ESG: BEYOND THE BOTTOM LINE

ESG:

BEYOND THE BOTTOM LINE

By Michelle Goldsmith, Contributing Editor, Mining Magazine

A heightened focus on ESG is gaining momentum within the mining industry, as non-financial factors play an increasing role in investor and consumer decisionmaking worldwide. This new reality calls for mining businesses to consider the unique ESG risks to which their operations are exposed, and measure, report and improve performance on various ESG criteria. Understanding ESG principles and adopting an appropriate framework enables companies to provide the transparency and accountability that investors now require, overcoming challenges while offering opportunities for innovation and value creation.

What is ESG?

More and more frequently, investors are considering a company’s wider impacts, beyond the purely financial, when deciding whether to invest. ESG (environmental, social and governance) refers to the three main pillars encompassing the non-financial criteria often used by investors to assess company performance.

Environmental

Environmental ESG criteria primarily relate to positive and negative environmental impacts, including effects on the atmosphere, land, oceans, seas, habitat, coasts, water bodies, and biodiversity. Investors may consider environmental protection policies and measures taken to optimise environmental impact by reducing pollution, balancing resource consumption, conserving natural ecosystems and resources, and supporting climate mitigation and adaptation.

A company’s social performance depends on the effects of its activities on people and communities. This includes outcomes related to community health, liveability and wellbeing, social cohesion, gender equality, education, housing, security, and more. Investors assess policies and measures to ensure fairness, accessibility and inclusion, or to enhance quality of life and community wellbeing.

Governance

Investors may assess the governance of a company on criteria including transparency, accountability, inclusive decision-making and building community trust. Good performance in this area generally involves transparency and demonstrating inclusive governance mechanisms, effective community engagement and risk mitigation, user focus, ethical business practices and good corporate citizenship.

Different investment firms may measure ESG performance against different criteria and assign varying weights to different elements. Overall, excellent ESG performance requires company management to consider impacts across the entirety of a business’s operations and successfully optimise and balance outcomes under each of the three pillars.

The new reality of investor expectations

Across Australia and worldwide, investor interest in ESG outcomes has rapidly intensified over the last decade. This comes in response to changing consumer and investor expectations of business transparency and accountability, resulting from increased awareness of the wide-ranging direct or indirect impacts of various commercial activities. For many investors, including a growing number of large investment firms, ESG impacts are now a major influence on investment decisions. In a 2021 investor survey by EY, 91 per cent of investors reported that non-financial performance was “pivotal” to their investment decisions1. Measuring an investment’s value on criteria beyond maximising profit is becoming the norm, rather than the exception, and momentum continues unabated.

While many investors want their investments to align with their own ethics and benefit people and planet, and seek to avoid association with unethical companies, these are not the only reasons for their focus on ESG. Increasingly, companies that perform well on ESG are seen as smarter investments with lower risk and greater potential for long-term financial returns. Essentially, ESG performance is considered to reflect good management and risk mitigation. Adopting an ESG framework and reporting on performance demonstrates that management has a comprehensive perspective of business operations, is collecting and analysing relevant data, and is taking a proactive approach that considers and addresses risks that may disrupt operations, affect investment value and reduce competitiveness.

Evidence suggests a strengthening link between companies’ financial performance and their ability to track, measure and report on ESG criteria2 . On average, mining companies with better ESG ratings generate shareholder returns outperforming the general market index by ten per cent3. Poor performance on ESG criteria, or lack of data or transparency, can be a powerful deterrent to investors, making it more difficult and expensive to access capital. The mining corporations with the lowest ESG scores can end up paying capital costs up to 25 per cent higher4 . Meanwhile, companies that perform well can access funding from a wider range of sources and at more generous interest rates. ESG accountability also has crucial implications for a mining company’s ability to obtain permits, protect their assets from disruption, and access strategic partners, customers and other opportunities.

ESG exposure in mining

Commercial-scale mining operations are inherently exposed to various ESG risks. Extracting valuable resources from the earth will always involve some level of disruption to surroundings, while using industrial machinery has safety implications and necessitates hazard mitigation, and tailings and other waste products must be disposed of.

Like any large-scale industrial activity, mining operations consume significant energy, resulting in emissions from fuel use and electricity generation. Mining generally also has heavy water supply demands, which must be balanced with environmental requirements and the needs of any other water users sharing a source.

Unique ESG concerns may be associated with the location of mining operations; certain applications, processes or materials involved; or an array of other factors relevant to individual sites or projects. Industry and project-specific concerns come in addition to the ESG risks common to most businesses and employers, or to companies dealing in valuable resources, managing high-value projects, handling large amounts of money and/or generating significant profits.

Fundamentally, investors may appraise companies on ESG criteria encompassing any non-financial topic, though some are more prevalent than others (e.g., carbon emissions). Some of the most common issues falling under each pillar of ESG are listed below.

