What it means for your insurance
ESG: three letters that have been driving the evolution of global decision making. In recent years, we have seen insurance companies making executive level decisions to stop supporting certain industries they feel are not “ESG friendly.” But what does it really mean to have good ESG credentials, and how can mining companies adapt?
Mining operations are part of the problem and solution for E (Environmental). The world’s use of non-renewable energy, including coal, natural gas, and petroleum, produce greenhouse gas emissions, which have a negative effect on climate change. The shift from coal power generation has already begun; however, the energy transition will take time especially in developing countries where the capital resources required for cleaner energy are more difficult to obtain.
Thermal coal will still be needed during the energy transition if we want to keep our lights on, but some insurers have announced they are phasing out support for this industry. Mining companies producing thermal coal are forced to find alternative risk transfer solutions, such as captives, increasing retention levels, and using non-conventional insurance markets. Some insurance companies have realized they were too quick to make executive level decisions to stop supporting non-renewable industries after realizing the world cannot quickly move from non-renewable energy sources to 100% renewable energy. The technology for constant reliable renewable energy has yet to be created: we are not as advanced as we had hoped. The world is still working on the solution, but it is clear there will need to be a wide variety of energy options to be sustainable.
Copper, nickel, aluminum, chromium, zinc, lithium, rare earth elements, uranium, cobalt, and their by-products are key minerals and metals needed to supply cleaner energy technologies, such as solar, wind, hydro, bioenergy, geothermal, nuclear, electric vehicles, and battery storage and hydrogen. Although there is a growing demand for these minerals and metals as part of the cleaner energy transition, mining companies responsible for producing these need to do so sustainably. The mining industry relies on large quantities of water during the mineral extraction process, which is an issue as there are growing concerns with the depletion of water supply in certain jurisdictions. The energy sources mining companies use to power their processing facilities and to fuel their mobile equipment do not come from 100 percent renewable energy. Mining companies need to focus on improved water management, reducing their energy intake as well as their Scope 1 and 2 emissions.
In the mining industry, the S (Social) is of utmost importance due to the typical geographic areas where mines operate. Mining activities tend to occur in small remote communities where relationships with the local community is essential for the mine’s social license to operate. Canadian mining companies operating in countries like Peru and Chile have political unrest top of mind at the board table and should review their political risk insurance coverage. Social activism has forced some mining companies to suspend operations due to issues with supplies or access to the site. This is a potential business interruption concern for insurers and mining companies will want to get ahead of it by providing insurers with information on their risk mitigation and contingency plans that are in place to manage this exposure. Getting the insurer comfortable with your risk treatment plan will help you secure more favourable insurance terms.
We have seen movements such as Me Too and Black Lives Matter impact the way insurers look at the makeup of boards, senior leadership, and overall workforce. Diversity, equity, inclusion, and belonging (DEIB) have been brought to the forefront with expectations that companies better balance representation and compensation. In an industry that has historically been male-dominated, the mining industry has a well-known challenge of recruiting and maintaining women. Executive risk and financial line insurers want to understand how mining companies are managing their DEIB considering the increased shareholder activism targeted at companies with little diversity on their boards and the reputational damage that it can cause.
The silent G (Governance) provides insurer confidence that the insured’s business practices are sound and ethical. Strong board and management structure, corporate policies, and procedures promote strong governance, which also drives the environmental and social factors. Most Canadian mining operations are required to provide the ministry of environment with financial assurance for the decommissioning and reclamation of the mine. This financial assurance can be met by placing a surety bond that offers competitive rates to companies with strong corporate governance and financials.
Telling your ESG story (e.g., net-zero targets, good relationships and partnerships with local communities, and strong corporate governance) to your insurers is important messaging as it shows you are on the path to transition and doing your part to secure a sustainable future. The insurance industry was built on long-term relationships and insurers want to partner with insureds who have a strong future. Mining companies that are not able to demonstrate they are moving towards improving their ESG performance may find themselves in more difficult insurance renewal situations than mining companies that can evidence their ESG progress and achievable targets.
ESG is a board level topic not only for mining companies but also at insurance companies looking to partner with clients that are setting ESG targets and have a plan to reduce emissions. Unlike the financial industry, insurers have not yet taken the extra step in their underwriting and do not require an evaluation of the insured’s ESG performance through credentials and scoring. However, it is very likely during the insurance renewal process your insurers will ask more questions, possibly even a questionnaire, regarding your company’s ESG strategy and commitments as they complete their own due diligence.
There is no question certain insurance markets will move towards evaluating ESG credentials, but it has not yet been determined how that will look. In October 2021, a Lloyd’s of London insurance syndicate was created with the sole purpose of underwriting risks that perform well against ESG metrics. There is a clear shift in the insurance industry to continue to support only the “ESG friendly” companies. My advice is to be proactive and continuously share your ESG journey with your insurers. Communication is the building block of long-term relationships and the founding block of the insurance industry.
Katherine Dawal is vice-president, risk management at NFP Canada.