW has not completely closed out on this recommendation and has stressed to the Company that, in accordance with the IFC Mapping Tool, it needs to prepare a technical standard specifically on indigenous peoples. It states that it is reiterating its opinion that: ‘comprehensive guidance on applying the IFC’s definition and the correct handling of potential issues associated with ‘indigenous peoples’ may be required for successful implementation of the sustainability framework’. It also reiterates the importance of evolving international law and possible implications for future projects, as well as legacy issues with acquisitions.

Although the SW Company-level recommendation 2.5.22 on cultural heritage is not strictly covered by EIRIS’ recommendation 1, it does have great importance for how the Company approaches indigenous rights. SW recommends: ‘In developing new sites adopt a standardised approach to the identification of sites of cultural heritage value involving formal documentary sources, site surveys and community consultation.’ SW states that Vedanta has developed a technical standard on this. The SW report has closed out on this, commenting that there are no current concerns, presumably because permission for

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the bauxite mine is on hold. However, it is important to bear in mind the continuing importance of this area, given the on-going issues reported in the press about the cultural importance to indigenous peoples in the Niyamgiri hills.

The committee should have oversight of stakeholder engagement generally.

The Company has provided details of its technical standard on stakeholder engagement. As noted in the summary table, in order to meet this EIRIS sub-indicator in full, more details are required on the plan for Lanjigarh. This includes how it is working in practice; for example, regarding the alleged issues of pollution around the red mud pond at the smelter in Lanjigarh.

With regard to the specific issue of consultation with local communities and indigenous peoples concerning new developments, the SW process provides recommendations based on the IFC’s guidelines. This clearly will be of particular importance for any controversial new project, such as the expansion at Lanjigarh or the proposed bauxite mine. SW recommendation 2.5.17 calls on the Company to: ‘Develop a standardised approach to community consultation for new developments which responds to IFC guidelines and communicate this to all stakeholders via its website.’ SW states that the timeframe is too short to provide evidence of this and therefore it has combined assessment of this recommendation with that of Stakeholder Engagement Plans (2.5.12) so the recommendation is closed out. However, it suggested that: ‘Vedanta investigates ways to develop indicators of ‘Broad Community Support’ as a means of monitoring the success of its various consultation measures. It should also provide detailed guidance in regards to how it can support both government-led consultation processes and provide suitable and sufficient information about the proposed project and its positive and adverse impacts in regards to Free, Prior and Informed principles for public consultation.’

SW recommendation 2.5.12 is not closed out, according to the report. It states that Vedanta is currently developing stakeholder engagement plans for each company within the group, but only the Lanjigarh example was provided in the Vedanta progress report. In order to close out on this, SW states that they will need to see: ‘how Vedanta intends to satisfy the IFC requirement in clause 29 of the 2012 version of Performance Standard 1 in relation to the disclosure of information on project performance to affected communities’.

EIRIS notes that clause 29 states: ‘The client will provide Affected Communities with access to relevant information on: (i) the purpose, nature, and scale of the project; (ii) the duration of proposed project activities; (iii) any risks to and potential impacts on such communities and relevant mitigation measures; (iv) the envisaged stakeholder engagement process; and (v) the grievance mechanism.33 EIRIS recommendation 2 - amber Train and allocate responsibility at board level on the full range of the Company’s ESG risks. As indicated in the table, this EIRIS sub-indicator requires details of training for all main board and operating company board members. It also requires allocation of responsibility at the operating board level, as well as main body level. Regarding operating company board members, the Company has disclosed to EIRIS details of its assurance process for its Vedanta Sustainability Assessment of all operating company CEOs. The range of ESG indicators which CEOs have to self-assess themselves against includes human rights, environmental impact assessments, biodiversity and safety, amongst others. This is a process which is done quarterly, and the sustainability team audits them regularly and provides feedback. This process counts towards the indicator of training, however this process does not appear to include the main board members of Vedanta Resources.

