COVID-19 has given many investors a chance to step back and evaluate the longevity of companies in the face of sudden critical incidents. It has defined the need for ESG more so than any other event in history, especially for the mining sector. At its core, mining is a risky business. In January 2019, Brazil’s iron ore giant, Vale, experienced a deadly dam disaster at its Corrego do Feijao mine which sadly claimed the lives of 259 people. More than three years before, another massive dam disaster occurred in the same Brazilian state and Vale was again involved. Earlier this year, Brazil’s National Mining Agency ordered the immediate closure of 47 iron ore tailing dams for which stability was not certified, with more than half of them owned by Vale and its affiliates. The Vale mining disaster drew international attention, making ESG hard to ignore for the mining industry.
Investor interest in ESG is growing
During the London Metal Exchange (LME) Week seminar on October 20, the managing director of commodities research, Colin Hamilton, said ESG was no longer a “fad” as there has been growing investor and industry interest. He believes ESG will be the core front and center of the industry. Large investors are increasingly setting minimum ESG thresholds for investment. Norway’s Wealth Fund decided in June 2019 that it would no longer invest in firms that mine more than 20 million tonnes of coal per year, nor generate more than 10GW of coal power per year. As investors continues to seek alpha in the ESG space, it is important that companies in the mining industry improve their reporting on ESG topics to create material information for investors to make sustainable investments.
In the mining industry, the three pillars that make up ESG include an extensive range of topics, including biodiversity, waste, water and resource use, and pollution in the environmental pillar; human rights, labor practices, safety, health, community and diversity in the social pillar; and in the governance pillar, corporate governance, ethics, compliance, executive pay, diversity, lobbying and approaches to taxation.
In regards to the expectation from investors in the mining industry, in an annual 2020 survey conducted by White & Case, more than a quarter of senior decision-makers expect a continued focus on productivity gains to be the number one priority for the sector. Pursuing ESG policies, dealing with tailings dams and responding to the challenges of climate change were all seen as more important than growth. Just under nine percent of the respondents said that growth would be the leading goal this year.
Investors critical to success, but need government support
While investment decisions can be influenced by policymakers, governments globally need to come up with “thoughtful, efficient, long-term frameworks” that send the correct messaging, according to Marisa Buchanan, Head of Sustainability at investment bank JP Morgan.
In recent years, a number of regulatory bodies have published their own frameworks or guidance on ESG, highlighting the growing importance of the topic. The London Stock Exchange Group (LSEG) first published its ESG guidance in February 2017, and then updated that guidance in January 2018. This trend has been followed by the Australian Securities Exchange (ASX), which has, as of 1 December 2019, introduced new listing rules explicitly requiring mining companies to publish quarterly reports on their business activities for the quarter. In 2015, the Hong Kong Stock Exchange (HKEX) upgraded its standard and made a shift from “voluntary” ESG reporting to a “comply or explain” requirement.
Various influential international bodies have set or are in the process of setting standards that mining companies are now being held to. Global ratings agency Fitch has warned that natural resource companies have a higher chance of having their credit rating affected by ESG issues than the broader corporate sector. It has come to the point where there has become an ever-increasing number of ESG reporting frameworks in this industry. Examples include the Global Reporting Initiative (GRI) Standards, CDP questionnaires, the World Gold Council’s Responsible Gold Mining Principles (RGMPs), International Council on Mining & Metals (ICMM) Performance Expectations and more.
Data gaps and divergent assessments need to be harmonized
While investors are often looking at corporate-level data, most of the risk for miners are likely to manifest at site level. Because ESG data tends to be on corporate-level terms, it is easy to disguise site-level issues, where most risks occur. There is a need for companies to disclose both raw data for in-depth analysis and corporate–level data, that can be used more broadly to compare businesses across industries. Recently, the ICMM launched Mining Principles that must be followed by their members, including site-level validation. As mentioned in previous articles, there is a big discrepancy in rating agencies’ data and final company results. Consequently, it is important to pick the right framework that best evaluates the mining industry while complementing investors’ strategies.
Failure to maintain strong ESG performance will make it harder for mining and resource companies to secure capital. Mining and resource companies should take steps now to be compliant and take advantages of the benefits that a strong ESG performance can offer, such as improved branding, a better public image, and a smoother process to gain capital investments.
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