There can be no denying that the single largest change affecting the corporate sector in decades is the rapid evolution of Environmental Social Governance (ESG) as a tool to measure both a company’s sustainability and its risk management. Higher rated ESG companies have, generally, outperformed and proven greater resilience to those that are not - the recent period incorporating COVID-19 has further demonstrated this.
The importance of minerals For years, the mining industry has struggled with its image; the narrative always defaults to the negative. However, the world is transitioning to a sustainable future and its success can only be accomplished with the minerals and metals that the industry produces.
There is no hiding that many issues need to be addressed and improved. Thermal coal, tailings dam failures, energy footprints of mines, child labour and many other topics can and must be tackled. But with a world encouraging transparency and the financial community now rewarding this as a differentiator, the mining industry could use ESG reporting as a means to start owning the narrative to show the many benefits of its products and the positive impact it can have on local communities.
A not so new initiative Socially Responsible Investing (SRI) reportedly dates back to the Quakers in the 1700s. It gained modern day momentum in the late 1990s but fizzled out until its recent and far more pronounced resurgence. Since the introduction of the Equator Principles in 2003, an increasingly structured approach to social and environmental commitments has been adopted with marked success by developing and producing mining companies. No mainstream debt provider is likely to approve lending without meeting these or similar key principles.
More recently, the growing pressure to address global warming and tackle other societal imbalances has spurred a new wave of sustainable investing. The adoption of the UN Social Development Goals in 2015 as the foundation of most ESG criteria, combined with the need for greater reporting under the Paris Accord, has formed the basis for today’s structure. COVID-19 has further enhanced this development as it is increasingly accepted that the virus is just a foretaste of greater disruption from global warming.
Change is here to stay Sustainable investing has now become mainstream, with $12 trillion under management with an ESG theme in 20181 and reported record inflows in 2019. Furthermore, the leading US and Asian ESG indexes have outperformed the normal indexes throughout the COVID-19 crises, adding further weight and increasing investor focus on “company resilience”.
Larry Fink, Blackrock’s CEO, warned in an open letter to corporate CEOs earlier this year that he expected a “fundamental reshaping of finance” which would lead to a “significant reallocation of capital in the near future” and “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”2
ESG, its culture, reporting and evolution is here to stay. Society has demanded it; furthermore, there is overwhelming evidence of lower idiosyncratic risk and improved performance for those companies that fully embrace it.
The mining industry is at the forefront of the raw material supply chain and has mines located in many disadvantaged areas of the world; so as well as its obvious environmental impact, it has an oversized level of responsibility to act. The benefit of sustainably-mined products, from electric cars to windmills, solar energy and even health, should and can be positively recognised.
The concern from parts of the industry has been that adopting ESG is costly. While short term adjustment and investment will no doubt add to costs, these could pay off in many different ways:
Evidence is now unmistakably supporting the proposition that higher ESG-rated companies experience lower risks and better risk-adjusted returns. This is likely to lead to lower cost of capital for those higher rated companies - or at least avoiding negative pricing for those perceived as higher risk assets/companies.
Many companies, from small explorers to large producers, have been practising ESG for decades; their license to operate is dependent on approved procedures from their host country. What is new is the sudden requirement to transparently report on many different metrics across multiple topics and, as such, to accept greater public scrutiny.
ESG reporting - the great conundrum If society is to achieve its goals and reap the true benefits of ESG, then a uniform approach to reporting is required. This is no different to the established concept of financial reporting except that no single framework fits all sectors (let alone sub-sectors) and in the case of mining, its own peculiarities.
With over 40 initiatives applicable to the sector3 let alone companies going alone with their own self assessments, appropriate comparability between companies is virtually impossible. As Adam Mathews, Director of ethics and engagement at Church of England Pensions Board said: “The lack of consensus on frameworks and methodologies means that it’s simply not yet possible, when investing across multiple asset classes”4. Standardisation of data, along with trust in the quality of the data, is paramount to success. If this can be achieved, applied to the 600+ operating sites globally with annual assessments, then this will drive performance improvements at scale.
Non-producing sector in need of help The existing frameworks, themselves failing to achieve uniformity, have been constructed for the purpose of producing companies and so ignore the 2,200 publicly traded non-producing mining corporates worldwide, despite them increasingly needing to engage in ESG reporting in order to access finance.
Non-producing companies (or juniors) are critical to the ecosystem of the mining sector as a whole; much of the reserve replacement of senior producers depends on successful exploration and development carried out by these groups. Exploration risk is baked into project development, so failing to address core competencies early on only raises risk in the future, whoever the owner. In addition, social and other environmental considerations take years to develop, requiring long term planning and engagement. Ethically-managed operations are a long-term commitment and require not only a structure but also an appropriate culture from early on.
M&A As part of the ecosystem, producing companies engage in strategic investments, joint ventures and takeovers of these juniors to support long term growth. Due diligence has now extended beyond geological resources, permitting, mine plan and financials to a thorough review of all ESG-related topics. There is increasing evidence that M&A will be constricted if risks have not been properly assessed and confronted. Why would a mining company that has worked hard on improving its credentials to its stakeholders risk this premium position through an ill-judged takeover of a junior?
It's not too late The speed and veracity of change flowing through the financial markets towards the adoption of ESG metrics as a requirement prior to investing has driven not only the producing companies but also the largest primary financiers, private equity, institutional funds and alternative lending groups to enforce ESG requirements on any potential investee company. While this remains unorganised at present, its importance has been demonstrated by an almost competitive approach in the current financing cycle with major foundations.
The goal of all the groups is to prove necessary due diligence has been achieved; this will prove the attainment of certain minimum requirements, a positive corporate culture to adopt ESG goals and a progressive approach to enhanced performance. Is it then not beyond imagination that the financial sector, along with the producers who need to encourage ESG adoption throughout the industry, can combine and set standardised frameworks for different sub-sectors of the industry? Failure to do so will only create unnecessary inefficiency within the financial groups and the wider sector as well as a more limited form of success in achieving the goals.
The emergence of ESG as a global theme is an unstoppable force. To fully benefit from this will require harmonised frameworks, together with independent and rigorous scoring that can identify lack of progress, raise awareness and effect change. Achieving this will have the additional benefit, unique in its scale to the mining industry, of winning the hearts and minds of society.
The mining industry is well known for its slow uptake of new initiatives. The longer it takes for producers to align themselves to a single framework, the greater the number of wasted days - this new means of communication is a golden gift, not to be wasted.
Jamie Strauss is the founder of Digbee, a fintech data and research platform dedicated to the mining industry, providing cost effective appraisals of complex mining studies through its extensive expert network of mining professionals. jamie@thedigbee.com
1 https://www.ussif.org/files/US%20SIF%20Trends%20Report%202018%20Release.pdf 2 https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter?cid=ppc:CEOLetter:PMS:US:NA&gclid=EAIaIQobChMI0bqUxvyD5wIVCr7ACh3Taw9aEAAYASAAEgKSP_D_BwE&gclsrc=aw.ds 3 https://www.responsibleminingfoundation.org/app/uploads/2019/12/RMI_Methodology2020_Mapping_EN_WEB.pdf 4 https://www.ipe.com/what-does-aligning-with-the-paris-climate-agreement-mean/10030976.article