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The SW report’s corporate-level recommendation 2.5.9 differs from EIRIS’ recommendation in that it is not focussed on board members, but it relates to training throughout the Company in relation to ‘the IFC Performance Standards and Guidelines, human rights, vulnerable groups and the GRI Mining and Metals Sector Supplement’. Although the SW report does give some detail about a one-off training session for operating company CEOs, more details are required to assess the level of training of the main board members. EIRIS recommendation 3 – light green Create a link between both board directors’ and senior executives’ remuneration and ESG performance. The Company has provided further details on the new scheme which links remuneration to KPIs based on the Sustainability Framework. It also needs to extend to board directors. EIRIS recommendation 4 – amber Set up complaints/grievance mechanisms at all operations. The Company has provided details of their new technical standard for this. It is rights-based and makes use of best practice, such as that found in the ICMM’s Handling and Resolving Local Level Concerns and Grievances.34 However, more details are needed on the operation of this mechanism in Lanjigarh and also the implementation timeframe for operations globally. The Company verbally stated to EIRIS that the grievance mechanism at Lanjigarh has been working well, that the resettlement is closed out satisfactorily and that no one is now waiting for more compensation. In a letter of 16 July 2012 the Company has provided some additional details of how what they call the ‘Grievance Cell’ operates in Lanjigarh. Community grievances are managed by the Head of Community Development; there is a surgery every Friday

which is open to members of the public and all complaints are recorded in the computer system. The Company states: ‘we work with the person to find an acceptable solution.’ Of a total number of 464 grievances in the year to April 2012, of which 445 are closed, the majority relate to requests for ‘a rise in the one-time compensation paid when people were relocated in 2003 due to the change in the law in 2006.’ However, in order to achieve a ‘light-green’ grade, the Company needs to provide more details to show that the mechanism at Lanjigarh meets best practice. For example, accessibility in a culturally appropriate way, how they ensure that all types of concerns can be raised (such as the perception of environmental pollution), confidentially of complaints and assurance of no reprisals. EIRIS recommendation 5 – light green Improve risk management systems available to the Board including: a) set up a panel of external experts to assess the Orissa operations against international norms relating to human rights, indigenous rights and the environment The Independent Environmental and Social Performance Review (February 2012) of the Alumina Refinery at Lanjigarh, carried out by the Environmental Resources Management (ERM) India, makes clear that it is reviewing the operation of the refinery according to international norms for human rights, indigenous rights and the environment, amongst other areas. This includes the IFC Performance Standards, the ICMM Principles and the OECD Guidelines for Multinational Enterprises. Although this independent review is not a panel of external experts in the strict sense, this does count towards this sub-indicator. The gap analysis and recommendations are detailed. However, its remit is limited to the operational refinery, so it does not cover the

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proposed expansion of the refinery or the proposed bauxite mine. It is vital that the Company provide details of how best-practice improvements will be implemented in other operations globally. This is especially pertinent in India, given allegations of wide-scale failure by the authorities in India to effectively regulate the mining sector. For example, see allegations in the Human Rights Watch report Out of Control – Mining, Regulatory Failure and Human Rights in India (June 2012). b) commission independent environmental and human rights impact assessments and publish these and commit to issue a public response to the recommendations. The Company has disclosed to EIRIS details of its Technical Standard – Conducting ESIAs to International Standards. With regard to the ESIA for Lanjigarh, SW recommendation 3.3.20 has a proposed close out of July 2012. The report states that a systematic gap analysis of the plant against industry best practice has been carried out by ERM in their Independent Environmental and Social Performance Review: 1 MTPA Alumina Refinery, Lanjigarh, Odisha (February 2012). ERM’s main recommendations are in an integrated Environmental and Social Management Plan. However, it should be borne in mind that the Company’s handling in practice of the possible extension of the refinery and the bauxite mining project at Lanjigarh would be crucial. SW has specific recommendations on this. Regarding the possible expansion of the refinery, SW recommendation 3.4.3 states that, in this case, a supplementary report would be needed to update the existing EIA, to meet international best practice, and it should be made available to key stakeholders. The SW report states: ‘Any future projects affecting Niyamgiri will be subject to the Lenders’ requirement to apply the Equator Principles and the IFC Performance Standards.’ (Original’s italics) A Tribal Development Plan

