The growing importance of ESG to mining and resource companies

Ahead of the Mining Indaba Conference being held in Cape Town from 3 – 6 February 2020, Jaspal Sekhon and Sam Hudson from our corporate team discuss the growing pressure on mining and resource companies to improve their environmental and social governance (ESG) performance.

Our firm recently attended the London Stock Exchange Group’s (LSEG) first ever ‘mining & metals’ conference and there was one topic that dominated the agenda: environmental and social governance (ESG).

In this article we discuss the growing pressure on mining and resource companies to improve their ESG performance, the new guidance and legislation released on ESG, the repercussions of a complacent attitude to ESG, and what we can expect in the near future.

Pressure to change

Climate change permeated the global cultural psyche in 2019. The mining and resource sector continues to grapple with concerns around climate change, the use of unsustainable materials and ethical practices, and how companies can improve their ESG performance.

As a consequence of growing concern, investors are placing pressure on companies to engage in ESG, with good ESG performance being a core factor influencing fund and investor decisions on whether or not to proceed with investments. Sam Pazuki, the vice-president of investor relations at OceanaGold, has stated that large investors will increasingly set minimum ESG thresholds for investment. Indicative of the changing investor attitudes, Norway’s Wealth Fund decided in June 2019 that it would no longer invest in firms that mine more than 20 million tonnes of coal per year, or generate more than 10GW of coal power per year.

Guidance and legislation

The growing importance of ESG is further highlighted by the publication of guidance on this subject by a number of regulatory bodies in recent years. Industry bodies and NGOs have introduced codes and principles that set out legislation obliging companies to adhere to robust environmental stewardship agendas, equitable distribution of benefits, and transparent accounting practices.

The LSEG first published its guidance relating to ESG and investor reporting and communication in February 2017 and then updated that guidance in January 2018. This trend has since been followed by the Australian Securities Exchange (ASX) which has, as of 1 December 2019, introduced new listing rules which explicitly require mining companies to publish quarterly reports on its business activities for the quarter.

Fail to prepare, prepare to fail

Companies who fail to maintain good ESG practices risk the diminishing value of their company’s share price. In January 2019, Brazil’s iron ore producer, Vale, experienced a deadly dam disaster at its Córrego do Feijão mine which sadly claimed the lives of over 250 people. Sustainalytics, a company that rates the sustainability of companies based on their ESG performance, immediately downgraded Vale after the dam collapse, and the company was also removed from Brazil’s ISE corporate sustainability index. As a result of this, the share price of the company fell by 10% in January 2019 according to S&P Global Market Intelligence.

Failure to maintain good ESG performance will make it harder for mining and resource companies to secure capital. Fitch (a leading ratings agency) has warned that natural resources companies have a higher chance of having their credit rating affected by ESG issues than the broader corporate sector. Speakers and panellists speaking at conferences such as the LSEG’s ‘Mining & Metals’ conference, ‘Mines and Money London 2019’ and ‘Minex Eurasia’ have explained that mining companies are finding it harder to raise capital as a result of the growing focus on ESG. Therefore, in order to regain or improve access to capital, mining companies need to improve their ESG performance. Naturally, updating practices to improve ESG will come at a cost and investment in technological advances will be important. It can therefore be expected that some smaller companies with limited financial resources may fail to move with the tide in relation to ESG and could get left behind.

Looking ahead

The changing public discourse in relation to ESG will continue to translate into an expectation that mining and resource companies improve their ESG performance. Tom Palmer of Newmont noted that the biggest challenge for the gold-mining industry in 2020 will be ESG, stating that it is a topic of conversation ‘in just about every meeting’ they have at Newmont.

It is anticipated that we will see a pipeline of new ESG policies in the next few years. Throughout 2020, the EU will release its benchmarks’ ESG disclosures, which will be directed at indices used for benchmarks. The increased emphasis on ESG matters is further highlighted by the Financial Reporting Council’s new 12-principle Stewardship Code 2020 which took effect on 1 January 2020. The Code’s introduction makes it clear that, ‘Environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship.’ Principle 7 of the Stewardship Code requires signatories to consider material ESG issues, including climate change, as part of their investment, monitoring, engagement and voting activities.

Mining and resource companies should take steps now to be compliant and take advantages of the benefits that good ESG performance can offer. A key challenge will be to deal with the unlevel playing field when it comes to ESG. Different jurisdictions demand different standards of their operators and, being mindful of this fact, must ensure they install a wider adoption of improved ESG practices.

Jaspal Sekhon is a partner in the corporate and commercial team in London. He has varied experience across a number of sectors including natural resources, real estate, technology and financial services. Sam Hudson is a senior associate in the corporate and commercial team in London. He advises public and private companies on an array of corporate finance transactions. Sam’s experience has spanned multiple sectors, including but not limited to mining, oil and gas, commodities, finance and property.

Mining and resource companies that wish to speak to our team regarding ESG should contact Jaspal Sekhon and Sam Hudson.