Why Mining Companies Should Care About ESGThursday, April 15, 2021
Sustainability, responsibility and, more recently, ESG have been “buzzwords” in the mining industry for a while.
Mark is the Vice President, Sustainability, for the Lundin Foundation, which supports the Lundin Group of Companies with corporate-level environmental, social and governance (ESG) advisory services and site-level community development programming. He leads the Foundation’s work with several Lundin-owned mining and energy companies of different levels of maturity. Mark has more than 20 years' experience in complex corporate, operational, and project settings in North America, Latin America, Africa, and Asia, in sustainability, government relations and communications. He received the "Canadian Young Mining Leaders" Award from the Canadian Institute of Mining, Metallurgy, and Petroleum to recognize his achievements and potential.
This interview discusses ESG's role and current state in the industry, the importance of having a robust plan, and some enriching tips for creating a plan. Today, the mining industry continues to battle the Coronavirus and its implications on the health and safety of everyone – collaborators, communities, contractors, and other stakeholders. Additionally, in recent years, the industry’s actions – or inactions – have led to high-profile tragedies, such as Vale’s tailings dam disaster in Brazil and Rio Tinto’s destruction of ancient rock shelters in Australia. Companies clearly must do better if they want stakeholder trust and a viable business over the long run.
Sustainability, responsibility and, more recently, ESG have been “buzzwords” in the mining industry for a while. It is widely recognized that ESG planning is fundamental for reducing risks to people and the environment within a mining setting. More recently, ESG has become an important criterion to evaluate the management and performance of companies. We would love to hear from you about different ways companies can – and perhaps should – approach ESG.
1 | It is noticeable that investors are raising expectations for how companies operate. What are the ESG topics of growing interest to investors?
For anyone – even those of us who follow this space – it’s hard to keep up with all the emerging ESG topics that investors are interested in. The pace of at which investor interest in ESG has been growing in the last couple of years is quite remarkable. In any case, let me name a few ESG topics that have a broad spectrum of interest:
For Environment, climate change continues to be THE leading investor topic – and it’s still gaining momentum. Investors are divesting from companies with large carbon footprints or that aren’t prioritizing climate change adaptation, management and planning. Climate concerns are generally targeted at operating companies, as they produce the most emissions. Voluntary disclosure frameworks – especially the Taskforce on Climate-related Financial Disclosures (TCFD) – are becoming table stakes for all publicly traded mining companies. In addition, investors are showing a growing interest in understanding how development-stage juniors approach this topic, in terms of assumptions from technical studies, project design considerations, trade-off analyses, proposed energy sources, transportation emissions, etc. Mining sites are heavily regulated, and companies understand the importance of managing their direct operations-based environmental impacts – tailings, waste, air, emissions, etc. Tailings management in particular is being scrutinized closely by investors, following the catastrophes in recent years. There’s growing pressure on companies to demonstrate compliance with the recently launched Global Industry Standard on Tailings Management. There’s also a growing interest for companies be more involved in managing environmental aspects beyond the mine footprint, such as biodiversity and the watershed. Some miners have been doing this well for years, others haven’t. Investors are starting to push this issue. For instance, on the heels of the growing acceptance of TCFD, the investment community is developing the Taskforce on Nature-related Financial Disclosures (TNFD), which will focus on setting requirements for the management of ecosystem services related to biodiversity, land and water, primarily.
For Social, as you mentioned, COVID-19 is a global crisis, which has put a spotlight on the “S” in ESG. Expectations around social topics are set to grow. The topic that is top of mind for investors is Diversity and Inclusion (D&I), especially since certain D&I requirements are being regulated by stock exchanges. But it’s one thing to have at least 30% of your board being female, and another to have a workforce that is truly representative of society, especially in a male-dominated industry like mining. Plus, with the momentum of Black Lives Matter and other activist movements, there’s a lot more to come. Related to D&I is human rights, which has been on the radar for a few years, but traditionally pushed by certain pension and faith-based funds. Now it’s becoming more mainstream, especially vis-a-vis Indigenous rights, child labour, community health and safety, and artisanal mining.
As for Governance, it’s really about greater transparency on all material ESG topics and being able to demonstrate that you have plans and systems in place to address them. There’s also been a lot of movement from “voluntary” standards to “regulatory” requirements. Every few weeks it seems, there are headlines coming from governments and stock exchanges around the world, putting in place tighter ESG regulations for listed companies. Clearly, the universe of ESG topics is vast. You can easily get lost in it. For listed mining companies of any size an important starting point is to understand who are your current and target institutional investors, what are ESG topics they care about, and how do they evaluate those topics. For instance, they may use certain ESG ratings agencies or only consider disclosures aligned with the Sustainability Accounting Standards Board (SASB), TCFD, or something else. In any case, understand your investor audience and build out your approach for engaging with them from there. You want to be focused, so your efforts support corporate strategy as tightly as possible.
2 | Studies show that companies that do not focus on ESG are putting their long-term competitiveness at risk. What are the ways that the ESG proposition can create value for the companies?
