GeoLegal Weekly #30 - Raising Standards / Market Meltdown / Israel-Iran and more
In a world where governments are deadlocked and unambitious, industry self-regulation may play a bigger role. The CEO of the International Council on Metals and Mining explains how in our interview.
There’s been an absurd amount of negative news this week; if you’re looking for the market meldown or Middle East, scroll down to "In Other News.” But this week I start with the story of an industry group pushing global standards higher in a fragmented and fractious world to prove that progress is possible even in such wild times.
Raising Standards
If the average person on the street thinks your industry is pollutive and doesn’t care about the communities in which it operates, you have a few choices. First, you could ignore public opinion, combat regulations and continue to make money. That’s not going to solve your problem but it is a comfortable space for many companies and industries. A lot of the global economy fits here.
Or, you could work with international organizations and national politicians to achieve legislation and regulation that might impact all those in your sector evenly. The problem is that it is virtually impossible to coordinate a coalition of industry stakeholders to pursue “just right” rules when many will try to defect politically - convincing politicians to abandon regulation or to provide carve-outs that benefit them. This is particularly true when the industry cuts across national boundaries.
A third path is to lead by example and simply hold yourself to a higher standard. Of course, choosing to make yourself less competitive is usually not popular with shareholders. And if your competitors don’t do the same, the industry PR challenge hasn’t been resolved.
In the case of the mining industry, a fourth model has emerged: A high-quality enhanced-standards model. As I’ve dived deeper into political deadlock and weaponization of the legal system, I’ve been looking for examples of alternatives to traditional political structures that have proven successful so we can understand what the future might look like. The International Council on Metals and Mining (ICMM) provides one model.
This week, I sat down with ICMM’s CEO Rohitesh Dhawan to understand how the organization has corralled the top mining firms in the world to agree to more sustainable practices. Our video interview is below:
Elevating the Mining Industry
The stakes are high: The energy transition is going to require more copper to be mined in the next 30 years than has been mined in the last 5,000 years. Mining without guardrails can destroy natural environments and indigenous communities while also feeding a cycle of corruption and state capture. Yet, ICMM has been able to achieve striking successes, like voluntary restraints on mining in world heritage sites or agreement among members to publish all mining contracts with governments and all taxes paid on a country by country basis.
How do you build something like this? And is it a model for other industries?
First, you need to tackle a traditional collective action problem where it’s easier for companies to defect than to go along with higher standards. One way to get around this is to create critical mass in the industry toward change so that it’s costly for companies to remain on the outside. ICMM’s 24 firm membership represents roughly a third of mining industry revenue hailing from public and private sector companies in the US, UK, Peru, China, Japan and many other points on the globe. That’s enough to generate meaningful commitments that can create a gravitational force for governments to contemplate codifying the rules and for non-members to bear some cost for being on the outside.
Second, you actually need decision-makers in the room. For ICMM, that means that CEOs themselves are the members. The CEOs meet and discuss the future direction of the industry and where it could go. Rohitesh noted that the second most important person in the room is ICMM’s antitrust lawyer, who is there to make sure there’s no actual collusion, or any appearance as such given that some US politicians have been fighting back on ESG via antitrust threats (see GeoLegal Weekly #7 ESG End Times).
Third, you need to create a high but achievable bar for decision-making. For many years, ICMM operated under unanimity as a rule. Of course, this means fewer rules can be passed. Today, ICMM requires a 75% majority for decisions and then forces companies that don’t join to either get on board or issue a public explanation why they are objecting to a particular standard. That public justification is there to prevent accusations of greenwashing by holding accountable their own members when they choose not to be onboard.
Finally, you need high standards for membership. Many industry groups are “broad churches” - they take on their own inertia driven less by impact and more by fees and, thus, welcome members of all stripes. For ICMM, they accept about 10% of applicants and only those that can document clear performance on sustainability criteria before joining.
A broader model?
