ESG (environmental, social & governance) has come to fruition through investors and stakeholders alike demanding a shift in attention from the bottom line of financial statements to the broader and more ethical inclusions of culture, environment, and management of mining organisations. Although the introduction of these standards has seen a shift in the way reporting is undertaken, it can also be difficult for industries to define what is important and how to report on these measures. Mining companies have often been challenged with reporting against the sustainable agenda, but with the implementation of ESG, it allows to companies to report on the entire framework of benefits to the planet, people, and profit.
The current world is amid a global transformation due to multiple unstable factors such as climate impacts and a COVID-19 pandemic, pushing decision-makers across the world to transition towards a more sustainable and low carbon economy. The driver of change - environmental, social, and governance – disrupting the core organisational strategy of many multinational companies, to allow the building of trust across the supply chain, producing more sustainable outcomes.
Prioritising ESG Across Mining
Minimising risk, identifying opportunities, and safeguarding assets from impairments can all become long term benefits from environmental, social and governance reporting. A recent poll conducted by Verdict assessed the ESG areas across mining and resources that should be prioritised for improvement.
The results showed the heavy focus on environmental factors to be the most important with a majority 45% of total voters, with 18% suggesting social factors being a priority, leaving 37% on governance factors. Currently, during the Covid pandemic, the environmental issues have led the charge in focus with climate change, carbon emissions and global warming showing quantifiable data that can be easily and readily reported on, attracting investor confidence. Although environmental factors lead the focus for many companies, mines need to be also integrating societal approval through engagement of community and third-party stakeholders as well as non-governmental organisations to avoid opposition from local communities and instil confidence for the company.
ESG benchmarking in the Mining Industry
The power behind ESG strategies will allow for Australia’s (and global) economy to accelerate into a more sustainable future. Traditionally, mining companies have prioritised safety with building a core organisational structure to support, but ESG must be integrated into strategy whilst engaging stakeholders by setting targets, transparently reporting, and refining progress. These mining companies must continually set targets and ensure that the entire supply chain understands the risks associated yet committed to addressing in a positive way. Setting benchmarks for reporting may pose a challenge as an analysis of each factor needs to be considered and how it relates to the specific business. The below ESG descriptions are just some of the ways reporting can be integrated into business-as-usual practices.
Environmental: carbon footprint, greenhouse gasses, ecosystem services, biodiversity, mine closures and regeneration of land, air, energy, noise, water management, mine waste.
Social: land use, vulnerable people, health and safety, workers and their communities, resettlement, labour practices, mine closures and regeneration of these sites.
Governance: legal & ethical compliance, anti-bribery, and corruption transparency.
Many mining companies have already taken steps to report and integrate ESG into their agenda with sustainable global investment now topping $30 trillion, driven by broader consumer and stakeholder attention. Both executive and investors alike also contribute to the drive by realizing a forward thinking and strong ESG strategy can safeguard the company’s long-term success. The graph below represents Gunner Friede’s (2015) findings on the correlation between a strong ESG proposition and higher equity returns. Improvements in ESG also corresponds with a reduction in downside risk.
Source: ESG and Financial Performance
When taken into consideration the implementation of a strong ESG strategy, how can the financial side be justified? Research conducted by McKinsey has stated that ESG links to cash flow in 5 ways (below) with the 5 points to be top of mind in relation to the implementation and planning of ESG checklists and benchmarking.
Facilitating growth
Reducing cost
Minimising legal and regulatory interventions
Increasing employee confidence and productivity
Optimising investment and capital expenditures
Source: ESG Framework: McKinsey
The orientation towards long term responsible ESG implementation and reporting is extremely important for future investors, stakeholders, and employees alike. The mining and resource sector have the opportunity to fulfil fiduciary duties and align with the broader interests of the society and environment for now and into the future.
“Positive social impact correlates with higher job satisfaction—when companies ‘give back,’ employees react with enthusiasm.”