Contents
1. The Evolving ESG Landscape
Overview
This chapter examines significant ESG developments in the past two years and explores how companies can be better prepared to navigate future challenges. It argues that companies should expand their external focus and connect with the end consumer and other stakeholders to deepen ties and have a positive impact on their operating ecosystems.
COVID-19 Propels ESG Into the Mainstream
Globalization has undoubtedly enabled a more interconnected, interrelated, and interdependent world, among many other benefits. But at the same time, the COVID-19 pandemic has deepened economic and social inequalities on a global scale.
Battered markets curtailed trade and travel, disrupting global chains, and nations went into varying degrees of lockdown. All while millions lost their jobs, and small- to medium-scale businesses that survived did so in turbulent circumstances. Additionally, the crisis not only forced companies to pivot to virtual workspaces, but many fundamentally changed their entire operating models. These massive disruptions to the world as we knew it created a renewed sense of urgency to find a new modus operandi to tackle the challenges of tomorrow today.
We witnessed a historical crisis that permeated society as a whole. The pandemic forced the world into a gloomy season. Yet, it also shed light on the strong business case for environmental, social and governance (ESG) commitment as a pathway for increased resilience and positive impact. For the mining industry, this is an unprecedented opportunity to create a long-lasting, positive footprint. Because of their nature, mining companies have always been under scrutiny from a multitude of forces, including communities, advocacy groups, governments, NGOs and the media. However, the industry entered 2020 with uniquely positioned balance sheets to lean on compared to other sectors.1 Many mining companies also leveraged their manpower, facilities, supply chain and resources to buttress their entire communities during these unprecedented times. Ultimately, as we examine later in this report, the disruptions caused by the pandemic only accelerated the imperative for companies to embed ESG into their DNA.
Numerous studies demonstrate that COVID-19 also served as a catalyst for ESG adoption and investment rather than reversing this trend as many skeptics had believed. For example, Fidelity International examined the performance of 2,660 companies from January to September 2020 and found that those with high sustainability ratings performed better than their peers as markets fell.2 The logic is compelling: Companies with the most resilient and sustainable business models are bound to fare better in highly challenging circumstances. When companies embed ESG at the core of their purpose, culture, and strategy, not only are they more resilient, but they are also more attractive from an investor's standpoint.
Another study also supports this premise. S&P Global Market Intelligence found that 73 percent of the ESG exchange-traded and mutual funds analyzed outperformed the broader market in the first year of the pandemic, rising by as much as 55 percent over that period, while the S&P 500 rose by 27.1 percent.3 Not surprisingly, investors are increasingly shifting their money into ESG funds: ESG and value-focused exchange-traded funds recorded net inflows of US$89 billion in 2020, almost three times higher than 2019 levels and ten times higher than the levels seen in 2018.4
“It is telling that the top 20 percent of ESG performers in the mining and metals industry consistently outperformed the bottom ESG performers on a market cap-weighted basis during the COVID crisis—an indication of the power of purpose in helping companies ride out disruptions.”
Jörgen Sandström
Head of Energy, Materials, Infrastructure Program - Industrial Transformation, World Economic Forum
Climate Change Demands Immediate Attention
With limited time for action, regulators, investors, and broader society are recognizing the urgency for a swift response to mitigate global warming.
Top asset managers BlackRock and Vanguard recently became signatories to the “Net Zero Asset Managers Initiative,” joining 71 other members with combined assets of US$32 trillion under management. This international group of investors commits to pushing companies in their portfolios to target net zero emissions by 2050 or sooner.5
Rising sea levels, cyclones, hurricanes, forest fires, droughts, disease and disrupted food chains are only some of the dire consequences of climate change that pose a threat to human health and safety, infrastructure and transportation systems, as well as energy, food and water supplies. Although some may argue that this focus limits itself to the “E” of ESG, the ramifications of climate change can already be seen on broader business and society.
In May 2020, Russia saw one of its worst environmental disasters to date: Over 20,000 tons of diesel leaked in the Ambarnaya River from a storage tank owned by LSE-listed Norilsk Nickel, contaminating a vast stretch of sub-soil and turning its surface crimson red. Investigators believe that the storage tank sank because its supports were compromised by melting permafrost due to global warming. The company not only paid a record US$2 billion fine over the vast oil spill, but its profits dropped by 39 percent because of the fine.6 Additionally, Norilsk fell out of favor with surrounding communities that were negatively impacted. Such a catastrophe underscores the critical need for companies to understand and anticipate major climate risks.
