THE investment focus on how mining companies interact with society has sharpened profoundly in the last three years; now, controlling emissions is as important a metric to fund managers as production.
However, two UK fund managers are asking whether the current formulation that measures emissions specifically, the Scope 1 to 3 standard is entirely appropriate. In fact, the environment, governance and sustainability (ESG) movement as it currently exists has prototypic faults, they say.
“The way we’re doing ESG is we’re looking up every drain pipe in the company and trying to measure what’s coming out,” said Douglas Upton, an investment analyst and partner at Capital Group, a US fund manager with over $1 trillion under management.
“But I feel like we’re measuring stuff that we can measure and not really stuff that’s important,” he said. Upton was speaking earlier this month at the Joburg Indaba, a conference.
According to the Greenhouse Gas (GHG) Protocol Corporate Standard, to which mining companies comply, emitters have to control and reduce their own GHGs, the so-called Scope 1 of the standard, as well as the emissions of their suppliers in a Scope 2 level of scrutiny which can be managed through procurement.
The more controversial element of the protocol is managing the emissions of end-users, or Scope 3 as it’s called.
According to a report by Bloomberg News on October 1, the 182 page, 15 category guidance for Scope 3 compliance in the standard “… offers so much scope for discretion and ambiguity that companies can more or less mark their emissions to model – or even refuse to disclose them at all”. In fact, about a fifth of the world’s total GHG emissions come from a group of companies that don’t disclose their numbers at all, according to Bloomberg News.
“I don’t think Scope 3 belongs within ESG,” said Upton. “If you look at everything about ESG outside of carbon, we kind of look at it and say: ‘Ok, does the company comply with the laws, with the rules, maybe with best practice’? But what is Kumba [Iron Ore] supposed to do about ejection of steel emissions when they coal into a furnace and burn their iron ore? What can they do: just stop selling iron ore?
“So I think we’re measuring the wrong thing here. Scope 3 doesn’t belong,” he said.
LACK OF UNIFORMITY
Another problem is that mining firms are reporting their own numbers based on in-house criteria. This would appear to make a mockery of the ‘standard’, since standardisation is not being achieved.
George Cheveley, a portfolio manager for Ninety One in London, said evaluating the contribution of mining firms to the ESG debate could fall on metrics other than just reducing emissions which would remain of critical importance.
For instance, mining firms with coal as a major part of revenue could declare they were managing those assets “for cash”, and then reinvest the proceeds into metals that contribute towards decarbonisation, such as copper or nickel. That might be a better strategy that oil producer, BP’s approach which was its declaration to re-invest oil profits into renewable power. What does BP know about renewable power Cheveley asked?
“We have to go through this stage and we have to engage in it and get through to a set of standards,” said Cheveley of Scope 3. One standardisation would be to narrow the accountability between mining and consumer facing industries to one of understanding the whole value chain.
“The materials consumer facing companies are using materials that are coming from those miners. So the miners are all terrible whereas consumer facing companies are fine even though they are all part of the supply chain,” he said.
