Jonathan Brooks, head of Mining at Fieldfisher, considers how investor and activist pressure is shifting respect for sustainability and ethics from option to obligation.
Environmental and social governance (ESG) has, for a long time, been a woolly issue for the global mining industry.
Chiefly because there were no hard and fast rules on how to develop and implement ESG policies, nor any penalties for failing to do so, many companies felt they could legitimately ignore calls to ensure operations were carried out ethically and sustainably.
But in an industry with a checkered history of accidents, environmental disasters and eye-watering corruption scandals, is seems that the balance is finally starting to tip in favour of "good" ESG.
Industry bodies and NGOs have introduced codes and principles that set minimum standards for ESG, and governments are laying down legislation that obliges companies to observe robust environmental stewardship agendas, equitable distribution of benefits and transparent accounting practices.
Perhaps more significantly, money is also starting to talk.
Large institutions with long-term investment horizons are putting more pressure on extractives companies to prove the sustainability of projects, while buyers of metals 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.
As advisers to the mining industry, we have observed four main drivers of improvement in ESG.
- Corporate values - a genuine desire to live up to commitments in company documents to conduct business in a fair and ethical way.
- Compliance - legal obligations which remove choices about whether or not to implement certain ESG procedures.
- Competitive advantages - opportunities to distinguish a business from its peers in investor and customer engagement.
- Risk management - reducing the possibility of losing assets through accidents and disputes caused by poor ESG.
Here, we examine each of these factors separately and consider how the industry is responding to rising demands for better ESG.
Corporate values typically come under the umbrella of corporate governance.
Broadly speaking, corporate governance refers to sets of rules, practices and processes devised to ensure decisions are made in the best interests of all stakeholders in a business, and who is accountable for them.
Corporate values theoretically ensure a company strikes the right balance between its economic and social objectives.
For mining companies, there is a growing expectation that the interests of communities that live near to, or somehow stand to be affected by, mining operations are seen to be given fair weighting.
In many countries, achieving this means paying particular attention to cultural governance expectations - tailoring corporate practices to match the priorities of community stakeholders on the ground, rather than doggedly adhering to policies formulated in the splendid isolation of the board room.
To achieve this, companies need to establish accessible and open feedback channels with key community representatives, not just politicians - particularly in African jurisdictions, where formal top-down governance can appear opaque and tinged with colonial legacy.
The need to marry operational philosophies with corporate practice has proved challenging for many, as the emphasis has shifted to outcomes, rather than the length of environmental and social impact assessment (ESIA) reports, which are often highly detailed but remain forgotten on office shelves.
However, new generations of mining professionals and investors with a keener sense of social and economic justice have helped encourage the establishment of meaningful community engagement and environmental protection programmes at mining projects around the world.
Compliance - legislation, principles and codes
One of the most noticeable trends in mining in the last 20 years has been the hardening of government ESG requirements, from loose guidelines into mandatory obligations.
A good example of this is the creation of Community Development Agreements (CDAs) - contracts between investors and communities that set out how the benefits of a project will be shared directly with affected stakeholders.
CDAs are required by law in some countries, such as Nigeria, before a company commences any development activity within the lease area.
As well as being a legal requirement, CDAs have proved an effective route for companies to obtain the goodwill of host communities - the "social licence to operate" - by involving local decision-makers and giving them responsibility for how any financial rewards will be used.
Environmental considerations are likewise now much more embedded in the mining industry's culture than they were 20 years ago.
This is partly due to the legal requirement by most national governments to complete detailed ESIAs, as well as much more focus by NGOs on environmental issues following a series of ecological disasters in the extractives industry.
In the UK, the 2010 Bribery Act embodies in statute many of the requirements of the 1997 OECD Anti-Bribery Convention and the 2003 Extractive Industries Transparency Initiative (EITI), which together have given greater visibility into how assets and licences are awarded to extractives companies.
In addition to legislative developments, there has also been a proliferation of NGO and industry-led codes and principles.
While some, such as the International Finance Corporation (IFC) Performance Standards, are overarching, most refer to specific issues, such as social engagement, environmental practices or fiscal accountability, and many are tied to the extraction of specific metals - like the Cyanide Code in the gold mining sector.
But although ESG principles and corresponding performance rankings have been around for some time, until recently, there has been little rigour in the way these principles are applied, and even less understanding among stakeholders about what to look for as evidence of good ESG.
Industry, as opposed to NGO-led, initiatives such as the International Council on Mining and Metals' (ICMM) 10 Principles, have typically evolved as a result of efforts by large companies to re-engage apathetic stakeholders.