Environmental:

♦ Biodiversity preservation ♦ Threatened species conservation ♦ Energy production and use, carbon footprint, greenhouse gas emissions and associated climate change impact ♦ Ecosystem services ♦ Water use and management ♦ Mine waste/tailings management and utilisation ♦ Air quality and noise ♦ Waterway health ♦ Hazardous substances ♦ Recycling ♦ Site remediation

Social:

♦ Human rights ♦ Preventing child and forced labour ♦ Land use ♦ Resettlement ♦ Vulnerable people ♦ Local infrastructure ♦ Local communities ♦ Community outreach and engagement ♦ Employment ♦ Indigenous cultural heritage ♦ Gender equity ♦ Labour practices ♦ Worker and community health and safety ♦ Security ♦ Artisanal miners ♦ Mine closure ♦ Company culture ♦ Diversity ♦ Education ♦ Sanitation ♦ Food ♦ Disaster and crisis management ♦ Mental health

1. Five-step framework for CFOs to get non-financial reporting off the ground, EY, 2021 https://www.ey.com/en_ie/cfo-agenda/five-step-framework-for-cfos-to-get-non-financial-reporting-off-the-ground 2. Mine 2021: great expectations, seizing tomorrow, PwC, 2O21, https://www.pwc.com.au/mining/global-mine-2021.html 3. Mine 2021: great expectations, seizing tomorrow, PwC, 2O21, https://www.pwc.com.au/mining/global-mine-2021.html 4. Creating the zero-carbon mine, McKinsey & Company, 2021, https://www.mckinsey.com/industries/metals-and-mining/our-insights/creating-the-zero-carbon-mine

Governance:

♦ Legal compliance ♦ Ethics ♦ Anti-bribery and corruption (ABC) ♦ Transparency ♦ Policies ♦ Tax ♦ Lobbying activities and association with other parties (such as political parties)

To unlock the benefits of better ESG ratings, managers must understand which considerations are most relevant and pressing across a company’s operations and apply measures to minimise negative effects while maximising positive impacts.

Challenge or opportunity?

For the mining industry, ESG is still sometimes framed primarily as an inhibitor to profit or a hurdle that must be overcome. Satisfying investor expectations in this arena indisputably has its challenges. In EY’s annual report on risks and opportunities within the global mining and metals sector for 2022, surveyed mining companies ranked environmental and social issues as their number one disrupter, followed by decarbonisation and licence to operate5 .

Thankfully, many of the problems that result from ESG issues and increased investor scrutiny can be avoided by taking a proactive approach to adapt that takes advantage of technological advancements and data analytics. Reframing ESG as an opportunity and potential source of value has a variety of benefits, direct and indirect.

PwC (PricewaterhouseCoopers) cites ESG as a key growth prospect for mining companies.

“ESG represents one of the mining industry’s most significant opportunities for long-term value creation, building trust and sustainable growth,” states the 2021 mining industry report. “Miners need to engage with their stakeholders and start to ‘bake’ ESG into the core of their strategies.”

ESG performance can become a key differentiating factor for companies that actively align their businesses to ESG principles, giving them a competitive advantage and making them more attractive to potential project partners, customers, investors and financiers. Additional near and long-term advantages for companies that successfully navigate ESG include: ♦ Access to the best industry talent and better staff retention ♦ Reduced costs due to more efficient use and better management of energy, water and other resources ♦ Greater resilience to disruption due to water, energy or other resource scarcity ♦ Reputational benefits, including strengthened stakeholder relationships and reduced insurance and other costs ♦ Expanded scope for innovation and continuous operational optimisation by utilising advanced insights from more comprehensive data collection and reporting ♦ Greater supply chain transparency and control ♦ Increased productivity ♦ Investment and asset optimisation ♦ Reduced regulatory and legal interventions

These sources of upside value, in combination with the advantages of avoiding the worst repercussions of ESG-related problems or serious incidents (including loss of access to finance, loss of permits, civil or criminal liability, reputational damage, project disruption due to protests, investor divestment, employee dissatisfaction, and more) make a compelling case for miners to invest in ESG.

The need for in-depth data and reporting to demonstrate ESG accountability and prove performance is one of the foremost challenges for businesses seeking to navigate this industry climate, especially for newer or smaller operations with limited resources. Failure to disclose ESG metrics due to lack of data can put a company at a competitive disadvantage and may even be seen as evidence of having something to hide. The challenges inherent in measuring and reporting on ESG are often exacerbated by a lack of guidance and uniform standards. However, new industry frameworks and technology can help ease the transition.

Performing on ESG

Data, reporting and the adoption of a strong ESG framework are key to ESG success. Satisfying expectations on ESG criteria essentially involves balancing an array of elements across all dimensions of a business and its activities to align with ESG principles.

The greatest benefits of ESG-related market transformation will be realised by companies that take an outcomesfocused, proactive approach, applying effective policies to embed ESG principles into operations and align their business to best practices, rather than merely fulfilling the minimum mandatory requirements.

Effective application of ESG policies to action real improvements necessitates rich data to assess risks across the ESG spectrum, and the capabilities to accurately measure outcomes against metrics, analyse results and assess opportunities.

“As stakeholders continue to hold miners accountable for environmental and social practices, purpose, long-term value and sustainability are no longer add-ons to business as usual – they are themselves business as usual. In such an uncertain and shifting environment, we are likely to see greater use of data science, scenario planning and data modelling to guide more intelligent decisions and create differentiation,” said Paul Mitchell, EY Global Mining and Metals Leader6 .

