ESG stewardship as a foundational component of mining investment strategy

ESG Perspectives

As investors become more attuned to Environmental, Social, and Governance (ESG) principles, they may be surprised to find that much of the mining industry’s poor reputation in these areas is based on outdated perceptions and misinformation. In actuality, not only are many individual companies and the industry at large continuing to evolve rapidly in response to growing ESG demands, but mining and the capital investment that supports it are vital to the broader sustainability agenda globally.

ESG provides a set of factors that investors can use to evaluate how well a corporation works on behalf of environmental and social goals and institutional governance factors that focus on robust performance, prevent mismanagement, and promote ethical and sustainable business practices. ESG is often discussed in tandem with the United Nations Sustainable Development Goals (UN SDGs), an ambitious framework of interconnected objectives aimed at eradicating poverty, reducing inequality, and protecting the environment.

As issues related to climate change become more fully apparent and social justice issues such as diversity, equity, and inclusion (DE&I) come to the forefront, ESG metrics are increasingly being used to evaluate companies and industries. In much of the world, particularly Europe and to a lesser extent Australia and Canada, ESG performance is now a primary investment consideration. The US has been slower to respond but is catching up quickly. In a survey of institutional investors managing a total of around US$18 trillion worldwide, 73% planned to significantly increase ESG investment by the end of 2021. Deloitte predicts that by 2024, ESG-mandated assets will make up half of all professionally managed assets.

The mining industry is fully aware that sustainable ESG performance, including improved management of social and environmental impacts as well as positive contributions towards the SDGs, will play a growing role in attracting and retaining investment. Rather than writing off the industry based on perceived or real failings of the past, investors should be looking at a range of criteria to evaluate individual company responses to these multi-faceted global ESG demands.

They will have plenty of opportunities: as the growth of green energy and urbanization increases the demand for metals and minerals, mining companies will have the opportunity to have a more positive impact on communities and create societal value, putting their ESG performance firmly in the spotlight.

Mining is critical to a sustainable future

Green Energy Transition

Since the Paris Climate Accords were adopted in 2015, over 192 countries – and an ever-increasing number of mining companies – have pledged to achieve “carbon neutrality” by 2050. In other words, drastically reduce greenhouse gas emissions and offset the rest by removing an equivalent amount of gases from the atmosphere. It’s an achievable goal—if these two things happen:

  1. Vehicles and other equipment powered by fossil fuels are replaced by machines that run on electricity; and
  2. Low- or no-emission sources of renewable electricity, such as wind, solar, nuclear, and hydro power, are widely adopted

The technologies that will help us achieve that net-zero future rely heavily on mining. So-called “Green energy” solutions and electric vehicles generally require a much greater mineral input than their fossil-fuel predecessors. An electric vehicle, for example, may require up to six times the mineral resources of a traditional car3. Carbon neutrality cannot be achieved without significantly increasing the availability of what have been labelled “critical metals and minerals”, the demand for which is expected to rise exponentially by 2040. The International Energy Agency (IEA) forecasts that the demand for lithium alone will be 42x its current level. Demands for graphite, cobalt, and nickel will be 25x, 21x, and 19x respectively—and these are just a handful of the materials that will be needed in increasingly larger quantities to build the green energy transition.

Urbanization

Mining’s role in a more sustainable future goes beyond energy. The United Nations predicts that by 2030, there will be 43 megacities (cities housing 10 million or more people) around the globe4 and that 60% of the world’s population will live in urban areas5. Managed well, which is critical, this rapid urbanization has the potential to confer a number of economic and environmental benefits. By decreasing the impact of transportation on the climate, enabling economies of scale, and increasing access to basic needs, such as clean water and sanitation, urbanization can play a vital role in achieving many of the UN SDGs.

Like green energy, urbanization is not only supported, but made possible by mining. As demands for reliable power, transportation, telecommunications, housing, and sanitation grow, so too will the need for cement, steel, copper, and other raw materials used to build the bridges, schools, hospitals, houses, and roads of the future. The Swann Index, which forecasts demand for metals and minerals, predicts enormous growth for nickel, steel, aluminum, copper, and zinc in rapidly expanding urban areas, particularly in Asia and Africa6.

Current mining outputs are simply not adequate for meeting the SDG targets for 2030. Large-scale investment in the industry will be needed in order to scale up production and provide the infrastructure necessary for a cleaner, more prosperous, and equitable future.

Mining supports ESG locally

As the need for metals and minerals increases, so too will the number of mines, and with them, the opportunity to positively impact local and Indigenous communities. The most obvious and immediate benefits of mining operations are employment and local purchasing. However, with good planning and sensitivity to local community values, mines can create an even wider variety of lasting socio-economic benefits like any other productive sector of the economy.

Most mines are served by roads, electricity, airstrips, health clinics, water supply, and sanitation. When these mining company resources are made available to the community they can have a deeply positive impact, often with little added cost. This infrastructure not only benefits communities in the short term but can also support the growth of other types of “off-mine” economic activity, including the ability for increased trade. In addition, some mining companies have adopted procurement policies that favor local suppliers and contractors and support local non-mine economic development through strategic social investments and partnerships with non-governmental organizations7.