While the development of core standards for the mining industry has been mostly welcomed by proponents of better ESG, there has also been criticism that the different codes and sets of principles are disconnected with each other and enforced by too many disparate organisations.
Bodies such as the World Gold Council (WGC) are lobbying for insurance providers to take some responsibility for enforcing standards, by requiring mining clients to sign up to and uphold ESG principles in order to receive insurance cover.
The WGC is currently developing its Responsible Gold Mining Principles, which are intended to recognise and structure existing instruments under a single framework, and which the WGC hopes will be managed by stakeholders.
One notable difficulty with non-mandatory standards is that, while industry leaders are habitually quick to sign up to the latest set of principles, smaller players and those further down the supply chain do not always follow suit.
This is usually either because there is neither a carrot nor a stick incentivising them to join their larger peers, or because smaller companies feel so overwhelmed by the sheer variety of codes on offer that they consider it safest not to commit to any.
But shying away from best practice initiatives is a time-limited solution. As companies grow, scrutiny increases, so it is wise to think early about what standards to adopt.
Whatever principles a company decides to adhere to, they need to fit its business model.
Simply adopting policies for the sake of it risks corrupting a company's existing ESG process and ethos, if external guidelines do not reflect the circumstances of a particular project.
Competitive advantage - the investment incentive
Two decades ago, many mining companies assumed that environmental and social matters could be addressed after what they considered to be more pressing concerns, such as securing assets, exploration activity, financing and construction.
Many have since learned from acrimonious experience that failing to address ESG questions at the outset can lead to expensive problems further down the line.
Taking account of ESG preemptively gives companies the opportunity to embed policies in all aspects of a project, including fundraising.
In the UK, ESG is becoming part of the workstream for some of the larger mining IPOs, alongside the more customary technical, financial and legal due diligence, with specialist ESG rating agencies becoming increasingly influential in investment decisions.
ESG also increasingly comes up in investor roadshows, where the focus of questions can vary from cursory "tick box" inquiries, to forensic interrogations about spending commitments and how a company's initiatives align with key ESG codes and relevant national laws.
At the perfunctory end of the spectrum, questions such as "what are you doing on ESG?" are so broad brush as to be unhelpful.
When faced with unfocused queries, mining companies should engage with investors to establish constructive dialogue and illustrate clearly what ESG risks they have identified in their operations, and what they have done specifically to mitigate these.
Lenders that require companies to observe a prescribed group of ESG principles typically place a lot of emphasis on a miner's management plans and how these are designed to meet identified KPIs.
While it is gradually becoming accepted that good ESG reduces project risk, demonstrating its long-term value as a financial metric continues to be difficult.
Some companies approach this by modelling the financial impact of being forced to close a mine for an extended period, 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 on site, but relatively few employ proper community engagement staff to handle social risks.
ESG risks need to be assessed judiciously and be based on extensive environmental, social and political fieldwork.
The findings of these assessments should be costed generously and built into project budgets.
Definitive feasibility studies, for example, need to plan for using local labour, which may involve providing extensive training in areas like health and safety.
In addition to resettlement costs for people whose homes may need to be relocated, companies also need to think about the risks associated with economic displacement, if communities rely for their livelihoods on the land earmarked for mining.
Concepts such as the World Bank's Natural Capital Accounting framework are evolving as means of calculating the value of natural resources depleted through exploitation, to help companies work out how much corresponding investment needs to be made in human capital (such as education or health) or produced capital (such as infrastructure) to redress the balance.
An added area of risk for most mining companies is the obligation to vouch for the ESG credentials of their contractors.
Approaches by EPC contractors to ESG vary, so when negotiating with providers, companies need to consider contractual incentives for compliance and penalties for non-compliance with their ESG policies.
Points to remember when approaching ESG
While many mining companies still come in for criticism on ESG, it is not always the case that those being harangued are doing it badly; sometimes, they are just not reporting their activities in a way that satisfies external monitors.
Management teams need to ensure that they are generating the right sort of data to inform their reporting, especially as guidelines continue to be updated.
Management plans also need to be iterative and flexible enough to adapt how they approach ESG, as project technicalities or the priorities of the host community or government may change.
Governments can be both capricious and inflexible, but this is a risk mining companies need to accept and factor into their budgets and schedules.
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.
ESG should not be sacrificed just because mutable circumstances change.
Push for best practice
It is true that the mining sector currently lacks a level playing field when it comes to ESG, with not every jurisdiction demanding the same standards of all operators.
But this should be an impetus for wider adoption of better practices, rather than a motive for rejecting ESG.