The mining, investment and ESG 101

Heightened focus on environmental, social and governance (ESG) issues has irrevocably changed the way that mining businesses operate over the past five years. Now regarded as the industry’s number one source of risk and opportunity, today ESG performance and compliance is a key factor in investment decisions.

But the landscape is evolving rapidly. Standards, of which there are an ever-growing number, are changing. There is new information and guidance coming to light every day along with an avalanche of acronyms and bewildering terms, like ‘greenwashing’.

Organisations are struggling to find the talent and resources needed to keep up with current stakeholder requirements, let alone prepare for future ones. “It’s like trying to drink from a fire hydrant,” one industry insider told me recently in a horrible but accurate analogy.

Whether we like it or not, ESG is now everyone’s concern. To better understand it’s importance from the operations level all the way to the boardroom, it’s helpful to know how ESG influences the way in which money flows to and from mining companies.   

In my experience, if you want to better understand a subject, you ask experts. And I was fortunate that Elizabeth Freele, Managing Partner at ESG consultancy and think tank, Sympact, and Kevin PCJ D’Souza, Chief Sustainability Officer for Resource Capital Funds, a  mining-focused alternative investment firm, answered my call.

Both are respected ESG professionals and, in previous roles, have sat on the operational side of the equation.     

ESG disclosure: what, why, how?

Let’s start at the very beginning (a very good place to start). “What is ESG disclosure, and what does it mean to the mining industry?” I asked both Freele and D’Souza.

“To disclose is to share information, usually in the form of a report,” Freele explained. “In this case, it’s a way to share information on a mining company’s ESG risks and opportunities and the way in which they’re managed with stakeholders. It’s not synonymous with sustainability – that’s something that gets confused a lot.

“The majority of investors – around 70%, depending on the jurisdiction – now consider ESG information to be an important factor in their decision making. Many investors will either not invest or will divest if they don’t see sufficient evidence indicating that ESG risks are being managed.”  

“ESG reporting is incredibly important, but it isn’t a proxy for true performance or genuine progress,” D’Souza cautioned. “Strong, sustained ESG performance at mine sites is what underpins credibility; that’s what drives value, and savvy investors will look way beyond what’s included in a report as part of their due diligence.”

There are concerns amongst ESG professionals that an overt focus on reporting may actually be hindering ESG progress, especially in the junior side of the market, because reporting consumes a lot of bandwidth and can detract from important work on the ground.

For both Freele and D’Souza, this is a source of frustration. “I’ve seen company after company channel resources that ought to be put towards ESG projects on the ground, into reporting instead,” said Freele. “It’s a waste of internal resources.”

D’Souza agreed: “We need to encourage companies to focus on site-based performance first and foremost, then use the data that generates to produce reports that convey real, measurable impacts,” he said.

“At the moment, very little reporting considers true double materiality; companies tend to focus on risks to their operations from the community, rather than on risks to the community and environment from their mining operations. That needs to change going forward.”

While risk management is an important aspect of ESG performance and disclosure, investors are also focusing on the associated opportunities.

When managed properly, ESG is a vehicle through which mining companies can create value and thus, a better world. For example, through enhancing the biodiversity on land that they manage, or providing support for small businesses so that local economies thrive, both during and after extraction.

Which standards?

Today, there are lots of different ways that ESG disclosure can happen. The most common is through reporting against one of the mainstream voluntary standards and frameworks like those from the Global Reporting Initiative (GRI) or Sustainable Accounting Standards Board (SASB).

“The GRI has been around for 25 years, and that standard is focused on the way that companies impact the environment and society,” said Freele. “SASB is about 10 years old, and it’s focused on the risks and the opportunities that affect enterprise value, making it the investor favourite.

“The Taskforce on Climate-related Financial Disclosure (TCFD) is another important framework. That was introduced in 2018, and we’ve seen a 5x increase in adoption since, because climate change is the hot ESG topic of our time.”

There are also industry-level frameworks that are attached to performance standards, which are different from reporting standards. A good example is the International Council on Mining and Metals’ Mining Principles or the Mining Association of Canada’s Towards Sustainable Mining framework. Then there are supplier-led frameworks, like, The Copper Mark.    

“I think we’ll see some convergence in standards over the next decade, or hopefully sooner,” said D’Souza. “That’s important because it’s very difficult today for miners to know which standards to align with and what information to disclose in each instance.

“Too many companies are being advised to align with a specific standard because that’s what their peers are doing. Companies must take a step back and figure out their own ESG journey. Understand each stakeholder group and what they deem important, then decide which performance standards are relevant to them.

“For example, I’ve never known a community turn against a mining company because they’re not TCFD compliant, but they will if that company isn’t making measurable ESG improvements.

“Some OEMs and consumer companies also have stringent rules about the provenance of the minerals they source through offtake agreements with mining companies. Again, those requirements might dictate which standards miners align with.”

Challenges, today and tomorrow

It’s one thing to ask for information, but it’s another to know what to do with it. The sheer quantity of data included in ESG reports means that not all of it will be (jargon coming up) ‘decision useful’ to investors.

This is partly because many investors have never lived ESG at an asset level – they’re doing their best to make informed choices based on a limited understanding. Also, numbers are the language of investors, and certain ESG themes, like social risk, can be challenging to quantify.

Both Freele and D’Souza pointed out that today, most ESG reporting is done on an annual basis. This means that, by the time it reaches investors, the information could be anywhere from five to 18 months old and therefore has limited use.

Some companies are moving towards quarterly, monthly and, eventually, perhaps even real-time reporting, but more reporting requires more time and resources.

“Some companies now release ESG data or fact books to supplement their traditional report. That’s specifically for investors and analysts and is sometimes updated more frequently,” said Freele. “But the technology is available for real-time reporting today, if companies are willing and able to invest in it.

