ESG in mining is a force that can’t be ignored

Susie Davies, Jo Hewitt & Isabel Carty Baker McKenzie London

Investorsin miningprojects(whether debtor equity) are increasingly focused on environmental,social &governance (ESG) factorswhen making investment decisions.

Thisis unsurprisinggiven that, according to a review undertaken byPwC Mine 2021: Greatexpectations, seizing tomorrow those miners withbetter ESG ratings havedelivered, on average, 10%higher shareholder returns than the wider market in recent years.

This meansthat to access meaningful capital,mining companies willincreasingly needto demonstratearobust commitment toaddressing and managing ESG risks and concerns, aswell asa strong track record of compliance.

The GlobalSustainable Investment Alliancestates in its most recent report Global Sustainable Investment Review2020 (July 2021) that atthe time of publication sustainable investment assetscomprised 35.9% of totalassets under management. Thistrend is expected tocontinue upwards, withmany investment managersmoving from ESG integration screening strategies (requiringa review of ESG factors aspart of their overall investment analysis) towards negativescreening strategies (whereby companiesthat donot upholdspecificESG principleswouldbe prima facieexcluded froma manager’s portfolio).

Itis apparentthatmaking an allegation is not enough. Rather, itmust beaccompaniedby evidencedemonstratingtheactualbreach.The DPC hasalso emphasised that the act only applies to natural personsmeaning legal persons are excluded.

While the act authorises datasubjects toexercisetheir rightsdirectly orthroughan appointed representative,this rulinghas madeitapparent that where a representative is appointed, proof must be provided to the DPC.

Finally, theprinciples of publicrecordshavebeendiscussed atgreat lengthin this ruling and future litigants will needtoensure thatthepersonaldata inquestion isnot part of the public record.

● Reviewed by Mahesh Acharya, an executive at the ENSafrica Kenya office.

particular ESGprinciples that acompany mustuphold to receive funding.This places scrutiny onminers’ operational managementplans and howthese willassista companyin meetingitskey performance indicators (and, indeed, theESG requirements set out by lenders).

Similarly, the International Financial Corporation’s Environmental andSocial Performance Standards definestandards thatapplyto investment andadvisory clients goingthrough IFS’s initial creditreview process, and AXA IM have proposed transition bondswhich provide anopportunity to finance brown companies with an ambitionto transition togreenin thefuturein industries suchas materials, extractives, chemicals and transport.

Incertain markets(such

FAILING TO ADDRESS ESG CONCERNS AT THE OUTSET OF A PROJECT CAN LEAD TO ISSUES FURTHER DOWN THE LINE

Carrying The Load

Anumber ofinstitutional investors havenow publicly committed totaking ESG factors intoaccount when making investmentdecisions, suchas HermesEOS and BMO. TheDutch pension fund ABPhas statedthat “responsible investmentis central toour investment philosophy” and similarly BlackRock hasstated that “we haveintegrated ESG considerations acrossour investment research,portfolio constructionand stewardship processes”

Taking thisone stepfurther, certaininvestment funds (for example,the Norwegian OilFund) have announced thatthey will actively exclude investment prospectsthat arethesubject of ESG noncompliance.

Alongside the increased equity investorfocus onESG, lenders arealso prescribing as London), as well as technical, financial andlegal due diligence, the influence of ESG rating agencies has resultedin ESGbecominga majorfocus inrelationto larger mining initial public offerings Investor roadshows are fastbecoming aplatformat which investorscan andwill pose ESG-relatedquestions, including how a company’s initiatives align with relevant ESG codes and standards.

This means companies that have adopted a more transparent andadvanced ESG disclosure framework may bein abetter positionto attract investors seeking sustainable opportunities.

While certain ESG-related information will be available from public sources with respect to thelarger mining groups thatare subjectto relevant reportingobligations, there arealso indices and ratings agencies (such asFTSE4Good,DJSI,Sustainalytics, MSCI)that rankcompanies according to their actual or perceived ESG strengths.

Larger investorsmay well also retain in-house ESG specialists responsiblefor assessing these issues.

Activism

In additionto informinghow investors deploy their capital inthe firstplace, ESGfactors have become afeature of shareholder activism, whereby existing investors use their shareholding to seek to influence the relevant company’s ESGperformance. Inthe oiland gas industry, groups such as Follow This have been making themselves known at AGMs, often diverting attentionfrom otherkeystrategic messageswhichboardswish to communicate.

We anticipatethat the mining industry will soon followasa target.Forexample, theshareholders ofBHP Group submitted resolutions in 2022 regarding climate sensitivity analysis in financial statements, and advocated forBHP todeliver a consistent climate policy.

Other bodies,including the World Gold Council, are lobbying for insurers to become more involvedin the ESG movement, in particular by requiring mining companies to uphold ESG principles tobe eligibleforinsurance policies.

Recommendations

The mining sector continues to attract investment, including from those investors focused on ESGand, in particular, sustainability,not leastbecauseofitskeyrolein facilitating the accelerating energy transition (something which has not always been well understood by the wider investment community). In our experience,preparing (and,in somecases,publishing)a clear,robustand deliverable ESG strategy will help toassuage investorconcerns regarding the mining industryandtopromotecontinued investment.

Such astrategy should carefully consider both the mandatory andvoluntary ESG frameworks and standards (and theextent to which those voluntary codes shouldapply toaparticular company’s operations),as wellas yourcompany’s specific corporate values and overall strategic priorities. It isclearly importanttooutline howthat strategywillbe implemented and to demonstrate, monitor and record compliance in practice.

It isalso possiblefor miners to obtain independent certification of their ESG performance from bodies such as the International Council for Mining and Metals or theInitiativefor Responsible MiningAssurance, which evaluate performance againstindustry accepted ESG (for example the InternationalFinancial Corporation). The independentnature oftheassessment (depending on the

Investor

outcome) can provide welcome assurance for potential investors looking for sustainable investment targets.

Failing toaddress ESG concernsat theoutset ofa project can leadto issues further downthe line.We recommend thatcompanies actively engagewith investors to proactively identify ESG concerns from the startand explainhowthey proposeto mitigateoreliminate thoseESG risks.Having anopenandconstructivedialogue not onlyshows a company’s commitment to the ESG agenda but potentially dampens the ire of activist shareholders in theface of any future challenge.

Looking Ahead

Fromaboardperspective,the “G” aspectof ESGis growing in prominence. Litigation risks arising from potential parent companyresponsibility for subsidiary actions (or inactions) in the ESG sphere are increasing. In addition, the volume and remitofrequiredESGreportingis growingin manykey jurisdictions, generating greater complianceobligations and openinga window for activiststo seekto hold companies to account for upholding the ESG claims they make.

Weanticipate thatitwill notbe longbeforemost investors expresslyinclude corporate governance, and verification ofclaims madein ESG reportingexercises, within theirinvestment assessment processes.