In a world where governments are less likely to agree on international treaties or agreements than ever before - and where national governments struggle to regulate because of political divisiveness and the likelihood of every regulation being litigated in court - this type of model makes a lot of sense. But in searching for parallels, it seems the imperative in mining - where social license to operate is critical - is unique.
It’s hard to find other industries that have something similar. I initially thought of the Recording Industry of Association of America’s Parental Advisory stickers on CDs (for those of us from that era) or the Motion Picture Association’s film rating system. But while that tries to address the problem of selecting appropriate content, it’s really about evaluating and marking the content, not actually changing standards of the industry.
For lawyers, the American Bar Association probably comes to mind first and foremost. But most licensing, certification and self-regulatory industry organizations are more about establishing minimum standards for entering or remaining in the industry than they are about elevating practices across the industry. While they may talk a lot about trying to do so, decision-makers are not usually the titans of industry binding their own companies - they are supervisory or advisory bodies making opt-in regulations.
Even CEO-led groups like the Business Roundtable function more to recommend policies and moderate stricter government proposals than to upgrade standards.
Perhaps a model in the same vein is the Fashion Pact, promulgated by former Unilever CEO Paul Polman and the CEO of Kering, which owns Gucci and other top labels. Similar to ICMM, the Fashion Pact claims one third of the industry and is CEO-led. Their focus, however, is on collaborative projects and innovation to help solve some of the tougher challenges in the fashion industry. For instance, 17 of the members have launched a joint project to develop alternatives to plastic garment transportation bags.
What do you think about this type of model? Are there industries or organizations making meaningful progress via self-standardization?
In Other News
Iran and Israel Tensions - I’ve been pretty negative on the Middle East spiralling out of control and here we are. Foreign embassies are calling on their nationals to leave Lebanon and the Israeli government is preparing its emergency bunker for longer-term occupation. The current situation is bad but structurally similar to when I wrote about the Middle East going off the rails a few months ago. You can refresh here.
Market Meltdown - This week has been wild if you have exposure to the financial markets or perhaps get paid partially with public company stock. Coming at the same time as Middle East tension ramp up, a casual observer might think this is a geopolitical discount to asset prices. That’s not the case. A lot of the market momentum is from the unwinding of carry trades (where hedge funds had been borrowing money from countries where money is/was cheap like Japan and investing in higher-yielding places, giving them significant currency and interest rate risk exposure.) Threats of looming war don’t help things but my decades as a geopolitical analyst for the financial industry underscored that market participants are way more focused on rates and economic data than politics - until the guns and missiles are actually fired.
Justice Gorsuch’s New Book - Agree or not with his formal opinions, Justice Gorsuch’s personal opinions on the role of law in society are particularly interesting. David French sits down with Justice Gorsuch for a must-read interview in the New York Times. As I spend a lot of time contemplating an erosion of law, it will be interesting to digest his view that the US is “over ruled,” which is also the name of his book released yesterday.
Kamala Harris Chooses Governor Walz for VP - Harris’s momentum has been sustained and she’s now outpacing Trump in some key polls - an effect I expect to be amplified as she continues to own the news cycle in August through the nomination of her VP and the Democratic National Convention. Walz is a safe choice - he has an interesting bio, is progressive enough to get Democrats mobilized and is a plain-speaking midwesterner who can potentially draw a contrast to the MAGA crowd, which Democrats are attempting to troll as simply “weird.” In reality, all news around the VP choices is either anticipatory (who will it be?) or negative (can you believe Sarah Palin/JD Vance/Joe Biden said that?). A safe VP choice doesn’t make news and I suspect that’s where Walz will be.
Bangladesh Leader Flees - In another “it must be 2024” moment, protests manage to dislodge Bangladesh’s authoritarian leader of two decades after she tried to violently crush student protests. Microcredit innovator Muhmmad Yunis, who had faced legal trouble under the prior government, is due to be the caretaker leader.
That’s it for this week.
-SW