5 ESG trends to watch: Investor focus on ESG continues to intensify

With growing demand from investors for environmental, social and governance (ESG) related data and an ever–increasing number of ESG standards and frameworks, it can be confusing and difficult for miners to figure out what information is important and how to report it. But according to a panel on ESG at this year’s Prospectors and Developers Association of Canada (PDAC) convention in March, it’s worthwhile for companies to make the effort.

Moderated by Erica Coulombe of the advisory firm Millani, here are five takeaways from the expert panel.

1. ESG is here to stay

The current attention to ESG is part of a new approach to assessing investment risks and opportunities that looks beyond financial statements, said Ani Markova, a director of SilverCrest Metals and Golden Star Resources.

“There has been a huge investor demand for ESG sustainability related investments, not only in the equities but in the bond markets as well with green bonds and sustainability linked investments,” she said. “We have seen a big shift in the philosophy behind financial analysis from a simple analysis of income statement and balance sheets to a more complex labyrinth of factors, including the ethics of the organization, the competitive advantages and the culture, which are more intangible assets.”

As for why this shift is taking place, Markova noted that investors have the fiduciary duty to integrate financially material factors, including these ESG factors in their investment decisions.

In fact, investors themselves are being judged on how and whether they are collecting and considering ESG data.

“All these asset owners and asset managers are now required to disclose annually to the UNPRI (UN Principles for Responsible Investment) what are they doing in terms of integrating those ESG factors in their investment process and how are they engaging with the companies,” she explained.

2. Mining has a long history with ESG

Although the current intense focus on ESG is a newer trend, in and of itself, it’s not a new thing for miners.

Although the mining industry suffers from the perception of being a laggard in ESG efforts, Nicholas Cotts, senior vice-president, external relations and social responsibility, with Newmont pointed out that the mining industry has actually been foundational to the ESG agenda today.

“Back in the ‘80s when I started working in the mining sector, the ESG morphology was health, safety and loss prevention and environmental management. It was really what were companies doing to protect their people and what were they doing to stay in compliance with the laws and regulations that existed,” he said.

In the 1990s, the concept of social licence emerged.

“Fast forward to today – we have the concept of environmental stewardship, health and safety, transparency, ethics, supply chains, social performance, local procurement, human rights, it goes on and on.”

He added: “What’s changed is how companies are being asked to validate, to measure, to assure that information and that performance on the ground and how we are communicating that information out to an incredibly broad set of stakeholders.”

3. The proliferation of reporting standards

The ever-increasing number of ESG reporting frameworks can easily prove overwhelming for miners, especially juniors. There’s the Global Reporting Initiative (GRI) Standards, CDP (formerly Carbon Disclosure Project) questionnaires, the World Gold Council’s Responsible Gold Mining Principles (RGMPs), International Council on Mining & Metals (ICMM) Performance Expectations, the IFC Performance Standards; Dow Jones Sustainability Index (DJSI), and more.

“We all hear all the time how complex it is to navigate through all the standards in existence today. My impression is that we’re starting to see some convergence of those,” said Markova, noting that the World Economic Forum published a paper towards common metrics and consistent reporting and sustainable value creation earlier this year.

“But what I want to emphasize is that it will look overwhelming when you see how and what investors are looking for, but I encourage you to think about what is material to your business. What has a financial impact, both positive and negative?”

Gus MacFarlane, vice-president of Verisk Maplecroft, said that while investors are often looking at corporate-level data, most of the risk for miners are likely to manifest at site level.

“ESG data tends to be in corporate–level terms, which has the ability to disguise an awful lot of site issues, which can be of an extreme nature,” MacFarlane noted.

There’s a need for companies to disclose both raw data for in-depth analysis and corporate–level data that can be used more broadly to compare businesses across industries.

Newmont’s Cotts noted that while it is a challenge to manage the ever-increasing ESG data requests and reporting requirements, companies can’t become distracted from what’s important – performance at the mine site level.

“We have to find that right balance – while we want site-based information, we don’t want to burden sites with gathering info. So we have to find the right-sized systems and how we collect that information in a way that’s helpful to the sites.”

Newmont is attempting to accomplish that by designing information data collection systems at the corporate level, and then adjusting them or co-building them with the sites so they can use the information to make better decisions on a day to day basis. “If we can find that happy medium, then we’re creating value for the sites, we’re not just putting more work onto them,” Cotts said.

Jeff Geipel, founder and director of Mining Shared Value said that while companies are concerned about reporting being a burden, the sector’s experience with health and safety proves that reporting can work to drive performance.

“Health and safety performance has improved drastically and to be brutally honest, it’s not because of increasing sanctions on companies for poor performance, it’s more self-performance increments through things like recording and making it omnipresent,” he noted.

“You can’t look at reporting as a burden, you should actually look at it as a value creation opportunity,” Geipel said, adding that the benefits are many, including a lower cost of capital.

4. The need for harmonization

One issue that comes with the proliferation of ESG frameworks has been a need for standardization. As is stands, the same company can rank very well in one set of standards and very badly in another.

MacFarlane detailed several factors that are causing data gaps and divergent assessments as well as wasted effort when it comes to ESG data. First, he explained, there needs to clarity on what you’re trying to measure – is it ESG impacts, or ESG risks? Is it short-term operational issues or long-term strategic issues? Impacts on specific stakeholders or entire systems, like ecosystems? Second, the proliferation of disclosure frameworks and ESG standards, in addition to surveys and questionnaires coming from the rating agencies, investors, can cause confusion. “This can make for quite a baroque mess of definitely unsound advice that investors are trying to navigate their way through,” MacFarlane said.

And third, while there is a lot of quantitative data when it comes to the environment portion of ESG, the social and governance components are necessarily going to involve qualitative data where definitions will need to be checked and direct comparisons may become difficult.

A lack of context can also make the data less useful, said MacFarlane: Is the operation in the Atacama Desert in Chile or in Ghana where oversupply of water is an issue?

In the end, Newmont’s Cotts recommends doing as the gold major has, which is: “Being purposeful in evaluating and selecting the initiatives that we align with and then ignoring everything else.”

Markova had similar advice.

“There is a big discrepancy in rating agencies’ data and ratings, and this is really a challenge,” Markova noted. “What I want to emphasize is how important it is to pick the right framework and the protocol for your business because that imposes discipline in oversight. Investors and others really want to know the relevant disclosures that will give them the comfort they will achieve their investment returns.”

5. The climate wild card

Although the environmental, social and governance data and their challenges are generally well understood, and companies are aware of what improvements are necessary, climate change is an exception.

That’s partially because of regulations that are expected to be enacted in the near future, Markova said. “Climate patterns are changing very fast, and we can’t just pick up our mines and move them somewhere else, but also, the regulation that’s coming country by country will impact us in a very significant way.”

Investors are concluding that the world will not meet the Paris Accord climate targets, and therefore a temperature rise beyond 2 ° Celcius is likely, she added.

“This is why you’re seeing so many investors focus on climate change – because we can’t get those targets in place,” Markova said.

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