ENVIRONMENTAL and social governance (ESG) has, for a long time, been a woolly issue for the mining industry.
Chiefly because there were no hard and fast rules on how to implement ESG policies, nor any penalties for failing to do so, many mining companies felt they could legitimately ignore calls to ensure their operations were ethical and sustainable. But it seems the balance is finally starting to tip in favour of “good” ESG.
Perhaps most significantly, money is starting to talk.
Institutions are putting pressure on extractives companies to prove the sustainability of projects and customers are asking for evidence of ethical production practices. While the onus is currently on larger companies to set an example on ESG, smaller miners are also starting to face sharper scrutiny.
There is a growing expectation that the interests of communities that stand to be affected by mining are seen to be given fair weighting. This means tailoring practices espoused in corporate values statements to the priorities of community stakeholders, rather than doggedly adhering to policies formulated in the board room.
To achieve this, companies need open feedback channels with key community representatives, not just politicians, particularly in African jurisdictions, where formal top-down governance can appear tinged with colonial legacy.
Marrying philosophies with practice has been challenging, as emphasis has shifted to outcomes, rather than the length of environmental and social impact assessment (ESIA) reports.
One of the most noticeable trends in mining in the last 20 years has been the hardening of government ESG requirements into mandatory obligations. A good example is the creation of Community Development Agreements (CDAs): contracts between investors and communities setting out how the benefits of a project will be shared.
Environmental considerations are likewise now much more embedded in the mining industry’s culture than they were 20 years ago.
Most governments now require detailed ESIAs and there is much more focus by NGOs on environmental issues.
Until fairly recently, there has been little rigour in the way non-mandatory codes are applied, and even less understanding about what to look for as evidence of good ESG. There has also been criticism that different sets of principles are disconnected and enforced by too many disparate organisations.
Bodies such as the World Gold Council are lobbying for insurance providers to take responsibility for enforcing standards, by requiring clients to uphold ESG principles in order to receive cover.
COMPETITIVE ADVANTAGE
Two decades ago, most mining companies assumed that ESG could be addressed after what they considered to be more pressing concerns, such as securing assets, exploration activity, financing and construction. Today, ESG is becoming part of the workstream for some of the larger mining IPOs.
ESG also comes up in investor roadshows, where the focus can vary from cursory “tick box” inquiries, to forensic interrogations. When faced with fuzzy queries, mining companies should push to illustrate clearly what ESG risks they have identified and what they have done specifically to mitigate these.
While it is becoming accepted that good ESG reduces project risk, demonstrating its value as a financial metric continues to be difficult. Some companies approach this by modelling the financial impact of closing a mine following an accident or during a blockade by unhappy communities.
It has also been suggested that ESG risk needs to be thought of in the same way as other technical risks. No mining company would operate without a health and safety manager, but relatively few employ proper community engagement staff.
KEY POINTS
Data:
While many mining companies still come in for criticism on ESG, it is not always they are doing it badly; sometimes, they are just not reporting their activities in a way that satisfies external monitors.
Management teams need to ensure they generate the right sort of data to inform their reporting, especially as guidelines continue to be updated.
Strategy:
Management plans need to be iterative and flexible enough to adapt to changes in project technicalities or the priorities of the host community or government. Governments can be both capricious and inflexible, but this is a risk mining companies need to accept.
Cycle-proofing:
Resource cycles can make it difficult to deliver on promises, but every effort needs to be made to maintain community relations, regardless of commodity price movements.
Push for best practice:
The mining sector currently lacks a level playing field when it comes to ESG; this should be an impetus for wider adoption of better practices, rather than a motive for rejecting ESG.
Jonathan Brooks is Head of Mining at Fieldfisher, a European law firm with a focus on energy and mining.