would be necessary in accordance with the ERM report which, amongst other things, should provide long term benefits, mitigate impacts, protect rights and culture. It should be developed through: ‘intensive consultation with tribal groups and monitoring should include representation of these groups and their institutions.’ SW recommendation 2.5.24 calls for the Company to: ‘Undertake an independent audit of Group and Company environmental and social performance against international standards (IFC, ICMM and OECD) after 12 months of implementing the recommendations’. However, regarding the timeline, the report states that the global roll-out of new policies and standards, including training and internal audits, should precede external audits. SW recommendation 2.5.15 calls on the Company to benchmark its ESIAs against the IFC Performance Standards and ICMM best practice. The SW recommendation states: ‘Specifically EIAs should be expanded in relation to biodiversity and habitat identification, the identification of cultural heritage…and social and human rights impacts. Vedanta should commission independent reviews of one or more major EIAs each year’. Vedanta has identified four new projects for which it will commission such reviews: HZL Zawar and Kayar mines; BALCO Taraimar coal project; and the Sesa Goa Western Cluster project in Liberia. The SW report states that more detailed information was needed on these before close out. In order to move to a ‘green’ grade, the Company needs to publish at least one ESIA and its response to recommendations. EIRIS recommendation 6 – light green Support voluntary self-regulation standards. The Company has provided details of its mapping tools used to map the Sustainability Framework to international norms. This, in

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addition to the other elements met, makes the assessment ‘light green’. In order to move to a ‘green’ grade, the Company would need to become a signatory of the Voluntary Principles. The Company has stated that it is working on signing off a new security and human rights policy. However, it does not currently have plans to apply to become a signatory of the Voluntary Principles. EIRIS recommendation 7 – light green Strengthen systems for monitoring compliance with ESG policies. The Company has made progress on its monitoring systems and has provided details of its assurance process for internally auditing implementation of the Sustainability Framework. SW has closed out on SW recommendation 2.5.8 on monitoring performance, stating that ‘significant progress has been made’ with regard to sustainability oversight. However, it expresses concern regarding health and safety, specifically the number of reported fatalities. Likewise SW has closed out on recommendation 2.5.23 which calls on the Company to: ‘Maintain a register of major environmental, social and labour incidents at their plants and report to Vedanta Resources’. However, it has highlighted that the close-out was subject to refining the process to log specific sites and to the continuance of root-cause analysis and detailed remedial actions. Publicly report on any non-compliances and remedial actions taken. To meet this EIRIS sub-indicator, it is necessary for the Company to have publicly reported details from the results of its monitoring and actions taken to remedy the breaches. SW states that Vedanta is commissioning a gap analysis against the Global Reporting Initiative G3 and the Mining and Metals Sector

Supplement requirements, as well as a comparison with a sample of companies in their sector. SW recommendation 2.5.13 on reporting appears to be more top-level, calling on the Company to: ‘Report, where possible, on Group environmental and social performance as a whole, seek to benchmark performance against industry best practice, and seek assurance from appropriate bodies with industry and sustainability expertise.’

Conclusion

The Company has been responsive in the engagement process with EIRIS. Vedanta Resources is making progress with implementing its Sustainability Framework. It is putting policies and management systems in place, based on best practice and international norms; Vedanta Resources has moved forward on these matters reasonably quickly. This is reflected in the improvements in the assessment against the seven recommendations in this 2012 update paper. The Company intends to draw a line under past controversies and move forward. The test will be how well their policies and management systems function in the future, particularly with regard to community grievance mechanisms and consultation, indigenous peoples and biodiversity. How proactive and transparent the Company can be with a range of stakeholders will also be an issue. The Company needs to ensure that it actively manages ESG risks going forward, so that the work it has done in improving governance of sustainability yields results in terms of its performance globally. ______________________________

EIRIS would like to thank Aviva Investors for supporting the preparation and production of this report as part of their work to explore the most effective means by which shareholders can protect and enhance shareholder value with regard to sustainability issues. The content of the report is, however, the responsibility of EIRIS and nothing in it, or its recommendations, should be taken as a statement of Aviva Investors’ views.