“How well does your company understand what the models say, and what the estimates are, about the impacts of changing climate and weather on your operations and surrounding communities? What are the projections over the next couple of decades for rainfall or storm intensity, or the ability for supply chains to remain open? How are you thinking about that so that you add resilience to your operations, as well as help the communities in the developing world to be more resilient as well?”
Elaine Dorward-King
Non-Executive Director, Sibanye-Stillwater
Increasing Investor Scrutiny on Carbon Emissions
Major corporations around the globe have been under pressure from investors to publicly disclose and explain their climate action plans in line with the goals of the Paris Agreement to limit global warming, ideally to 1.5 degrees Celsius above pre-industrial levels.
Representing major investors globally, with US$54 trillion in assets under management, Climate Action 100+ published a December 2020 progress report that examined actions taken by 159 companies deemed to be the world’s biggest carbon emitters (accounting for about 80 percent of global industrial emissions) and assessed them on nine measures related to the Paris Agreement. One metric looked at whether these companies were on track to achieve “net zero” greenhouse gas emissions by 2050, and whether they had allocated enough capital to achieve their goals. The report uncovered that only 31 percent of the mining and metals companies assessed had set targets for net zero emissions by 2050, of which only four percent had included scope 3 targets (related to the emissions intensity of suppliers and customers).7
Among the miners, the report highlighted BHP as a case study of positive progress on pollinating information and best practices through networks, industry associations and their engagement with institutional investors as part of Climate Action 100+. Additionally, the company's own 2020 Climate Action Report outlines a clear path to achieve the goal of net zero operational emissions by 2050, including a scope 3 goal focused on value chain partnerships and the development of new technologies by 2030. Furthermore, BHP is one of the only companies to link a portion of bonus payments for its CEO and other key leaders to lowering emissions at both its own operations (scope 1 & 2) and those of its customers (scope 3). These actions set strong examples of how proactive and collaborative leadership can drive change holistically across the entire company value chain and industry supply chain while assuring investors that the company is committed to delivering on its promises.
“There are very practical ways that we as investors can work with company boards and leadership to help them. We don’t need to be presented to or showed off to. We are people you’ve really got to work with, engage with and take with you on your corporate journey.”
Adam Matthews
Chief Responsible Investment Officer, Church of England Pensions Board
Necessity (and a Vision) Is the Mother of All Invention
In a year when oil prices nose-dived to all-time lows (spring 2020), businesses around the world proudly announced ambitious plans to invest in fossil-free energy.
For an industry prone to short-termism, this marks a notable shift in company priorities toward long-term interests, not least given the collective pressure from investors, government, and consumers to achieve carbon neutrality. We are beginning to see many examples of proactive leadership and collaboration, including among industry competitors that have also partnered with service providers, government, consumers and academia, to make fundamental change.
Take, for instance, the Green Hydrogen consortium formed by Anglo American, BHP, Fortescue Metals Group and Hatch, an engineering consultancy, to “de-risk and accelerate” renewable hydrogen production using solar or wind power.8 Renewable hydrogen has future potential to replace the electricity grid. It also holds the promise of fuel cell technology to power fixed and mobile plants, mining vehicles and production, as well as microgrids. Although hydrogen technologies are in the early stages of development, they seek to utilize the most abundant element in the universe to produce emission-free energy.
In another example, a Swedish joint venture between state-owned LKAB (Europe’s largest iron ore miner), steel producer SSAB and Vattenfall (state-owned power company) is close to making zero carbon steel a reality.9 The JV has reinvented an age-old process for Direct Reduction of Iron (DRI). The new process uses hydrogen instead of coal as the reducing agent to remove oxygen from iron ore, which is the most carbon-intensive step of steelmaking. Given that the steel industry is one of the world’s largest industrial emitters of CO2, accounting for approximately eight percent of global emissions,10 this new process will also contribute significantly to reducing the scope 3 emissions of both mining suppliers and end-users of steel.
“We’re seeing terrific levels of ambition from actors right across the steel value chain who have recognized the potential of ambition and collaboration in reducing the industry’s carbon footprint.”