“For instance, air quality monitoring data is already available on some company websites for community members as part of their social licence efforts. So, in theory, the industry could move in that direction, and it likely will in time.”

Self-reported data of any kind, comes with the risk of bias and human error, some of which are wilful, some accidental. The mining industry, like many others, is currently awash with accusations of greenwashing (the exaggeration of a company’s environmental credentials).

But incidences of green lighting (only highlighting positive data while neglecting the rest) and green hushing (avoiding publicising performance in a certain area to avoid scrutiny) are also on the rise.

To combat this, there is a growing expectation of third-party assurance. For example, ratings and rankings agencies will award more points if a disclosure has been third-party assured, and that incentivises companies to verify their data.

“Company credibility depends upon their transparency,” said D’Souza. “It’s important that miners take control of this. Investors link authentic ESG performance to the value of businesses. They cannot forecast value unless they can accurately assess the risks and opportunities.

“From a disclosure point of view, companies should focus on substance and strategy – not spin. They must demonstrate that they understand which issues are important to them and their stakeholders, and that they’ve modelled their material impacts rather than copying peers.”

The emerging practice of integrating alternative data into a third-party assessment of a company’s ESG performance is also heralding a new level of transparency that many companies are unprepared for.

For example, in addition to a company’s self-reported data, an investor or ratings agency could monitor and analyse community sentiment on social media, or use satellite earth data to check the accuracy of emissions or effluent data.

It’s radical, and whether mining companies embrace it or not, this publicly available information is going to force them to apply more rigour and objectivity to disclosure than they have historically.

Trending ESG topics

So which topics are investors most interested in today, and what will be important for them over the next 3-5 years?

First up is climate change, the omnipresent ESG issue of today and tomorrow. Issues like water scarcity are going to intensify over the coming decade and investors need to know how companies will adapt to mine with little to no water, and how projects sit within the broader context of a region.

It’s about ensuring true water stewardship, operational continuity, reducing the risk of disruption and safeguarding investments.

Corporate contribution to climate change mitigation is another concern. Various markets will soon introduce carbon taxation, and it’s important that miners understand what their economic contributions will look through a range of emission reduction scenarios.

“Increasingly, investors want to see companies quantify the potential financial impacts of climate matters – especially adaption and resiliency,” said D’Souza. “They’re also looking at where companies are diverting capital to investment in climate change for different mitigation pathways.”

Human rights is another hot topic as many key mining jurisdictions move to implement tougher laws on issues such as modern slavery. Biodiversity is also moving up the priority list following the introduction of the Kunming-Montreal Global Biodiversity Framework following COP15 in late 2022.

Diversity, equity and inclusion (DE&I) is another important subject; one to which the mining industry has paid lip service for some time, but the gains have been painfully slow, and incidences of bullying, racism and sexual harassment are still rife.

D’Souza explained: “DE&I is of growing importance to investors, but very few mining companies know what to do about it, and how to do it. It’s no use having just one woman sitting on the board. If an organisation has highlighted this issue as being important, then they need to be able to explain why it’s important, what their strategy is and how they’re going to measure progress.”

Freele agreed: “As investors start to understand the reality of the talent crisis, DE&I will continue to rise up the agenda. The mining industry can’t afford to keep missing out on the broader talent pool. Companies must widen the DE&I focus because, at the moment, it’s all about gender and that’s simply not enough.”

D’Souza added: “As investors, we’re aware of all these key themes and more, but every company is unique and therefore their ESG strategy, targets and reporting should be unique.

“It’s important that companies can demonstrate how ESG is driving value creation in their organisation, that they can operationalise ESG effectively, and that they can articulate their own ESG story.”

Building a transparent future

Whereas 10 years ago, ESG disclosure was considered ‘nice to have’ or a PR exercise, today, it lives well within the realms of fiduciary duty and is subject to litigation.

“ESG risk is now crucial to investor decision making, and it’s an increasingly important part of their obligations under evolving financial regulations,” said Freele. “Even if a mining company thinks it’s exempt from regulation, if they’re in an investor’s portfolio, there’s probably regulation emerging that will affect their investor and, therefore, it’s the miner’s concern too.”

Both D’Souza and Freele agreed that there is a burning need for more professionalism surrounding ESG disclosure in mining, and for more senior level and expert accountability in the management of sustainability issues, because the level of liability is exponentially bigger today than it was five years ago.

D’Souza added: “We need to see a significant increase in the professionalism and competency of boards and executives with respect to ESG coupled with the right company culture. As companies bring in more diversity of thought, as well as people with lived experiences of these issues, then we’ll start to see the needle move on ESG.”

It’s important not to underestimate the value of lived experience in ESG matters and sustainability risk; a competent boards certificate cannot replace operational and asset level experience about ESG risks and opportunities on the ground.

Given the rapidly changing landscape, companies also need to be focusing, not just on today’s disclosure requirements but on future readiness too.

“The mining industry is facing a talent crisis in ESG as in other areas,” said Freele. “We do not have enough industry experts on this topic, compared to what actually needs to be done. I would really encourage a focus on strategic capability building, seeking advisory support from specialists when you can’t hire them in-house, and fostering an inclusive culture to attract new skilled talent.”

D’Souza summed up the conversation perfectly. “The mining industry, as the provider of critical minerals for the energy transition, needs to reimagine itself,” he said. “If we really boil it down, ESG disclosure is a way to explain to investors how a company interacts with the world around it.

“The companies that can best articulate what they’re doing and why they’re doing it will be the mining companies that survive and are profitable into the future.”

Disclaimer: The information in this article does not constitute investment advice. Seek appropriate professional advice before making investment-related decisions.