Of course, mines also have the potential to cause considerable adverse impacts to local and Indigenous communities. Benefits are not always evenly distributed – and aren’t always enough to compensate for damage to the environment, cultural heritage, and the loss of existing livelihoods and homes. The situation may be further complicated by deeply differing world views and a lack of cross-cultural competency within a mining company, resulting in disrespectful transactional dealings with local stakeholders and Indigenous groups.

Great care must be exercised by mining companies to ensure that communities tangibly benefit from operations, not just while the mine is in operation but long after it has closed; that local and Indigenous communities are able to play effective roles in the decision-making process; and that companies support the fundamental human and other basic rights of those communities – even when central governments fail to do so. But this approach is more prevalent than many investors realize.

Mining’s response to ESG

Contrary to popular perception, the mining industry has been responding to ESG concerns since the environmental movements of the 1970s. In 2001, the International Council on Mining and Metals (ICMM) was founded to improve sustainable development performance in the mining and metals industry, and for the past two decades, the industry has had the determination to constantly improve. There has been a parallel proliferation of ESG performance standards and reporting frameworks from respected industry groups, such as the Mining Association of Canada and the World Gold Council.

Companies, as well as shareholders, understand that there is a business imperative. Poor ESG performance presents bona fide business risks, including reputational damage, strikes, fines, transportation blockades, and even the loss of operating licenses. Moreover, they know that in order to attract capital investment, they need to meaningfully address the industry’s reputation as a whole. But ESG goes beyond getting good press and keeping distant shareholders happy; it’s a philosophy that needs to be integrated into every level of a company’s operations. It’s no longer enough to simply avoid bad outcomes. Mining companies now need to create meaningful and impactful change and bring positive contributions to the environments and communities in which they operate.

Part of the challenge companies face is that ESG issues are not static. They change and evolve with time and geography. Some issues may be long-term, others short-term, and not every ESG topic is relevant to every mine site or company. This makes it impossible to define one set of “best practices” for the industry; rather, there are a variety of constantly evolving “good practices.” Realistically, companies need to assess their own ESG materiality, and then develop a set of policies and minimum operating standards based on the accepted “good practices” – but tailored for their unique situations. But even though each company needs to approach ESG from within its own context, key elements of a successful ESG strategy are universal.

5 “good practices” for integrating ESG in mining

1. On-the-ground expertise

Successful ESG is hands-on, not academic. It must “bring the outside in” to be able to navigate the complexity and dynamism of ESG and understand what pragmatic good practices are. Beginning with the earliest exploration stages and continuing well past mine closure, employees with cross-cultural competencies should be on site and working directly with local communities, including Indigenous peoples, to create consistent, respectful, and open communication.

2. Governance

While the “G” of ESG is sometimes overlooked in favor of social and environmental considerations, sound governance holds it all together. Remember ESG affects virtually every function and discipline in a mining company. Mining companies must establish strong governance with clear lines of accountability and ownership; meaningful ESG metrics and analytics to quantify impact; and internal processes and procedures that prioritize, integrate, and address the needs and goals of all internal and external stakeholders, from local communities to shareholders.

3. Transparency

Disclosure around ESG approaches and performance can help burnish reputations, while withholding it could potentially harm valuations, access to capital, or brand reputation with a variety of important stakeholders. It would be a mistake to expect that every aspect of every ESG intervention or initiative will succeed. Even with high levels of expertise and the best of intentions, there are simply too many variables in any given situation to guarantee specific outcomes. It’s about testing and learning while acknowledging that transparency is the new normal. To build reputational value, companies need to be willing to acknowledge and address sub-optimal outcomes openly and transparently and share their lesson learned.

4. Net Value

Authentic ESG goes beyond legal compliance and adhering to regulations; it’s not enough to simply “do no harm” and check the box. Companies need to mature from a legalistic compliance to a value driven mindset. They need to ensure systematic application of ESG disciplines to proactively seek opportunities to create enduring value throughout the business, and that their operations have a positive net impact on the local environment and community whilst actively contributing to a “just” net zero transition.

5. Accountability

“Social license to operate” (SLTO) refers to the tacit “license” sought by mining companies around the world. A company builds and maintains a SLTO over time through meaningful local relationships and being a steward for the environment, its employees, and the community in which it operates—in short, by being accountable for its actions. However, too many in the industry fail to recognize the difference between a SLTO and social performance. The former is about benefit to the company only and its desire to secure community acceptance, whereas the latter is about benefit to communities and creating societal value through equitable benefit sharing and maximizing local procurement and local employment. The companies that successfully integrate ESG understand this important difference and commit to upholding high standards of accountability and integrity towards both.

Most importantly, companies—and investors—need to understand that “hands-on” ESG and mining experience is critical to sustained success. ESG cannot be directed from a satellite unit responsible for creating reports, delegated to “armchair experts,” or analyzed on paper. It needs to be built from the ground up on actual mine sites. When all is said and done, ESG is fundamentally about understanding how a business interacts with the rest of the world. It is about operating as a good corporate citizen that implements positive environmental, social, and governance changes, that is accountable for its actions, and is transparent about its mistakes.

