SA’s environment, society and governance metrics ranking

How mines can best position

themselves to lead the way on ESG

Adapting to ESG risks is not new to mining. This gives companies in this sector a competitive advantage when it comes to complying with new and evolving legislation around their environmental impact and social licences to operate. But being ahead of the curve can lead to complacency if not actively managed and monitored.

By Carla Clamp, Director at BDO South Africa

A pressing issue facing the mining industry is the global shift toward net zero carbon emissions. This has led to rising expectations among stakeholders. In turn, investment houses and banks have begun adjusting their credit ratings based on a company’s decarbonisation commitments, making it more difficult to access funding if these considerations are not taken seriously.

Community engagement is another ongoing ESG risk to mining operations. Due to the added risks brought about by Covid 19 and environmental instability caused by climate change, miners are increasingly being held to account when not meeting the health and safety needs of their employees and those of the local communities where they do business.

While some of these risks require substantial structural adjustments, there are a number of practical, quick wins to be found.

Data collection remains an area for improvement among most organisations. Companies that still rely on manual documents such as invoices to measure their energy and water consumption, should consider switching to ERP (Enterprise Resource Planning) or other software solutions to track related ESG indicators. This will help to improve and track performance in the long run.

Opportunities for improved ESG

Rather than view these risks as onerous, businesses should see them as opportunities. The most fundamental advantage of this is access to funding, which is often directly linked to ESG performance.

More broadly, within our own industry in South Africa, subscribing to the global benchmark for ESG can only take us so far. Going forward, we need to create the framework and standards for ESG in our mining sector. This requires taking into account our country’s unique context, from our climate to the social history of the country.

Get this right and we will be well equipped for the ESG challenges that lie ahead.

BDO South Africa

E CClamp@bdo.co.za

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This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specifi c situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specifi c professional advice. Please contact BDO to discuss these matters in the context of your particular circumstances. BDO, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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SA’s environment,

society and governance metrics ranking

South African listed companies can stand tall amongst the developed nations in our adoption and application of environment, society and governance (ESG) metrics.

By Chris Blair, CEO of 21st Century

For the first time, 21st Century (representing Africa) is part of a worldwide study of ESG metrics conducted by the GECN Group of companies covering five continents: Africa, Asia, Australia, Continental Europe and North America.

We have just completed the study across eight listed exchanges in which South Africa is the only emerging market exchange.

Why is ESG important?

ESG metrics can be described as non-financial

metrics and are about the sustainability of the world, the continents, countries, businesses and society. Everyone knows about the dire effects that global warming will have on the earth as we know it if the increase in world temperatures exceeds 1.5 degrees.

Society is becoming more vocal about government and business practice as the world moves from 'shareholderism' to 'stakeholderism'. This trend has been catapulted forward due to the Covid 19 pandemic, which has highlighted the unsustainable business practices worldwide that are leading to the destruction of the environment and of society – highlighted by the growing wage and wealth gap around the world.

Environmental Health & Safety

Scope 1 GHG Emissions Fatalities Scope 2 GHG Emissions Injuries Scope 3 GHG Emissions Illnesses GHG Emissions (scope not specified) Exposure to Harmful Substances Non-Renewable Energy Workplace Policies Renewable Energy Health & Safety Not Disclosed

More companies starting to incorporate ESG metrics in executive long-term incentive plans

This year’s GECN research aimed at examining any year-on-year trends in companies using ESG metrics in executive incentive plans (both the prevalence and weighting), particularly changes in connection with the Covid-19 pandemic and the increasing market pressure for companies to increase their focus on ESG in their business strategies. The study also identified that a growing number of companies are starting to incorporate ESG metrics in executive long-term incentive plans and that the weighting is higher than in prior years – tying sustainable metrics to executive pay in the long term.

The main trends emerging from the study are: • A growing number of companies across the world are tying executive pay to ESG performance, particularly in the environmental area. • There is an increase in the number of companies using social metrics in their incentives in all regions, except Singapore.

