‘Red Sludge’ Wake-up Call for Investors and Financial Institutions

Kolontar, Hungary, inundated by the tide of toxic sludge now heading down tributaries of the Danube. Photo credit: WWF Hungary

Hungary’s toxic ‘red sludge’ is a stark reminder of why mining companies need to better disclose their water-related risks.

On October 4th, the wall of a wastewater reservoir for the Ajka alumina processing plant broke, sending 35 million cubic feet of corrosive ‘red sludge’ downhill into nearby villages and ultimately the Danube River. This ecological disaster has claimed eight lives and devastated many more by destroying homes, livestock, and crops. Meanwhile workers are rushing to build emergency dams to stem a second flood that is expected to occur should another wastewater reservoir wall collapse.

This ongoing situation is the latest reminder of the environmental risks associated with the thousands of hardrock metals and minerals operations around the world. The site in Hungary was listed as “risky” by an environmental non-governmental organization in 2006, yet this warning did not spur the type of response required by regulators and corporate executives to prevent the flood. Last summer the same type of disaster struck at a copper mine in southeastern China, where 2.4 million gallons of waste water laced with acidic copper spilled into the Ting River.

Toxic Spill near Ajka, Hungary. October 9, 2010. Photo credit: flickr/DigitalGlobe-Imagery

The impacts of mining and metals activities on water supplies can be catastrophic, yet as a recent paper from WRI concludes, companies may not be fully disclosing these risks.

Unreported Risks

“Mine the Gap” points out major shortcomings in current water risk reporting in the mining sector that contribute to an inadequate understanding of the water risks involved in mining. As a result, investors and financial institutions can pay the financial consequences when disaster strikes.

To address these shortcomings, Mine the Gap presents a preliminary framework that the financial community can use to assess water risk, including a series of questions for mining companies about their water use. The framework offers a way towards a more complete understanding of a mine’s exposure to water related risks, thereby helping investors and financial institutions make more informed investment decisions that can be better for their bottom lines and the environment.

A Role for the Financial Community

The next step in WRI’s ongoing effort to understand and quantify the complexities of water risk is the forthcoming release of a prototype Water Risk Index. The Water Risk Index pulls together various data series to generate maps that highlight where and how water issues can pose financial risks (and opportunities) for companies. This will provide an essential geographic-specific context to understand where water risks are greatest.

The mining industry will face increasing water risks in the future as water resources become scarcer in many mineral rich regions, competition for water supplies increases, and the industry itself requires greater water withdrawals because of declining ore quality.

The financial community has an important role to play in encouraging improved water disclosure in this sector. By engaging with mining companies about their practices and supporting broad-based initiatives to improve water disclosure, investors and financial institutions can work with the industry to fully understand and report water risk in the future.

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