ESG 101: A primer
Everyone is still talking about ESG. Companies are producing ESG reports, governments have ESG policies, investors are ranking companies based on their ESG performance, and the list goes on. But that does not mean that everyone gets ESG. To be honest, the ESG field is changing and maturing so fast that there is not necessarily a firm definition or system for ranking ESG.
If you are still wrapping your head around ESG, you are not alone. Here are a few things to know (and questions to ask) about ESG.
What does ESG mean?
ESG stands for environment, social and governance and it is the term that investors use to think about non-financial but material issues facing a company.
E – Environment. This represents our lived environment and space, including water, land and air, plants and animals, and climate.
S – Social. This represents businesses influence on society, local communities, political and economic systems, and employees.
G – Governance. This represents all the decision-making systems, management and communications that a company has.
ESG is not necessarily new, it is part of the ongoing discussion about the role of a company in supporting a healthy society, environment and economy. ESG is particularly relevant in the mining sector because the negative impacts and benefits of mining for local stakeholders and for our global society can be so extreme. The language we use to talk about ESG has changed a lot over time depending on who is talking. Investors talk about ESG, companies used to talk about corporate responsibility and now generally refer to sustainability. Some civil society groups will talk about ethical resources or the just transition. ESG has gained favour over the past few years because it specifically calls out three factors and speaks to the whole company approach to managing these non-financial material issues. When it comes to ESG, it is really important to have a discussion about definitions, because this language is adapting and changing. We are still landing on common language and standards related to ESG. The fact that there is not an agreed upon definition in this space speaks to how quickly this space is changing and adapting and formalizing
Who is responsible for ESG?
It is easy to think that the sustainability group is the part of the company that is responsible for ESG. At most companies, the sustainability team is usually responsible for strategy and ESG disclosures, but every department is responsible for contributing to ESG performance. ESG includes everything from social performance to diversity and inclusion; net zero commitments to health and safety; procurement practices and hiring and employment practices to name a few. Every single employee contributes to ESG performance, regardless of what department you are in. The sustainability department leads the strategy and disclosures about ESG – much the same way every department contributes to a good balance sheet, but the finance team is in charge or setting the strategy and leading the way.
Why does ESG matter?
ESG matters for a number of different reasons. Effective ESG limits the likelihood and severity of risks to the business. In addition, many stakeholders, specifically investors, see effective ESG as a proxy for good management and this is one of the reasons why so many investors have grabbed on to this topic and are integrating it into their decision making. Effective ESG is also an expectation of stakeholders and rightsholders. They expect that companies limit the negative impacts and share the benefits associated with their activities. They also expect that companies communicate about their activities and collaborate with other stakeholders like government, local communities (especially when mining activity has an impact on Indigenous Peoples), civil society organizations, other businesses for example. This is compounded now more then ever because globally we see that society has less and less trust in government institutions and the private sector is more and more present. Effective ESG is also a legal requirement. Not only where you are doing business (host government) but also where you company is located (home government) will have rules and requirements for how businesses need to behave. The mining industry also has a lot of voluntary standards or requirements that guide practice, like the Mining Association of Canada’s Towards Sustainable Mining program. Last but not least, ESG is aligned with a company and employee’s values. It is the expression of a company’s and employees’ commitment to responsible practice.
What are companies doing about ESG?
Across the industry we can think about a company’s ESG strategy in three ways
> Sharing Benefits – Mining activity has many great benefits. Not only the value of the final product but also the financial wealth that is developed, the taxes and revenues that are generated, the jobs that are created as well as the indirect value of some of the infrastructure that comes along with mining activity. There can also be less direct or obvious benefits like improving local governance and economic development. How a company shares those benefits with stakeholders is a very big part of their ESG strategy.
> Managing Impacts – Mining activity also has some very significant, sometime irreversible impacts. These can be environmental impacts like changes to water quality and quantity, impacts to wildlife and plant life and how emissions contribute to climate change. They can also be social impacts as a result of resettlement, influx, as well as employee and community interactions for example.
> Collaborating and Communicating – Companies are not the only entity involved in (or managing) mining activity and they cannot work alone. How a company works with other stakeholders is central to an effective ESG strategy. This can include working with governments, including Indigenous governments and Indigenous Peoples, employees, investors and civil society organizations. Communicating with these stakeholders (which is different than collaboration) is also really important. This includes how companies share information about their activities for example – a sustainability report and disclosures, sharing information with local communities, being transparent about government payments.
A companies ESG response will change across the life of mine, but it will still hang on these three elements. This time of year, companies have recently released their ESG disclosures and / or sustainability reports. This is a great place to start if you want to start to learn more about a company’s approach.
CAROLYN BURNS is the executive director of the Devonshire Initiative. The Devonshire Initiative is a multi-stakeholder forum focused on improving development outcomes in the mining context. You can learn more about it at www.devonshireinitiative.org.