Sustainability, responsibility and, more recently, ESG are hot topics in the mining industry. In a recent interview with Mark Sitter, Vice President, Sustainability, for the Lundin Foundation, we discussed ESG’s role and current state in the industry, the importance of having a robust plan, and some tips for creating a plan. He leads the Foundation’s work with several Lundin-owned mining and energy companies.
It’s widely recognised 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 asked Mark about the different ways companies can – and perhaps should – approach ESG.
1 | It’s 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 prioritising 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 scrutinised closely by investors, following catastrophes in recent years.
There’s growing pressure on companies to demonstrate compliance with the 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, COVID-19 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 don’t focus on ESG are putting their long-term competitiveness at risk. What are the ways that the ESG proposition can create value for 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 customisation, 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 aluminium 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:
Map out a multi-year process
This is your roadmap to develop an integrated ESG strategy and disclosures – that should align with your business objectives, international standards and organizational culture. Make sure your approach is something that executives and the Board can relate to; generally speaking, evolution is better than revolution.
Take stock of what you’re already doing
What’s your current state? Whether or not you have formal ESG management systems in place, chances are you already engage with local stakeholders as part of your exploration program, you have safety measures in place for workers, and you’re taking steps to avoid any social and environmental impacts with your work. You can build some early momentum by packaging and communicating these things to investors. Be sure you’re walking the talk. A common pitfall is the desire to overstate the effectiveness of your ESG approach; that could amount to greenwashing and affect your credibility and authenticity with the market.
Map your stakeholders and priorities
Once you understand your current state, identify and map all your stakeholders – not just the investment community. And, as part of that exercise, give thought to their ESG concerns. There’s a lot of free, online information about how to do stakeholder mapping; you don’t need to bring in an expensive consultant to do that work.
Once you have a stakeholder map, you can conduct what is called a “materiality assessment” to identify and prioritize ESG topics that are material to your business and your stakeholders. The results show you what to focus on. Again, there is a lot of free online guidance on how to conduct a materiality assessment – SASB and the Global Reporting Initiative (GRI) lay out their methodologies on their websites.
It’s important to remember that materiality assessments are not static exercises; they should be revisited every year or two. And they’ll get better and more rigorous over time, so it’s okay if your first assessment cuts some corners and is based on a lot of assumptions. You have to start somewhere.
Once you have identified material ESG topics, have structured conversations internally to identify ways of addressing them in line with your corporate objectives. And then embed your approach into your management, budgeting and planning systems.
That involves developing or refining policies, procedures and processes, and setting targets and key performance indicators (KPIs) for reporting and continuous improvement. When you’re building the systems, targets and KPIs, you should consider which voluntary good practice standards you want to align with, as there are many. For a junior exploration company, for instance, a good starting point is the Prospectors and Developers Association of Canada (PDAC), which has a good practice guidance booklet for ESG topics on its website.
Create accountabilities and champions
It’s important to assign responsibilities and accountabilities to make sure your planning process gets carried out effectively. I don’t think you need to hire an ESG manager right away. Responsibilities and accountabilities can be shared among the management team. And try to involve both site and corporate personnel, to ensure there is alignment.
The importance of site-corporate alignment on ESG cannot be overstated – and it requires a lot of work. Make a point of engaging early with key supporters and naysayers and find those champions to foster a common ESG culture. To set the tone from the top, have the process driven by the C-suite and overseen by the Board of Directors.
You’ll also want to define a broader internal engagement plan for buy-in and awareness building among all employees and contractors, as well as an external communications plan for sharing your ESG approach and performance with the market and other stakeholders. Involve your CEO in this effort.
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 noticed.
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.