The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Inequality and environmental activism drive the rise of a new left in Latin America

Economic fallout from the pandemic, unmet social demands and upcoming elections in several countries have exacerbated Latin America’s already volatile political landscape

An extended version of this article can be found here.

By Caitlin Purdy, Senior Associate

Demands for economic and environmental justice will drive new risks and opportunities in Latin America’s natural resource sector

Latin America is facing economic fallout from the Covid-19 crisis while simultaneously struggling to address demands around reducing inequality, improving public services, and reducing corruption that emerged in the pre-pandemic wave of unrest. New governments took office this year in Ecuador and Peru, while elections are on the horizon in Brazil, Colombia, and Chile, among other countries. The political landscape remains volatile, with high levels of dissatisfaction pushing voters to extremes on both the left and right. This article explores three trends shaping the risk and opportunity landscape for Latin America’s natural resource sector. These include:

Latin American politics are up in the air

  1. Governments are rethinking fiscal regimes. States’ finances are strained by high levels of public debt, leaving little room to respond to electorates’ demands around increased social spending. This – combined with companies’ record-high profits and hopes of a ‘green’ mineral boom to fuel the energy transition – is driving a regional push for tax equity.
  2. The ‘Ecological Left,’ a new generation of leftist politicians, is less comfortable with the social and environmental trade-offs required for natural resource development and actively exploring alternative economic models. With the resource sector’s environmental and social performance in the spotlight, even some right-wing governments have become uneasy about approving controversial projects.
  3. The energy transition may intensify legal and reputational risks. The mining sector often thinks about its role in the energy transition in positive terms, but the downside risks are increasingly apparent. Companies in Latin America are already the target of high levels of global civil society activism and litigation. Increased extractive activity in the global south – and the perceived social and environmental harms associated with this – to fuel a ‘green’ transition in the global north will only intensify this.

However, this context presents new opportunities to address long-standing challenges. Firstly, in order to navigate this fast changing environment companies will need to ensure they have devoted adequate resources to understanding how the political context is shifting, particularly by looking outside their traditional political and social networks. Second, companies will need to ‘grasp the nettle’ and be active and collaborative participants in shaping new tax regimes that are perceived to provide a fair share of revenues to all stakeholders, particularly in high price environments. Simply opposing tax rises will likely be counterproductive and lead to firms being targeted by governments. Finally, executives will need to place ever greater weight on early and sustained engagement with local and regional stakeholders, including developing innovative models for benefits sharing based multi-stakeholder participatory processes (for further details see Critical Resource’s 2020 article ‘The social license to operate in a new era of inequality’). Finally, they can take steps to ensure the energy transition does not consolidate longstanding global inequalities, such as by supporting governments’ ability to affordably access essential ‘green’ minerals and supporting, where feasible, climate resilience initiatives in host countries.

Cash-strapped governments are pushing for a greater share of companies’ record-high profits

The macroeconomic outlook in Latin America is challenging. Demands for increased social spending persist but governments desperately need additional sources of revenue and have few places to get it. Intensifying calls for broad tax reform and governments’ desire to cash in on ‘green’ minerals – coupled with the mining sector’s banner financial performance – will almost inevitably mean higher taxes.

Governments dig for riches

  • Changes to fiscal regimes for the natural resource sectors across the region are highly likely in the short to medium term for several reasons. First, countries are facing general calls for tax reform. The region saw intense protest in late 2019 and early 2020 as citizens expressed outrage with the quality of public services and growing inequality. The pandemic has made these challenges even more difficult to address, intensifying demands while straining government finances. The Pandora Papers have further fuelled calls for reform, drawing fresh attention to longstanding issues of tax evasion.
  • Secondly, companies are likely to find it difficult to convince governments they cannot afford tax increases. The region plunged into debt during the pandemic, with public debt levels now at almost 78% of GDP.[1] In 2020, Latin America’s household wealth per adult dropped by over 11% and 22 million additional people fell into poverty.[2] Meanwhile, the mining sector globally enjoyed a banner year in 2020. Revenue was up 4%, net profit increased 15%, and cash on hand rose 40% compared to 2019.[3]  PwC forecasts that the largest 40 mining companies will report record-high revenue and EBITDA and the second-highest net profit in the 18 years it has been keeping track.[4] Dividends returned to shareholders are poised to hit all-time highs.[5] Miners are asking what to do with extra cash and governments have the answer: pay more taxes.
  • Thirdly, fiscal regimes are in some cases outdated and ill-suited to enable governments to capitalise on ‘green’ or ‘low-carbon’ minerals, those likely to see increased demand in the energy transition. In Colombia, where the royalty rate varies by commodity, coal is subject to the highest rate and gold the lowest. There is considerable debate regarding to what extent governments should reorient their fiscal policies in this context. However, for the time being, governments appear to be responding to price spikes with tax hikes. Copper – which contributed US$122 billion to group revenue at the largest 40 mining companies and is forecast to see price increases of 40% by the end of 2021[6] – has been a particular target, with tax increases pending in Chile, Peru and Panama.