Transparency is crucial. Investors expect companies to publish an ESG statement outlining their commitments and the performance criteria they are working to achieve. Regular reports on ESG metrics further build credibility and supply evidence of progress towards these goals. Voluntary accreditations can also demonstrate dedication to ESG principles, prove sincerity, and provide investors with independent validation of companies’ claims.

Technology and digitalisation can also be important elements of the journey towards accountability. Deployed in service of an ESG agenda, digital innovation can enable greater sustainability, provide opportunities for diversification, and allow larger quantities of richer data to be obtained and analysed efficiently for improved transparency and ease of reporting7 . Advanced digital technologies can help miners overcome the challenges of a transition to net zero, improve on-site health and safety, and more.

A growing number of resources are available to mining companies seeking to begin or progress their ESG journey. SLR Consulting outlines the key steps miners need to undertake towards ESG accountability8: ♦ Assess and screen ESG risks and opportunities for single sites and across your mining portfolio ♦ Set your ESG strategy and objectives at both a board level and for your corporate executive ♦ Agree and define your strategic action plan from board level through to individual sites ♦ Pursue specific project interventions at each mine site, focusing on your prioritised ESG issues ♦ Collect and report ESG data for your investors and other key stakeholders ♦ Seek certification and associated independent validation of your

ESG performance

Towards ESG excellence in Australian mining

While many facets of ESG accountability in the mining industry are universal, details can significantly vary by location. Acknowledging this, Australian miners must account for our country’s individual context. This may include consideration given to Australia’s unique regulatory and political landscape, societal factors, climate and geographical features, Indigenous heritage, flora and fauna, and ecosystems.

The Minerals Council of Australia (MCA) has adopted Towards Sustainable Mining (TSM), an independently verified accountability framework providing guidance to mining companies in relation to evaluating, managing, and communicating their performance on sustainability and other ESG metrics9 . The TSM framework was first established by the Mining Association of Canada (MAC) in 2004. It is being adapted for Australian requirements as part of a five-year implementation plan and will be administered by the MCA. TSM supplies much-needed standardisation and uniformity regarding measurement and reporting on ESG indicators for Australian miners. It builds upon existing commitments laid out in Enduring Value – the Australian minerals industry’s framework for sustainable development and aims to help companies address the challenges of ESG and reap the benefits of supplying the transparency and accountability investors and the public now demand.

TSM’s eight performance protocols focus on three core areas to link commitments and site-level performance – communities and people, environmental stewardship and climate change. Each protocol comprises a set of indicators to assess, demonstrate and enhance the Australian minerals industry’s ESG performance at site level10 . Above all, the TSM framework is built on the foundations of accountability (assessments are conducted at a facility level, providing communities with meaningful data on mining activities), transparency (performance is reported against a suite of indicators and externally verified), and credibility (the program is overseen by an independent Community of Interest (COI) Advisory Panel, which fosters dialogue between stakeholders to refine and shape the initiative into the future). From 2025, MCA members will be required to assess and publicly report on their performance against TSM indicators, with independent verification every three years.

Shifting expectations are undeniably transforming the landscape across all industries. Investors, financers and the public are demanding greater accountability from businesses. This new market reality sees investors placing a growing importance on non-financial factors when assessing risk and growth opportunities. Environmental, social and governance (ESG) performance has come to the fore. In this environment, transparency, accountability and alignment with ESG principles are becoming essential for mining businesses’ success in the near and longer term. This represents both the greatest challenge and foremost opportunity for organisations within the industry, with those who view ESG as an avenue for growth and innovation set to benefit by balancing commitments to people, planet and profit. By taking a strategic, proactive approach to implement an ESG framework and making the most of technology and digitalisation, companies can differentiate themselves in the market, optimise operations, and unlock additional value and sources of capital.

5. Top 10 business risks and opportunities for mining and metals in 2022, EY, 2021, https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/mining-metals/ey-final-business-risks-and-opportunitiesin-2022.pdf 6. ESG with a heightened focus on environment and social issues, emerges as the top risk/opportunity for the mining sector, EY, 2021, https://www.ey.com/en_lb/news/2021/10/esg-with-a-heightened-focus-onenvironment-and-social-issues-emerges-as-the-top-risk-opportunity-for-the-mining-sector 7. Top 10 business risks and opportunities for mining and metals in 2022, EY, 2021, https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/mining-metals/ey-final-business-risks-and-opportunitiesin-2022.pdf 8. ESG insights: how to tackle ESG risks and opportunities in the mining industry, SLR Consulting, https://www.slrconsulting.com/en/news-and-insights/insights/esg-insights-how-tackle-esg-risks-and-opportunitiesmining-industry 9. Towards sustainable mining: taking ESG accountability to a new level, MCA, https://www.minerals.org.au/towards-sustainable-mining 10. TSM 101: a primer, MCA, 2019, https://www.minerals.org.au/sites/default/files/MAC%20TSM%20101%20-%20A%20Primer.pdf