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Analysis

ESG Criteria at the Heart of Investment Decisions

By Paloma Duran | Wed, 06/30/2021 - 13:17

Environmental, social and governance (ESG) criteria are now at the center of investors’ decisions on whether to invest in a mining project or not. ESG practices create long-term value, reduce risks and help to seize opportunities related to environmental, social and economic issues. While raising ESG standards to reduce carbon emissions, to enhance diversity and to help communities develop is a challenge for the industry, it also represents an opportunity.

Mining will play a key role in the transition to a low-carbon economy and, according to experts, the demand for responsible practices will only grow. Therefore, mining companies that do not embrace ESG practices will not easily access capital.

Mining ESG Practices

ESG criteria is not new to the mining industry. Mining has a long history of implementing more sustainable agendas and practices to lessen its impact on communities and the environment. However, the term may sound unfamiliar as ESG now encompasses all environmental, social and governance issues into one comprehensive framework.

ESG criteria have made mining companies consider environmental, social or governance risks that may affect their access to capital, permits and work in communities. In addition to reducing risks, the also create new opportunities to reduce energy and water bills, as well as carbon emissions, improving performance and community relations and better managing mine closures.

There has been good progress in improving ESG practices. An example is the Global Industry Standard on Tailings Management developed by the International Council on Mining and Metals (ICMM), the United Nations Environment Program (UNEP) and the Principles for Responsible Investment (PRI). It is the world's first tailings management standard that can be applied to existing and future tailings facilities. The standard has strengthened current mining practices by integrating local social, environmental, economic and technical criteria that cover the entire lifecycle of the tailing’s facility. It has also established higher levels of accountability and expectations for transparency and disclosure of information.

Despite the significant promotion and adoption of ESG standards, there are still many mining companies that have not fully adapted to them. Fiona Reynolds, CEO of PRI, said market engagement on ESG issues has been mixed and there are many companies that still have a long way to go. She highlighted that it is investors who are pressuring companies to improve their practices. "While investors have a strategic role to play in ESG matters, so do companies. The two must work together to be successful," Reynolds said.

The COVID-19 pandemic created uncertainty regarding ESG issues as it was unclear whether the market environment would further promote ESG issues or reverse progress. Beth Burks, Associate Director of Sustainable Finance at S&P Global Ratings, said that companies that endure despite market volatility are the ones with strong ESG criteria and efficient structures. Burks added that the pandemic has acted as a catalyst to implement more ESG practices and set higher standards, rather than to backtrack on what has already been achieved. Although some short-term capital requirements could be prioritized to reactivate the global economy, the current crisis remains an opportunity to reshape industry practices. According to S&P Global Ratings, it is a fact that the pandemic is accelerating ESG goals, either in actions or in promotion. Therefore, an improvement is expected sooner or later.

How Do ESG Criteria Impact Investment in Mining?

A shift in market demand has created a prosperous stage for a green revolution in the sector, reported Clive Burstow, head of Capital Natural Resources at Barings.

There is a widespread misconception that mining is a dirty industry. However, that is not true. The industry has changed and is now considered one of the industries that benefit society the most. The demand for greener mining has led the industry to continually improve its ESG performance, making it a more safe, efficient and sustainable investment option.

Investors are highly interested in companies’ ESG performance and ratings as it shows good management and risk mitigation. “It is essentially a playbook for decreasing risks a company might face in a country where it plans to build and operate a mine — from carbon emissions intensity and mine tailings management to indigenous relations and worker safety,” said Nelson Bennett of Business in Vancouver, in an article for Mining.com.

According to Scotiabank mining specialist Bonita To, over the past two years, investors have increasingly engaged in responsible investment practices, which together represent around US$303 trillion of the world’s investment. To explained that if companies want to raise capital from institutions and investors, they must commit to ESG practices.

Randy Smallwood, CEO of Wheaton Precious Metals, told Mining.com that mining companies in general have done a very good job on their ESG issues. However, they have failed to disclose them. Smallwood said it is difficult for investors to know if a company has a good track record if it does not publish all its progress and ESG guidelines.

Also, there is a problem with standardization, as there are many ESG rating agencies that have different frameworks. Ross Beaty, Chairman of Pan American Silver and Equinox Gold, advised mining companies to disclose as much as possible. Otherwise, investors will not choose their projects or companies.

Mexico's ESG Progress

According to Sergio Almazán Esqueda, President of the Association of Engineers, Metallurgists and Geologists of Mexico’s Mines (AIMMG), the country has the resources and the capacity to become a global mining power and a leading example of responsible mining.

Last year, CAMIMIEX published its 2020 Sustainability Report, which shows the high commitment of its affiliated companies to responsible mining in Mexico. Through new mining technologies and metallurgical processes, in addition to a strong commitment to promoting eco-efficiencies, modern mining has arrived in Mexico to minimize the industry’s environmental footprint. Significant investments and programs have been implemented to reduce the use of water and energy, as well as to improve the quality of life in communities where mining companies operate, reported CAMIMEX.

According to CAMIMEX's 2020 Sustainability Report, in 2019, its affiliated companies spent US$87.94 million on social development programs, benefiting 1.5 million people. Meanwhile, the sector invested US$457.7 million in sustainability initiatives and US$375.2 million in environmental programs. Likewise, the sector spent US$76.06 million in training and internal development programs for its employees.

CAMIMEX’s report highlights 36 municipalities that represent 75 percent of the mining production value and that have a higher Human Development Index (HDI) and a Social Lag Index (IRS) lower than the national average.

The chamber explained that mining is one of the most regulated activities in the country. To start operations, companies must comply with labor, safety, environmental and energy regulations, among others.

CAMIMEX affiliates operate according to a legal framework that includes SEMARNAT standards such as NOM-001-SEMARNAT-1996 regarding discharge of wastewater and laws such as the General Law of Ecological Balance and Environmental Protection. Additional regulations include NOM-120-SEMARNAT-2020 on direct mining exploration, NOM-141-SEMARNAT-2003 on tailings dams, NOM-155-SEMARNAT-2007 on gold and silver leaching, NOM-157-SEMARNAT-2009 on mining waste and management plans and NOM-159-SEMARNAT-2011 on copper leaching.

CAMIMEX affiliated companies also promote UN Sustainable Development Goals (SDGs), which follow five axes of social performance, including health and safety, competitive salaries, diversity and inclusion, training and development and strategic alliances. During the pandemic, the sector played a fundamental role in many regions of the country as it gave important donations to hospitals including ventilators, medical supplies and personal protective equipment. It also partnered with municipal, state and federal governments to provide basic services and aid to communities far from urban centers.

Fernando Alanís, President of CAMIMEX, has highlighted that mining not only generates decent and well-paid jobs, but also supports 379,000 Mexican families directly and 2.2 million families indirectly. It is a sector that generates well-being, opportunities and social development in marginalized communities.

“It is of the utmost importance to highlight the true nature of the modern and professional mining industry that operates in Mexico. Mining is responsible and respectful of the environment; it is committed to the economic development of communities, regions and states where it operates. Mining develops supply chains and provides good jobs, access to education, health and basic services. It is an industry that ultimately boosts the quality of life of the inhabitants of our host communities,” Alanís said at Mexico Mining Forum 2021.

The data used in this article was sourced from:  
ERM, The Nothern Miner, Mining.com, S&P Gobal Ratings, ESG Clarity, CAMIMEX, MBN
Photo by:   Micheile Henderson
Paloma Duran Paloma Duran Junior Journalist and Industry Analyst