Tracking the value in ESG

ESG credentials are becoming increasingly important for strong businesses.

In the first of a three-part series inspired by Deloitte’s Tracking the Trends 2022 report, Australian Mining examines the use of ESG as a means to create value in the resources sector.

Now in its 14th year, Deloitte’s latest Tracking the Trends report delved into the top 10 issues that could shape the mining over the next 12–18 months. 

Unsurprisingly, the idea of environment, social and governance (ESG) credentials featured heavily in the report, as mining companies are increasingly reacting to stakeholder influence in the direction and strategy of their businesses. 

And while outspoken stakeholders may have posed a headache for executives in the past – conceived as meddling or “woke” – the growing sentiment is that their voices represent an important pillar in the development of modern mining. 

With more than 15 years’ experience in the field, Deloitte partner – sustainability Michael Wood is a leader in advising on decarbonisation, climate-related risk, and climate resilience. He said the rewards of taking ESG seriously could transform a business. 

“One of the lessons learned that we always start off with our clients is that your first good starting point is to understand your risk profile,” he told Australian Mining.

“But the rewarding thing for mining companies is that once you go into that, there’s a whole plethora of opportunities that are often untapped.”

Deloitte partner – sustainability Michael Wood.

SETTING UP SUSTAINABLY

In Trend 1 of the Tracking the Trends report, ‘Aligning capital allocation to ESG’, authors Andrew Swart and Andrew Lane outlined the many ways to create a sustainably advantaged business portfolio. 

Swart and Lane stated that a sustainable portfolio would make a company’s intentions clear to the ESG-minded investor. 

“As companies move beyond pure reporting of metrics to making ESG an integral part of their strategies, a key differentiator will be the narrative they build for investors around their portfolio and how they are positioning their assets for the long term,” the report stated.

Now that companies are beginning to gain confidence that investors will rally behind strong ESG credentials, these opportunities can arise in all kinds of ways, according to Wood.

“Capital markets are willing to invest into these opportunities, while there’s also an appetite from investors to commit to targets,” he said. 

“This allows leaders to gain confidence and start to make their own commitments, but also start to take action, whether that’s through allocating capital or signalling other types of involvement such as partnerships with OEMs or even alliances with competitors.”

This kind of action has been seen in a big way in the mining industry over the past few years. 

Major diversified mining groups – some of which consult with Deloitte – have taken the initiative to bring together companies of all sizes to collaborate on clean energy technologies. 

For example, the Charge on Innovation Challenge was founded by BHP, Rio Tinto and Vale, who challenged the industry to find solutions for decarbonisation issues in mining and present them for commercialisation. 

The Electric Mine Consortium presents another example of several major miners combining with recognised mining, equipment, technology and services (METS) companies to decarbonise their respective operations. 

These kinds of initiatives are what the industry needs, according to Wood, who said miners must focus on two main issues to prove they’re serious about their ESG credentials. 

“The first is you need to decarbonise your electrical systems, and then you need to decarbonise the way that you move materials,” he said. 

“The first challenge is typically the easier path to solve, given the technology is ready and the cost of renewables is already attractive. 

“The biggest challenge for this sector is, how do we move material most efficiently and in a less carbon-intensive manner?”

To meet this challenge, Wood suggested first understanding the life of a miner’s asset and its equipment and when certain decarbonisation solutions will become commercially and technologically available, if that is not the case already. 

“Currently, things like electrification of fleet and hydrogen utilisation are the two main technologies that entities are looking at with the ultimate aim of reducing the reliance on diesel to eventually eliminate diesel from operations,” he said. 

Once such technologies are implemented, or at least invested into, companies will begin to realise the value that such initiative can bring. 

As companies become known for their ESG credentials, customers in turn become willing to use their products to please the sustainability demands of their own customers. 

Wood said the influence of the supply chain was one of the major opportunities to create value from ESG. 

“It’s not just the mining sector’s responsibility – it’s a whole value chain. If the mining company or companies aren’t aligned to their value chain, they’ll be challenged eventually,” he said. 

“The mining sector is honestly quite astute in terms of those risks. The biggest risk for the sector, though, is that if we don’t understand what those pathways are, there will be a number of opportunities that we’ll miss.” 

Deloitte’s Tracking the Trends 2022 report, front cover.
Image: Deloitte.

THE BIGGER PICTURE

These missed opportunities could come in the form of the E, the S and the G, or a mixture of all three, as they are often linked in practice. 

