Preserving the ecosystem means preserving capital, naturally

Natural capital is one of the most valuable assets for mining companies. It provides the metals and minerals we seek, water during the extraction process and infrastructure to protect against flooding and droughts. But it’s hard to quantify with a dollar amount because its value isn’t easily captured by traditional accounting systems. This, however, has improved significantly, led by the United Nations-backed Economics of Ecosystems and Biodiversity initiative.

Ever since, financially quantifying the value of preserving nature versus development is a routine assessment in many municipal and national development decisions. This could put some mining companies at risk of losing access to land or water that will increasingly be revalued using more robust, reliable and globally accepted economic assessment methodologies.

Here are some considerations for mining managers to avoid surprises:

Legislative and regulatory changes

The US, UK, EU and Rwanda Governments are at varying stages of holding companies responsible for measuring the value of their natural capital use, and incorporating these ideas into their strategic planning. This type of analysis will increasingly factor into legislative decisions as well as regulatory and permitting requirements, impacting both new and existing corporate development plans. Mining professionals who engage with government and other key stakeholders can help inform new regulatory requirements to ensure they’re ultimately achievable.

Water crisis

Water is a prime example of an ecosystem service that’s key for the mining sector. EY’s top 10 business risks facing the mining and metals industry included access to water for the first time in 2014, and remained a relevant issue in the 2015/2016 ranking.

Lack of access to clean water is exacerbated by the increasing risk of both flooding and drought due to deforestation, soil erosion and wetland degradation.

Flooding and drought risks will only intensify concerns around water scarcity which, in turn, impacts biodiversity. The 2015 World Economic Forum Global Risk Survey identified biodiversity loss as a significant concern, one that is closely linked to economic development and water security.

Bloomberg’s Water Risk Valuation Tool illustrates how water risk can be incorporated into valuation models for gold and copper mining companies. The tool also offers the capability of modeling potential asset stranding based on conditions of future physical water scarcity, and estimates the effects of this water risk factor on earnings and share price.

Access to financial capital

In EY’s 2011 analysis of profit warnings issued by UK companies, the firm found that environmental externalities can equate to up to 50% of company earnings in a standard equity portfolio.

Appropriately pricing these externalities has become a significant concern for investors. This is particularly an issue for industries that are dependent on natural capital, such as mining.

In 2012, over 40 financial institutions launched the Natural Capital Declaration, which is a commitment to the integration of the value of natural capital into financial products and services.

Many large asset managers and owners are starting to re-evaluate stocks to incorporate potential increases in costs related to the use of natural resources. Issuers vulnerable to increasing natural capital costs may start to slowly experience an underweighting of their stocks in investment portfolios.

It is also becoming common for investors to engage with corporate leaders on their management of climate change and the corresponding resource scarcity, and related impacts on corporate profitability. For example, pension funds around the world, including Canada, publish their key areas of concern regarding environmental risks and other long term issues.

What does this all mean? Appropriately valuing the impact and dependency on natural capital is critical for mining companies to safeguard their natural assets and make better operational decisions over the life of a mine. Investing in natural water filtration systems, for example, can provide the same benefits as built infrastructure, and often at a lower cost. The negative financial and reputational consequences of poorly managed natural assets are very real. Proper valuations and overall transparency are must-haves to minimize those risks, and be viable in the long term.

Susan McGeachie is EY Market Leader, Climate Change and Sustainability Services.