Joan MacNaughton
Chair of the Climate Group and Non-Executive Director, En+ Group
All these developments are potential game-changers that can disrupt their respective industries and beyond. Not only are these companies pioneers; their leaders have dared to transcend boundaries for the greater social good. With a can-do approach, they have seen opportunity where most others have struggled. And they have engaged with atypical partners to leverage collective resources and know-how in the pursuit of shared outcomes.
Recognizing this opportunity is key to transition to a lower carbon world, Sibanye-Stillwater Non-Executive Director Elaine Dorward-King explains, “We’re going to need a lot more of these metals and minerals that have not been on the forefront of the industry’s minds. The earlier you get there, the more likely it is that you’ll get better ore bodies, for a lower price, in better jurisdictions. That’s what really matters.”
How Broad Is Your World View?
Despite the rise of ESG, many mining companies (and executives) continue to have a conventional view of the sector and the environment in which they operate. As such, some companies remain relatively isolated from end consumers and, in some cases, even the communities where they operate. This insularity is also reflected by the limited networks they tend to have beyond their obvious ecosystem. We have observed several companies that continue to state their purpose is to be the “best producer” in their commodity segment(s). This statement of purpose is now being updated to include a declaration of their intent to do so sustainably.
However, purpose is not what you “do” but “why.” Purpose provides the reason for a company’s existence and serves as the rallying call for the culture it espouses. A business with a higher purpose is one that aims to make a positive contribution to people and the planet through creating shared value. Boards and CEOs are recognizing their responsibility for infusing shared value throughout their organizations – from purpose statements to culture transformation (as discussed in our final chapter) to their impact on the communities they operate in.
Purpose in Practice
For an industry that is often vilified, the pandemic earned several mining companies considerable public goodwill for their support of employees and communities through the crisis. These companies not only safeguarded employee health, thanks to strong and ingrained safety practices, but also liaised with host governments to boost local healthcare and essential supplies. Many were quick to offer testing to their employees and subsequently vaccinations to the entire workforce and surrounding communities. To do so, they proactively leveraged their manpower, facilities and supply chain networks, as well as allocated funds to strengthen the measures taken by employees, communities and government. Such cross-collaboration and initiative provides a blueprint for how companies can truly make an impact.
The ultimate goal for companies, Dorward-King analyzes, is “being a partner of choice.” She explains why: “I think a lot of mining companies will say that they would like to be seen by both communities and governments as a partner of choice. The way to do that is not by what you say, but by what you do.”
Yet, there remains a lot of work to do, especially as mining companies continue to fall short of society expectations. According to the Responsible Mining Foundation’s RMI report 2020, results for “Community Wellbeing” show the largest number of low-scoring companies relative to other thematic areas. Although formal commitments to issues, such as human rights, are on the rise, the report notes that few companies have established adequate governance mechanisms to manage these social issues.11
Fair and Inclusive Governance of Social Issues
A case in point is the Juukan Gorge rock shelters disaster that occurred in May 2020 in Western Australia.
The 46,000-year-old aboriginal heritage site was blasted away by Rio Tinto’s Iron Ore division due to production pressures in what resulted in an immeasurable cultural loss. The incident sparked tremendous outrage among Juukan’s traditional owners, the investor community, the global press and subsequently the public. Although the company’s legal team had ensured that this was well within the law, Juukan Gorge came at a big price for the company’s executive leadership in particular, with the Group CEO, Divisional CEO of Iron Ore and the Group Head of Corporate Relations eventually exiting the business as a direct result.
We believe that several mining companies are similarly exposed to such risks for three interdependent reasons:
Structural conflicts of interest
For instance, companies where sustainability oversight is not sufficiently independent of operations. In other words, the portion of the company that owns the risk must be separate from the function or department responsible for managing that risk.
Inadequate governance mechanisms
This includes
- Governance at the board level – our chapter on “Board of Directors” talks in detail about integrating sustainability into the charter of the full board and that of all board committees; we also discuss why sufficient diversity and breadth of Board skills is key (disclosure of the board skills matrix is not simply a box-ticking exercise); furthermore, 20% of the mining Top 50 boards still lack a sustainability committee or its equivalent;
- Lines of defense in the organization – independent assurance being absolutely key; and
- Clear functional lines to escalate material issues from mine site to both the executive committee and board.
Departmental silos
Although this tendency is harder to pinpoint, we find that it greatly stems from the prevailing company culture. Moreover, any corporate culture that is not embedded in purpose will remain oblivious to the sentiments of the broader market system to which it belongs.