Wood recounted a story of a mining companies that failed to consult with Traditional Owners and paid the price by not maximising value from an opportunity. 

Deloitte posed questions to the client about historical climatic events, which extend from the typical issues of extreme temperatures, rainfall and flooding – events that can significantly disrupt supply chains. 

In analysing how the company was prepared against these kinds of events, questions were asked regarding how performance guidelines were established. 

Wood said they were measured on historical observations, but those observations only extended back to relatively recent times within the last 100 years.

“The question was, “where was that engagement with Indigenous communities who have had that knowledge of the land for 40,000-plus years?” he said. 

“These communities could easily tell you that the last one-in-100-year event may not be so – it may be more common, or it may be one of their one-in-500-year events that is more catastrophic. 

“So that shared knowledge is just a missed opportunity when we limit ourselves to our own observational data. 

“We don’t know what we’re missing out on when we don’t engage with the Traditional Owners in a respectful way to extract that information, but also to engage them through that process.”

This consultation process has historically been an issue of compliance and respect for landowners, but another motivator has arisen as ESG matters more and more. 

In Trend 1 of the Deloitte report, Lane discussed that some companies are recognising the financial value of community consultation. 

“Beyond energy, it’s likely that some companies will ramp up their community and stakeholder investments,” he said. 

“Often, these struggle for equitable assessment through traditional capital-allocation metrics, but some companies are developing methods to quantify these investments, particularly if they help de-risk assets and create deeper buy-in from communities.”

THE IMPORTANCE OF PATHWAYS

Once community consultation is considered and carried out, extra measures can be taken by working with industry experts such as Deloitte.

About five years ago, Wood spearheaded the development of Deloitte’s decarbonisation solutions – a service designed to determine how companies are exposed to climatic risk and inform them of the effects and valuations.

“What we do is we synthesise the latest science, whether that be at a global, regional or local level, and we translate that into the mining sector,” Wood explained. 

“We can downscale that to a value-chain level or a specific operating site to determine decarbonisation pathways, but also exposures to physical changes; for example, heat stress and other matters.”

By setting out feasible pathways to decarbonise, companies can avoid the legal and reputational pitfall of greenwashing. 

Greenwashing is the concept of claiming to be environmentally sound for the benefit of adhering to decarbonisation regulations and maintaining stakeholder confidence, when a company is in fact not achieving or cannot achieve its own ESG targets.

In Trend 4 of the report, ‘Embedding ESG into organisations’ by Henry Stoch and Harsha Desai of Deloitte Canada and Africa, respectively, the report discussed the risks associated with unachievable ESG goals. 

“For ESG commitments to be properly met at the operational level, information must be able to flow freely up and down the organisational structure, rather like through neural pathways,” the report stated. 

“Leaders must be able to look into the business and check that the commitments they have made publicly are being understood and reflected in practices below them.”

If this can’t be done, investors and regulators alike will begin to question a company’s authenticity, its reputation and the laws around greenwashing. 

The Australian Competition and Consumer Commission (ACCC) has publicly-available guidance on greenwashing and the Australian Government has developed its own guidance material on creating achievable goals. 

Wood suggested that reputational risks were just the start of the consequences for setting unreasonable climate action targets. 

“If those commitments exist, there needs to be defendable evidence as to support a statement. If that doesn’t exist, then greenwashing is a real issue,” he said.

“The litigation pathway and the legal exposure is very real for companies who have set targets or commitments without any reputable background or defendable evidence.”

Of course, no one expects a company to decarbonise overnight, but some proof that the wheels are is in motion must be shown to ensure the long-term reputation of any industry, let alone mining. 

And while the Tracking the Trends report only claims to forecast the coming 12–18 months, Patricia Muricy of Deloitte Brazil said the impact of today’s ESG commitments would stretch far beyond next year. 

“We know from global climate models what kind of changes will happen over the next 15 years under different scenarios ranging from 6°C to 1.5°C temperature rises,” Muricy said. 

“It’s only after 2035 that the trajectory of these models starts to diverge. The trajectory beyond 2035 is uncertain and will be determined by the speed of global decarbonisation.

“Miners therefore need to build a certain level of agility and optionality into their operating plans.”

Ominous, perhaps, but the uncertain nature of the mining industry beyond 2035 only solidifies the fact, as Wood alluded to, that there are plenty of opportunities ahead.  

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