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Appendix 1: Table showing Scott Wilson’s assessments of progress (March 2012 report) compared with EIRIS’ seven recommendations

SW recommendation – corporate level

Assessment EIRIS’ seven recommendations

1. Sustainability committee Closed out Aligned with EIRIS’ recommendation 1. EIRIS’ sub-indicator widens remit of HSE committee.

2. Sustainability officer Effectively closed out Aligned with EIRIS’ recommendation 1. EIRIS’ sub-indicator widens remit of HSE committee.

3. Revise wording of value statement on sustainability

Closed out n/a

4. Code of Business Ethics to include reference to local communities

Closed out n/a

5. Develop policies for all sustainability areas

Achieve close out in six months

Partly aligned with EIRIS’ recommendation 1. EIRIS’ recommendation on policy on the Universal Declaration of Human Rights is in accord with SW recommendation 2.5.16: ‘Adopt a specific human rights policy demonstrating its commitment to the UN Declaration of Human Rights and procedures to ensure its implementation’. EIRIS’ sub-indicator to publish policy on security guards based on UN guidelines is not part of SW’s recommendation.

6. Stakeholder engagement procedures

Closed out Partly aligned with EIRIS’ recommendation 1. SW recommendation 2.5.3 is closed out, as it is based on the establishment of a register, policies, technical standards and guidance notes. It states: ‘Adopt internal procedures to ensure that all requests for information from stakeholders (including investors, NGOs, international organisations and the press) are dealt with in a timely manner’. In addition, SW is to review results and recommendations of external study commissioned by Vedanta.

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SW recommendation – corporate level continued


7. Reporting on social and environmental performance


Partly aligned with EIRIS’ recommendation 7.

8. Monitor operating companies Closed out Partly aligned with EIRIS’ recommendation 7.

9. Training Achieve close out in six months

This is partly aligned with EIRIS’ recommendation 2. This focuses specifically on board member training, whilst the SW report is focused on training on HSE and CSR competencies across the Group. Note the SW report states that for senior management, all CEOs received a two-hour briefing. However, for EIRIS, a short briefing would not on its own be sufficient as evidence of training.

10. Human rights policy to include Universal Declaration of Human Rights

Closed out This is partly aligned with EIRIS recommendation 1.

11. Independent audit Extension until June 2013

Partly aligned with EIRIS’ recommendations 5 and 6. SW recommendation 2.5.24 calls for independent audits of environmental and social performance. It states: ‘As we are now satisfied with the progress made to date, we would support an extension of the deadline for the external audit until June 2013’.

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SW recommendation – company-wide level


1. Expand EIAs to include biodiversity, cultural heritage, social and human rights impacts. Commission independent reviews of one or more major EIAs each year


Partly aligned with EIRIS’ recommendation 5. SW recommendation 2.5.24 calls for independent audits of environmental and social performance. It states: ‘As we are now satisfied with the progress made to date, we would support an extension of the deadline for the external audit until June 2013’.

2. Land management: manage for maximum environmental gain and to promote biodiversity.


n/a

3. Incident register at all plants Closed out n/a

4. Report to stakeholders on environmental and social performance


Partly aligned with EIRIS’ recommendation 7.

5. Develop standardised approach to community consultation at new sites

Closed out n/a

6. Develop specific policy on vulnerable social groups in accordance with International Finance Corporation (IFC) standards

Reserve judgement until see Guidance Documents; expect to achieve close out in six months.