Environmental Incidents Air Quality Land Management Water & Wastewater Management

Waste & Hazardous Materials Management

Environment Not Disclosed

People & Culture Customer Community

Gender Balance Customer Satisfaction Community Incidents

Diversity & Inclusion

Customer Net Promoter Score Community Complaints Employee Engagement Customer Complaints and Resolutions Community Investment Training and Development Product Quality and Safety Community Not Disclosed Behaviours, Ethics, Values and Culture Customer Not Disclosed Other Community (State Measure) Employee Voluntary Turnover Other Customer (State Measure) People & Culture Not Disclosed

Governance

Governance at the Board of Directors' level

Governance at the Executive Boards' level Risk management Compliance Behaviours, Ethics, Values and Culture Other Governance (State Measure)

Sustainability

Sustainability Index

Percentage of Companies • The pandemic resulted in a significant shift in social metrics – away from employee engagement metrics and towards an increase in workplace policy metrics – employee wellness. • Companies allocate a higher weighting to ESG metrics in short-term incentives (25%) than in long-term incentives (20%). • The most significant increase in inclusion in long-term incentive plans is the inclusion of environment and climate change metrics. • The global average aggregate weighting of ESG metrics in incentive plans account for 9% of the maximum total remuneration package (fixed pay plus variable pay) received by the company’s top executive each year. The question is, is the weighting of these ESG metrics material enough to actually incentivise management to act?

How does SA perform compared to its peers?

More than 74% of companies in all sectors reviewed use ESG metrics. However, how does South Africa perform relative to its peers globally?

South Africa ranks fourth in the world with 75% of companies using ESG metrics, whilst Australia leads (84%), followed by the United Kingdom and Europe (79%). South Africa is just ahead of the world average – given that we are an emerging market (compared to developed markets), we should be proud and stand tall.

There has been a huge swing towards social metrics, catalysed by the pandemic which highlighted the inequity of pay and wealth around the world. The poor have borne the brunt of the fallout from the pandemic through loss of jobs, reduction in pay, increased fuel and food prices – hence there has been an increased focus on this

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This has been particularly prevalent in South Africa, which has the highest Gini coefficient (measure of income inequality), and one of the highest unemployment rates in the world. South Africa moves to third place for the use of Social Metrics (68%), behind Australia (84%) and Europe (70%). South Africa leads the charge on diversity, equity and inclusion (DEI) metrics with this social metric being front-of-mind in most companies’ strategies. 45% of companies worldwide use DEI metrics followed by 37% who use employee engagement metrics. South Africa ties in 1st place with Australia, with 13% for the most important metric of ESG – the weighting of the executive maximum total remuneration linked to ESG metrics. Australia United Kingdom Europe South Africa The link between

73% Canada USA Singapore Global

82% 84% 79% 74% 79% 75% 63% 70% 56% 62% 57% 57%

Figure 1: Percentage of companies using ESG metrics in incentives by region 2020 2021 74% 69%

the executive key performance indicator (KPI) and executive pay is critical in incentivising the executive to “do

the right thing”. Although the weighted linkage is still quite low (and increasing), South Africa is well ahead of the global average of 9%.

The split between weightings of performance metrics for short-term and long-term time horizons is critical in the incentivisation of executives. This determines whether a forward-looking sustainable approach is more important than short-term wins, that could result in long-term losses.

Figure 4 shows that using ESG metrics is much more prevalent in shortterm incentives (71%) than in long-term incentives (only 16%). We can only hope that the move from short-term towards long-term incentives continues rapidly, as this is how ESG metrics will become sustainable.

The prevalence does not, however, tell the full picture of the effectiveness of ESG metrics in short- and long-term incentives. It is rather the weighting of the metric that is important, as this incentivises the executive’s behaviour.

The median weighting for ESG metrics in shortterm incentives is 25% compared to 20% in longterm plans, and is significant for both. The upper

Figure 2: Percentage of companies using social metrics in incentives by region

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Australia United South Africa United Kingdom

Percentage of Companies 69% 70% 68% 67% 50% Canada USA Singapore Global

60% 48% 55% 53% 53%

70% 67% 63% 63% 60% 50% 40% 30% 20% 10% 0% Australia South Eurupe United Africa Kingdom

Percentage of Maximum Total Remuneration Opportunity 12% 13% Canada USA Global

Figure 3: Average proportion of top executives’ maximum total remuneration contingent on weighted scorecard ESG metrics by region 15% 2020 2021 13% 12% 11% 9% 9% 9% 9% 9% 8% 6% 5% 3% 0% 6% 5% 4%