Mining companies are inextricably related to their host communities and should be an ally, not a liability. VanEck’s Active Gold Portfolio Manager Joe Foster highlights the critical role community engagement plays from an investor standpoint: “We do a lot of site visits. That's when we look to see how you're interacting with the community from all the way up at the national level, down to the local level. We also look at what type of environmental practices and reclamation are in place. If we identify that a company does not have a good ESG record, we are going to avoid that company and it won't be in our investment universe.”
Photo courtesy of Anglo American
Systems Approach to Deliver Impact
Unfortunately, many companies still fail to recognize the extent of their inter-dependence with the broader market system they operate in. Many only focus on managing the downside risks of ESG impacts from their business.
However, “risk is both a threat and an opportunity,” Dorward-King points out. This implies taking a long-term strategic view of the opportunities associated with business risks, which can be leveraged by cultivating a harmonious and mutually beneficial market system. Furthermore, companies that limit themselves to ESG reporting and disclosure risk being caught unaware of disruptions or missing new avenues of growth, arising from market system change.
To make a lasting positive impact, companies must go beyond ESG, which is essentially a term coined by the financial sector for the measurement of non-financial risks at companies they may invest in or lend to. We believe that the UN’s overarching framework of the Sustainable Development Goals (SDGs) is better suited for companies that genuinely commit to creating shared value.
Companies must internalize that they form part of a bigger whole, comprising a complex and interrelated system of industry, regulators, investors, customers, suppliers, communities, not-for-profits and academia. Looking at one’s business from the “outside in” is essential to gain the perspective of all stakeholders, rather than focusing only on the company’s view.
Moreover, it is important to establish a continuous feedback loop from all relevant avenues in the external world for companies to remain true to their purpose. An external view also allows leaders to identify opportunities for joining forces with others to achieve common goals. These may be atypical partnerships that have the potential to generate pioneering solutions with wide-reaching impact.
Having an acute awareness of external forces is a business advantage to leaders who recognize that a company is heavily shaped from the outside in, Dhawan argues. “In reality, the forces that are shaping the industry today are outside of mining. It is not a difference in ore bodies or a different extraction method that will be the fundamental disruptor to your business model,” he says. “The fundamental disruptor to your business model is what your investors, civil society and governments are thinking about the role of mining. So, if that’s true, then the answers can’t only lie within you, because many of the people shaping it are on the outside.”
This is a job for enlightened and inclusive leaders who foster collaboration, question the status quo, are determined to break down silos and find inventive ways to encourage social and technological innovation. They are highly strategic in their thinking, with strong emotional intelligence and adept at engaging others. It is our hope that organizational competency and behavioral frameworks will be refreshed to reflect these imperatives and allow companies to recruit and develop future leaders who see the bigger picture and can apply a systems approach to deliver real impact.
“It’s time to change the frame of reference from ESG to SDG, which is a different three-letter acronym. The SDGs are a much better way to measure contribution, both positive and negative. There are 17 SDGs, and you can break them down to another 169 targets. Once you’ve done that, let’s have a conversation about which of those 169 do you have a positive impact on, and which do you impact negatively.”
Rohitesh Dhawan
CEO, International Council on Mining & Metals (ICMM)
Footnotes
- Mining & metals in the COVID-19 world: Underlying resilience masks ESG concerns, White Case, July 2020.
- Putting sustainability to the test: ESG outperformance amid volatility, Fidelity International, November 2020.
- ESG funds beat out S&P 500 in 1st year of COVID-19; how 1 fund shot to the top, S&P Global Market Intelligence, 6 April 2021.
- “ESG ETF Net Inflows Tripled In 2020,” Bloomberg Intelligence, 18 February 2021
- “Investors BlackRock, Vanguard join net zero effort,” Reuters, 29 March 2021.
- “Norilsk Nickel: Mining firm pays record $2bn fine over Arctic oil spill,” BBC News, 10 March 2021.
- Climate Action 100+ 2020 Progress Report, Climate Action 100+, 17 December 2020
- “Mining companies form green hydrogen research consortium,” S&P Global Market Intelligence, 19 March 2021.
- “HYBRIT: SSAB, LKAB and Vattenfall first in the world with hydrogen-reduced sponge iron”, SSAB Press Release, 21 June 2021
- Decarbonization challenge for steel, McKinsey, 3 June 2020
- Responsible Mining Foundation (RMF), “RMI Report 2020”