EIRIS has a sub-indicator to publish rights-based policies on indigenous peoples. The SW report has not closed out on the SW recommendation 2.5.15; it states that there is a ‘need to review examples of the Guidance documents – particularly those dealing with Human Rights, Vulnerable Social Groups/Indigenous Peoples, and Biodiversity – at our next review in order that we can close out this recommendation.’

7. Standardised approach to identifying sites of cultural heritage value

Closed out n/a

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SW recommendation – Lanjigarh site level


1. Environmental management gap analysis


SW recommendation 3.3.20 on environmental management confirms that the main recommendations from the gap analysis undertaken by the Environmental Resources Management (ERM) have been presented in the form of an Integrated Environmental and Social Management Plan for Lanjigarh and that the site is implementing the recommended actions. SW recommendation 2.5.15 calls on the Company to test impact assessments against IFC and best practice; SW stated that more detail was needed to close out on this.

2. Grievance mechanism for local community

Closed out, except for i) ensure complaints from vulnerable groups identified and ii) carry out additional raising of awareness about the mechanism.

SW recommendation 4.5.8, which is specifically on grievance mechanisms for Lanjigarh, is not fully aligned with EIRIS’ recommendation 4. The SW report states that the system to ‘ensure the effective receipt, recording, resolution and monitoring of community grievances appears to be functioning well’. Amongst other things it also states: ‘An action plan has been established to ensure that the VAL operation-level mechanism can feed into the group-level procedure as documented in Technical Standard 4 – Grievance Mechanism.’

3. Site housekeeping: collection/disposal of wastes; storm water draining systems

Closed out n/a

4. Proposed expansion Pending

5. Disaster management plan Closed out n/a

6. Plan to mitigate adverse impact on employees in event of suspension/closure of plant


n/a

7. Contractor accommodation Closed out n/a

8. Dust emissions – monitor and reduce

Closed out n/a

9. Livelihood training programmes for villagers

Closed out n/a

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SW recommendation – Lanjigarh site level continued


10. Work with local government on integrated rural development strategy

Closed out n/a

11. H&S management – carry out gap analysis and plan to remedy


n/a

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References

News sourced from Dow/Jones Factiva, except where websites given.

1 http://www.eiris.org/files/research%20publications/EIRISVedantaReport2010.pdf

2 http://www.eiris.org/files/research%20publications/EIRISVedantaReport2011.pdf

3 Aviva Corporate Responsibility Report 2011, http://www.aviva.com/reports/cr11/regions/aviva-

investors/trust/voting/voting-trends/#voting-engagement-vedanta-resources

4 Principles for Responsible Investment website: http://www.unpri.org/

5 In January 2012 Vedanta Resources (the Company) acquired a 38.8% share in Cairn India. The Company’s revenue in the fiscal year ending 31 March 2011 was stated at USD 11,427.2m. Anil Agarwal, who founded the Group in 1976, is also Chairman of Sterlite and is a director of BALCO, HZL and Vedanta Aluminum Ltd. 6 Herald, 20/06/2012

7 Press Trust of India, 18/06/2012

8 Amnesty International, ‘Open letter to India’s Ministry of Environment and Forests not to allow expansion of Vedanta

Aluminium refinery until human rights abuses faced by local communities are fully addressed’, 24/04/2012

9 The Guardian, 15/05/2012

10 The Telegraph, 30/04/2012

11 Survival International website: http://www.survivalinternational.org/news/8253 ; Economic Times website:

http://articles.economictimes.indiatimes.com/2012-04-09/news/31313153_1_bauxite-mining-project-niyamgiri-hills-vedanta-group