At the asset level, mining companies generally understand the value of ESG. It might be more palatable to call it HSEC (Health, Safety, Environment and Communities), which is an operations’ term framed around functions and accountabilities. Safety, for instance, has been the top priority in the industry for decades. Environmental regulations are becoming more stringent all the time. And consulting with stakeholders and resolving community conflicts are essential. There’s a lot of practical experience managing HSEC risks at site, and operators understand the financial, operational and reputational consequences of failing to do so.
I think the bigger opportunity for value creation is to embed ESG in corporate strategy. Many miners “do” a lot of this stuff – and benefit from it – but they often don’t frame it around long-term corporate goals and targets; it’s more about mitigating risk than facilitating growth.
Here are a few opportunities to leverage ESG for creating business value for corporates:
Access to capital | Effective ESG increases your pool of potential investors, as many now have clear-cut ESG screening criteria for investment decisions. Same for lenders. Most companies look to debt financing to develop projects. Complying with the IFC Performance Standards for Environmental and Social Performance, for instance, helps to de-risks your project, making it more attractive to a wider array of banks and often resulting in a preferential interest rate. The same logic can also be applied to insurers – if you demonstrate that you can manage your ESG risks well, your insurance rates will go down.
Access to resources | Social license matters. Host countries and communities will look at your track record. If you have a bad reputation, stakeholder criticism will present a risk that creates problems for securing permits and licenses, acquiring land, accessing water, etc. ESG done right can be a competitive advantage and a differentiator. For instance, we position our award-winning ESG work with Lundin Gold in Ecuador as part of the Lundin Group’s standard approach when we engage with stakeholders in other Latin American countries where Lundin companies are developing projects. It’s always well received; and right now we’re working on scaling some of these established community development programs for implementation in Argentina and Guatemala – with customization, of course.
Access to customers | Responsible sourcing is another important trend. This has taken off in the last few years. Companies like Apple and Tesla have ESG requirements for their entire supply chain – all the way to the mine site. It’s all about traceability and transparency. And they conduct third-party reviews at mine sites to qualify their customers. If you don’t meet their requirements, they will not buy your metal. And you may have to sell to secondary markets at a discount. On the flip side, you’re starting to see companies that have very strong ESG performance sell their products for a premium – like carbon-free aluminum or copper. There’s an opportunity to leverage ESG to enhance marketing, sales and pricing of products.
3 | Some companies operating in the junior space may not have a dedicated ESG function. How can these companies start developing and implementing an ESG plan?
Juniors generally don’t have the resources or activities to merit a large and complex ESG strategy. So start small. Remember: ESG planning is a journey that’s iterative and gets better over time. Here are some thoughts on what that process should consider:
All this can sound a little daunting. But, as I said earlier, start small; it’s iterative. Set out a multi-year process – keep things practical and don’t bite off more than you can chew. Execute and do what you can to build buy-in and momentum, and, if possible, get some quick wins.
4 | Typically, Large Cap companies do better when it comes to the visibility of their programs in sustainability. What can Small Caps do to get noticed by the ESG ratings’ agencies or be included in ESG indices?
More and more, investors of all stripes are leaning on ESG rating agencies – expert third parties that assess and rank company ESG performance, especially related to climate change. And the weight associated with this rater input on investment decision-making is increasing.
It’s important to point out that certain raters and indices – such as the Dow Jones or FTSE – only cover Mid to Large Caps, so even if you’re a Small Cap with great ESG performance, there are some systemic limitations to getting notice. It’s also worth mentioning that Small Caps come in all shapes and sizes and have different levels of maturity when it comes to ESG. All that aside, there are definitely a few things Small Caps can do to get noticed. First off, make sure your house in order and that you are working on an ESG strategy, a management system that incorporates international standards, and high-quality disclosures. As part of your strategy, you could set a mid-term target to be covered by certain raters or listed in certain indices, or a target for a particular score or ranking you’d like. Be aspirational but also realistic. Don’t focus on anything that is exclusive to Large Caps. A feasible starting point would be to focus on the raters that your investors – or target investors – care about – MSCI, Sustainalytics, S&P, Refinitiv, etc. And be prepared to put in the time and effort to achieve your targets.
Then you should reach out to those raters and indices. Some have surveys, others rely on company disclosures and stakeholder input. It takes time – many conversations and emails – to address their concerns and position your company well vis-à-vis their assessments. You will have to spend time chasing down or clarifying data internally, as well. Some indices and raters have a pay-to-play requirement to access their tools, others offer consulting services at a cost to help you improve your score. But, generally, costs – if there are any – aren’t that significant, and if you put in time, experience shows you can move the dial and improve your company’s score and profile.
My only word of caution here is to be careful that the tail doesn’t start wagging the dog. You can go down many rabbit holes with rating agencies and indices. Be sure that your ESG strategy remains focused your company’s priorities, without inadvertently skewing it towards something that isn’t a material concern, just to check a box.
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