Political shifts on the left are putting the sector’s environmental and social performance in the spotlight

Latin America’s political Left has reoriented towards social and environmental struggles, marking a break with the Pink-Tide-era focus on more classically leftist redistributive policy programmes. This is shifting the political context for natural resource development, with even right-wing governments more anxious about the trade-offs between economic growth and social and environmental protections. Development-stage projects increasingly face the risk they will stall – or be axed altogether – due to their perceived impacts.

  • The vanguards of the region’s new progressive wave are ideologically distinct from previous generations of leftist leaders, as focused on strengthening social and environmental protections as on the redistribution of capital. The ‘Pink Tide’ presidents of the 2000s and 2010s relied on revenues from natural resources to fund ambitious social programmes. The new Left is less comfortable with the environmental and social costs of development, particularly in the context of climate change, and has been more active in seeking out economic alternatives to mining and oil and gas.
  • As a result, the new left – sometimes called the ‘Ecological Left’ or the ‘Environmental Left’ – has a much more fraught relationship with the natural resource sector. In Ecuador, leftist indigenous party Pachakutik, a leftist, anti-extractive alternative to correísmo, gained 23 seats in the National Assembly, winning a total of 27. In Colombia, leftist presidential candidate Gustavo Petro, currently leading ahead of May 2022 elections, has previously advocated banning all extractive activity. He has floated a range of alternative revenue sources, including tripling tourism from five million to 15 million visitors per year and using hydroelectric power to mine Bitcoin.
  • With social and environmental issues in the spotlight, even the political right is taking a more cautious stance on the natural resource sector. In Chile, Sebastian Sichel, presidential candidate for the governing centre-right Chile Vamos (Let’s Go Chile) coalition, has been critical of mining on the campaign trail. In Colombia, the environmental authority shelved Minesa’s application for its Soto Norte gold project in the Santander department in October 2020, despite the right-wing Duque’s administrations aims to develop copper and gold projects.
  • However, the political landscape remains volatile and it remains unclear to what extent the Ecological Left will be an enduring political force, as well as how effective it will be, particularly as dissatisfaction with governments continues to push voters towards extremes on the left and right. In Chile, the leftist, anti-establishment Lista del Pueblo (The People’s List) – the organisation emerging out of the 2019 protests – was widely anticipated to act as a champion of social and environmental rights in the constitutional convention. However, it proved to be a short-lived phenomenon, imploding amid a series of high-profile scandals in August and September 2021. Meanwhile, right-wing independent candidate José Antonio Kast is polling second ahead of presidential elections, buoyed by a recent unexpected surge. In Argentina talk show host turned anti-establishment politician Javier Milei, who describes himself as “philosophically an anarcho-capitalist,” looks likely to make in into the legislature and reportedly aspires to the presidency.

The energy transition may create new legal and reputational risks

There is growing concern among civil society about the ways in which the energy transition could exacerbate global inequities, including by increasing demand for natural resources and intensifying the perceived social and environmental harm associated with extractive activities, particularly in the global south. As the conversation around the transition and the trade-offs it requires evolves, companies may be forced to confront an onslaught of new legal and reputational risks. Those in Latin America will inevitably find themselves in the crosshairs of this debate given the continent’s store of ‘green’ minerals.

Reputations are on the line

  • Coordinated global civil society campaigns seeking to draw attention to the private sector’s environmental and social impacts are gaining momentum and increasingly taking legal action to target companies in both their home and host jurisdictions. In 2021, the Paris-based International Federation for Human Rights (Fédération internationale des ligues des droits de l’homme, FIDH) and its member organisations announced the #SeeYouInCourt campaign, a coordinated, global campaign of legal actions targeting multinationals alleged to have violated the human right to live in a healthy environment. The campaign’s first five actions all target companies operating in Latin America and four of the five involve the natural resource sector. The campaign has attracted considerable attention from prominent figures on social media, including Greta Thunberg.
  • The energy transition could attract increased scrutiny to natural resource companies in two ways. Firstly, any reputational benefits accrued via contributions to the ‘green’ economy are likely to be offset if green minerals projects are consistently besieged by local conflict and opposition. Latin America has one-quarter of the world’s known copper reserves, over half of its lithium reserves, and over one-fifth of its iron ore reserves. The region also faces high levels of conflict around natural resource development, notably copper in Peru and lithium in Argentina and Chile.
  • Secondly, the push for ‘de-growth’ (the idea that the only way to address the climate crisis is to dramatically reduce levels of economic activity and use significantly less raw materials) is increasingly working its way into anti-mining debates. There is growing discomfort over the quantities of green minerals needed to facilitate the energy transition globally and the increases in extractive activity this will likely necessitate. Indeed, the European Union (EU) Green New Deal has faced intense criticism from civil society along these lines.

[1] Financing for development in the era of COVID-19 and beyond, Economic Commission for Latin America and the Caribbean (ECLAC), 2021

[2] Social Panorama of Latin America 2020, Economic Commission for Latin America and the Caribbean (ECLAC), 2021

[3] Mine 2021: Great expectations, seizing tomorrow, PwC, 2021

[4] Mine 2021: Great expectations, seizing tomorrow, PwC, 2021

[5] Mine 2021: Great expectations, seizing tomorrow, PwC, 2021

[6] Mine 2021: Great expectations, seizing tomorrow, PwC, 2021