12 The Times of India, 03/06,2011

13 Press Trust of India, 09/04/2012

14 Moneylife, 06/03/2012; Mint, 01/03/2012

15 The Economic Times, 23/03/2012; Moneylife, 05/03/2012

16 Amnesty International website, 25/01/2012

17 The Pioneer, 14/06/2011

18 The Economic Times, 26/01/2012

19 IHS Global Insight Daily Analysis, 6/2/2012

20 The Wall Street Journal Asia, 18/11/2011

21 Dow Jones Commodities Service, 15/11/2011

22 TerraGreen, 30/01/2012

23 TerraGreen, 30/01/2012

24 The Hindu, 27/09/2011

25 United News of India, 14/11/2011; Financial Express, 12/10/2011

26 Guardian website, 09/04/2012

http://www.eiris.org/files/research%20publications/EIRISVedantaReport2010.pdf


http://www.aviva.com/reports/cr11/regions/aviva-investors/trust/voting/voting-trends/#voting-engagement-vedanta-resources

http://www.aviva.com/reports/cr11/regions/aviva-investors/trust/voting/voting-trends/#voting-engagement-vedanta-resources

http://www.unpri.org/

http://www.survivalinternational.org/news/8253



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27

Economic Times – Kolkata edition, 09/04/2012

28 URS Scott Wilson, Vedanta Resources plc and Lanjigarh Alumina Refinery – Review of progress on recommendations, Final

Report, March 2012

29 http://www.vedantaresources.com/sustainability/files/Vedanta%202012_report_Final%20220312%20Final%20Final.pdf

30 http://www.vedantaresources.com/sustainability/files/oj6.pdf

31 http://social.un.org/index/IndigenousPeoples/DeclarationontheRightsofIndigenousPeoples.aspx

32 http://www.cairnenergy.com/files/pdf/policiesandprinciples/corporate_social_responsibility_policy.pdf

33

http://www1.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/publications/publications_handbook_pps

34 http://www.icmm.com/page/15816/human-rights-in-the-mining-metals-sector-handling-and-resolving-local-level-

concerns-grievances

http://www.vedantaresources.com/sustainability/files/Vedanta%202012_report_Final%20220312%20Final%20Final.pdf

http://www.vedantaresources.com/sustainability/files/oj6.pdf

http://social.un.org/index/IndigenousPeoples/DeclarationontheRightsofIndigenousPeoples.aspx

http://www.cairnenergy.com/files/pdf/policiesandprinciples/corporate_social_responsibility_policy.pdf



http://www.icmm.com/page/15816/human-rights-in-the-mining-metals-sector-handling-and-resolving-local-level-concerns-grievances

http://www.icmm.com/page/15816/human-rights-in-the-mining-metals-sector-handling-and-resolving-local-level-concerns-grievances

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About EIRIS (www.eiris.org) EIRIS is a leading global provider of independent research into the environmental, social and governance, (ESG), and ethical performance of companies. With nearly 30 years’ experience of conducting research and promoting responsible investment strategies, EIRIS now provides services to more than 100 asset owners and asset managers globally. In the last ten years new EIRIS research has focussed on the risks and exposure of companies in key ESG areas, and how companies are responding. EIRIS works with clients to create their own ESG ratings and rankings, to engage with companies and to create specific funds for their clients. EIRIS has a multinational team of over 70 staff in London, together with offices in Boston and Paris. The EIRIS network includes research organisations in Australia, Germany, Israel, Mexico, South Korea, South Africa and Spain, and now covers around 3,000 companies globally. Lead Author: Louise Tippett Contact us: 020 7840 5700 or [email protected], www.eiris.org © EIRIS July 2012 This report is one of a series of three reports on Vedanta Resources. 2010 report http://www.eiris.org/files/research%20publications/EIRISVedantaReport2010.pdf 2011 report http://www.eiris.org/files/research%20publications/EIRISVedantaReport2011.pdf Disclaimer Information herein has been obtained from sources that EIRIS believes to be reliable. However EIRIS does not guarantee its accuracy or completeness. Opinions and recommendations constitute our judgement as of this date and are subject to change without notice. This report does not contain investment advice. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. This report is intended for the exclusive use of the parties to whom it was provided by EIRIS. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without EIRIS’ permission.

Commissioned by Aviva Investors