Investors must remain vigilant

While the industry is making important progress toward ESG goals, there remains plenty of room for improvement, and investors must distinguish between true impact and value creation vs. vanity metrics. Many believe we are in midst of a true industry transformation, and the ESG performance bar is continually being raised. However, not all mining companies fully appreciate that in today’s world merely providing an annual ESG reports and paying lip service to ESG ideals is not enough. Glowing ESG metrics and annual reports are not the end goal: investors and the public alike are becoming increasingly sophisticated and alert to evidence of “greenwashing.”

It’s also important to understand that even the best-intentioned companies are sometimes limited by lack of experience. Some, for example, try to apply methodology used for technical risk management (e.g., for predicting the likelihood and cost of a slope failure) to ESG risk factors, such as permitting delays or community resentment. However, ESG risks are generally less predictable than technical uncertainties and don’t fit well within traditional risk methodologies. And, many companies remain ferociously myopic, habitually focused only on the next quarterly results. This pervasive short-termism is based on the misperception that ESG issues are only long-term concerns and hence do not need to be part of current business strategic imperatives.

It is also important that companies avoid what is sometimes referred to as “defensive sustainability;” that is, focusing primarily on monitoring negative impacts and doing “less bad” while failing to create value. To be truly successful, a company must reject the outdated trade-off mentality thinking ESG always costs more and adopt an approach that focuses on creating a sustainable culture that maximizes social and environmental value while also addressing the expectations and needs of a wider audience, including lenders and investors. To that end, some lenders are now deploying new tools in the capital markets with sustainability-linked loans and bonds which incur positive or negative pricing adjustments on drawn balances based on ESG performance criteria.

The companies that lead in ESG will lead the industry

The green energy transition and urbanization are massive demand forces that will continue to make ESG a critical component of any mining company’s strategy. Companies that thrive in this new era of accelerating transformation and stakeholder capitalism will embrace ESG as a business imperative. Their ESG approach will not be about short-term thinking, hoping to do the right thing, maintaining relationships to secure permits, or simply ticking boxes. Rather it will be about creating value through the systematic application of ESG disciplines throughout the business. It will strengthen company-wide operational preparedness, build resilience, and help attract and retain the best talent because these companies will be the partner of choice for all stakeholders.

However, getting it right is complex. It requires in-house leaders with deep knowledge in mining related ESG who can influence and inspire. When ESG is embraced and implemented through an informed strategy, positive impacts ripple out from the local community to a country as a whole, to industries and consumers around the world—and to the capital investors who are stewards and enable this virtuous cycle.

The key is identifying those companies that genuinely understand their interactions with the rest of the world and are primed to respond well to ESG concerns to unlock greater long-term value – then supporting them with the capital they need.

What are the SDGs and why are they important?

The 2030 Agenda for Sustainable Development is a set of international development objectives adopted by the United Nations in 2015 with the goal of achieving them by 2030. It includes 17 interconnected environmental, social, and economic objectives known as the Social Development Goals (SDGs), which have been widely accepted as benchmarks of sustainable progress.

The mining industry has the opportunity and potential to positively contribute to all 17 SDGs and because the criteria are more consistent and concrete than many ESG scorecards, they provide a useful standard for the industry to follow.

The 17 SDGs are:

  1. No poverty
  2. Zero hunger
  3. Good health and well-being
  4. Quality education
  5. Gender equality
  6. Clean water and sanitation
  7. Affordable and clean energy
  8. Decent work and economic growth
  9. Industry, innovation, and infrastructure
  10. Reduced inequalities
  11. Sustainable cities and communities
  12. Responsible production and consumption
  13. Climate action
  14. Life below water
  15. Life on land
  16. Peace, justice, and strong institutions
  17. Partnerships for the goals.

Learn more at: https://sdgs.un.org/goals

Source of data

1 MSCI Investment Insights 2021 – Global Institutional Investor Survey. https://www.msci.com/documents/1296102/22910163/MSCI-Investment-Insights-2021-Report.pdf.

2 Ingraining sustainability in the next era of ESG investing. https://www2.deloitte.com/us/en/insights/industry/financial-services/esg-investing-and-sustainability.html.

3 EVs vs. Gas Vehicles: What are Cars Made Out Of? https://elements.visualcapitalist.com/evs-vs-gas-vehicles-what-are-cars-made-out-of/.

4 10 cities are predicted to gain megacity status by 2030. https://www.weforum.org/agenda/2019/02/10-cities-are-predicted-to-gain-megacity-status-by-2030/.

5 Policies on spatial distribution and urbanization have broad impacts on sustainable development. https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/undes_pd_2020_popfacts_urbanization_policies.pdf.

6 How the Expansion of Megacities Will Boost Metal Markets. https://elements.visualcapitalist.com/how-the-expansion-of-megacities-will-boost-metal-markets/.

7 MMSD – Chapter 9 – Local Communities and Mines. https://pubs.iied.org/sites/default/files/pdfs/migrate/G00901.pdf.

Important Information

This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the ESG landscape.

The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Resource Capital Funds and/or its affiliates (together, “RCF”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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