Managing ESG and Other Risks in Non-Operated Joint Ventures
Post By: James Bamford, Josh Kwicinski, and Saadhika Sivakumar
Rip Van Winkle-like companies are waking up to the risks of non-controlled ventures. According to a recent Ankura survey of 29 mining companies, 92% of executive leadership teams and corporate boards are spending more time in the last 18 months understanding and seeking to mitigate ESG risks in non-controlled ventures, with 42% spending substantially more time, compared to prior periods (Exhibit 1). Several mining companies, including Anglo American, have launched corporate training programs aimed specifically at managing ESG risks, including those related to human rights violations and bribery and corruption, in non-operated joint ventures.
Meanwhile, companies are recalibrating how they perceive risks in non-operated entities. Ankura’s recent discussions with oil and gas companies reveals an implicit re-tilting of the industry’s risk register. The classic industry risk map plots risks based on two dimensions: likelihood of occurrence and potential severity, as measured by health, safety, environmental, financial, and reputational impact. Our survey of 38 international and state-owned oil and gas companies shows that more than 40% of firms now believe that non-operated ventures have a higher likelihood of an incident occurring compared to a wholly-owned or operated assets, and that 97% believe that the potential severity is equal to or greater than wholly-owned or operated assets.
Whether justifiable confidence or utter hubris, it is not surprising that companies believe that the likelihood of an incident occurring is lower in ventures they operate than in those operated by others. What is surprising is the impact data – that is, that companies now believe that non-operating positions provide no real shield from negative consequences, especially to their reputation. Facts bear this out. Our analysis of the share price impact of major health, safety, environmental, and ethical incidents occurring in joint ventures shows that investors tend to punish non-operators as much as operators. For example, when we recently looked at 20 major risk incidents that occurred in joint ventures – incidents that spanned major explosions, spills, tailings dam failures, contaminations, and bribery and corruption scandals, we found no statistical difference between operators and non-operators in terms of whether there were abnormal negative returns to company shareprice. We also found no difference between partner-operated and JV-operated ventures.
Managing ESG and other risk in non-operated ventures requires a different mindset and processes. To read our perspectives on how companies might rethink the traditional “three lines of defense” model for JVs, click here for the first of a two-part series we’ve written on JV risk management.
About the Authors: Saadhika Sivakumar is a Senior Associate, Josh Kwicinski is a Managing Director, and James Bamford is a Senior Managing Director within the joint venture and partnership practice of Ankura Consulting.
**The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.