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Demystifying ESG to enhance value creation for miners

Environmental, social and governance (ESG) is a lens used to rate a company or an investment and its exposure to environmental, social and governance risks. That includes the physical risks of climate change, the reputational risks from lack of action and the regulatory risks of government action. Alignment with ESG principles means a company understands, and hopefully optimises, its risk profile.

For resources companies, expectations of corporate behaviour are changing rapidly. More and more investment capital is being redirected towards more responsible entities, and sustainable investment now tops $35 trillion globally, including 25 per cent growth over a two-year period in Australasia.  For the companies participating in Australia’s largest mining conference, the International Mining and Resources Conference (IMARC) in 2022, the stakes have never been higher with the need to get it right and to be transparent.

More and more, companies are scrutinised by a growing legion of environmentally engaged investors that hold businesses to a higher moral and ethical standard; a standard that places corporate accountability side-by-side with —sometimes even higher than —government responsibility in driving the social, political, economic and public health agenda.

This has seen a rise in production of the ESG report which varies widely across sectors, commodities and jurisdictions.  The value of producing one is clear, but it seems that actions speak louder than words for those who choose not to produce an ESG report.

Investing through an ESG lens

Natural resource expert and managing partner of Pacific Road Capital, Matt Fifield, uses ESG reports to firstly gauge whether companies are savvy enough to note that investors want to see companies producing ESG reports.

“ESG has become a bit of a buzzword, particularly in the space of producing reports.  However, the fact that a company cares enough to actually produce a report, shows that they have thought about it, that they are alive enough to know that people are interested to know about this stuff and that they care about being transparent,” he said.

Overall, as an investor, if a company is producing an ESG report, it signifies that the company recognises the importance of ESG.  That said, ESG reporting in recent years has gone from something that is desirable to something that is crucial to attracting and retaining investor capital and support.

In the mining sector, formal adoption and integration of ESG standards is generally inversely related to size. Large integrated companies already operate within robust ESG frameworks. Smaller producers however, many of whom are at the forefront of key growth areas such as critical minerals and energy transition, are often well behind the large, diversified companies in making ESG risk management systematic and disclosing to outside stakeholders.

This however is changing; Pacific Road conducts an annual survey of publicly listed mining companies on key exchanges with market capitalisation ranging between $US100 million ($138 million) to $US2 billion on their ESG disclosure and reporting and can confirm that there have been marked year-on-year improvements in ESG reporting.

“Our analysis demonstrates that there is an elevated awareness amongst small-to-mid cap companies of the increasing importance that the investment community places on ESG performance in the belief that strong ESG performance will enhance both short- and long-term value creation,” Fifield said.

A company committing to producing an ESG report also implies that the company is serious about creating both short- and long-term value whilst mitigating risk.  While it is not necessarily true that companies without an ESG report have something to hide, it could raise tremendous, if not deal-breaking concerns from the investment community.

Different regions of the world do require different areas of emphasis; bribery and corruption policy, for example, are key in less developed countries, while first nations and water policies are more important in others. The ESG report, when developed properly, provides an investor great insight to the most material risks.

In today’s world, an ESG report provides an investor with access to everything—capital from investors and strategic partners, customers, governments, and a wide range of external stakeholders.  Particularly in a post-COVID world, the mining ecosystem has become more connected, and having an ESG report is an essential means of engagement with these constituencies.

“Over time too, we think that ESG will serve as a key driver of value creation for miners.  Consumers ultimately will pay more for commodities that are sourced in ethical and high-performing ways, and as a result, investors will see premiums for companies that perform well from an ESG standpoint.  We’re not there yet, but we think one day good ESG will flow directly to the bottom line,” Fifield said.

The key ingredients of an ESG report

Pacific Road Capital believes that an ESG report needs to overall communicate the material risks of a miner’s operations and state explicitly how these risks are being managed.  Matt Fifield and his team have provided the following list as some guidance:

  • Disclosure of risk: One needs to recognise that risk materiality is different for different operations and where these operations are in the maturity continuum from early explorer to stable producer. The investment community want to see that a company has thought about risks, identified them, and is savvy enough to know where these risks could affect their business;
  • Policies: While dry, companies need to provide guidance on their ESG policies and specify the performance standards that they are using to frame and measure their individual performance. This shows the company is well-managed and provides some comfort to an investor;
  • Key reporting areas: Identifying ESG focus areas of Disclosure, Corruption, Human Rights, Indigenous Rights, Tailings, Air-Water and Rehabilitation, Health and Safety, Economic & Community Contributions, and Diversity as being important.
  • Overall Disclosure is a big focus as a starting point, with the belief that “what you measure is what you get” supported by ensuring that Board and management incentives are linked to ESG performance metrics. It shows a company is sincere and takes its responsibilities seriously.

Using public forums such as conferences to talk about ESG practices and collaborate and learn from peers is also important.

“We participate in as many conferences as we possibly can.  Our next big conference is IMARC in 2022 where we’ll be attending as many presentations and talking to as many companies as we can about how important this kind of transparency and disclosure is, in their commitment to ESG,” Fifield said. 

Standardising socio-environmental disclosure

Traditional environment or sustainability reports tended to use baseline information on, for example: water quality, air quality, noise pollution etc, and then reported on year-on-year improvements.

There is an expectation that an ESG report will do some of the same, but with the understanding that standards are an ever-evolving beast. As an example, a catastrophic failure of a tailings storage facility at Vale’s Corrego do Feijao mine in Brumadinho, Brazil on 25 January 2019 brought tailings safety to the fore.

This resulted in several multi-lateral environmental and investment stakeholders collaborating (including participation by Pacific Road) to formulate a global tailings standard which has been adopted across the mining sector.

More recently, the effects of climate change have come sharply into focus with a global emphasis on decarbonisation. Into the future, Pacific Road believes that as the issues and emphasis change, there will be a continuous need for companies to monitor and assess their role in the evolving ESG landscape and their ability to drive and affect change within that landscape. Without disclosure, management teams and boards are unlikely to think about their ESG footprint nor how they can improve.

“Disclosure starts the dialogue and supports the process of continuous improvement.  Companies that fail to incorporate ESG into their mindset and culture do so at their peril and will increasingly struggle with capital formation as investors look to generate risk mitigated sector leading returns,” said Fifield.

Matthew Fifield will share further insights on ESG investing at the upcoming International Mining and Resources Conference (IMARC) in Melbourne January 31 until February 2.

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