ESG global mining and the social license

• ESG principles have become ubiquitous and the global mining industry is no exception
• According to PWC, global mining companies have realized the importance of a social license in their communities
• This social license between global mining companies and communities derives its value from the extent to which miners embrace and adopt ESG principles

Environmental, Social, and Governance (ESG) principles have transformed corporations worldwide.

PWC’s recently published Mine 2022 reports that miners will see benefits to their businesses by reconfiguring operations around a value proposition that puts people and planet alongside profit.

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The largest mining corporations in the world need to be intentional and deliberate about building “brand mining” businesses. One of the central methods of doing this is developing a “social license” to operate their businesses. This is a critical lesson because societal impact on communities and the ecosystem of stakeholders should be central in the minds of managers of miners. In the coming years the following trends will like likely emerge.

Adopting ESG enhances value lessons for entrepreneurs

Governments and regulators are sending clear messages that they will hold mining companies to a high standard of accountability in terms of operating more ethically and sustainably. The EU has taken the lead in this regard with a higher than usual scrutiny of its supply chains. It is by no means the only jurisdiction taking a firmer position on ESG. In 2021, PWC reports that the United States Securities Exchange Commission created and released a risk alert focused on what the regulatory body called “greenwashing”.

This is when the management team within an organization makes false, unsubstantiated, or outright misleading statements or claims about the sustainability of a product or a service, or even about business operations more broadly. The same year, a major Chinese regulatory body reported declared its intention to enforce improved sustainability reporting. Japan, Malaysia, India, Singapore, and the UK have also made moves towards demanding more transparency and action on ESG from companies, according to Mine 2022.

Mining company managers have taken these increased demands for ethical and transparent management of their companies in their stride. Some have risen to the challenge like Rio Tinto which has begun to produce carbon-free aluminium and sell it to Apple.

BHP has begun to supply nickel sulphate to its customers, namely Toyota and Panasonic to make low carbon batteries as part of a green electronic vehicle ecosystem. These are some of the initiatives that miners are using to demonstrate to address the escalating ESG expectations from governments and stakeholders such as employees, local communities, and customers.

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There is also a significant financial benefit as will be shown later, for mining companies to pursue ESG principles. Research conducted by S & P Global Market Intelligence shows that companies in general that pursue ESG principles are more conscious of these principles and tend to command higher market values in capital markets relative to their peers who may not be as conscious of the same principles.

In this new era of critical minerals, the need to maintain a robust social license to operate is a serious success factor for mining companies. The demand for critical minerals is outpacing any available supply in the near terms. According to PWC, miners will have to develop more mines to meet this demand.

In developing these new mines, the miners will have to make deliberate efforts to meet the expectations of the communities where they operate, as this will foster trust. There are serious operational consequences for companies that ignore this new mandatory imperative. Miners would be well advised to ignore ESG at their own peril. In January 2022, the Serbian Government revoked Rio Tinto’s operating permits for the group’s US$2.4 billion Jadar Lithium project. This was in response to environmental protests. The decision eliminated almost one third of future lithium production.

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In Central Africa, cobalt miners are under pressure to uphold community expectations on worker rights and child labour. These matters need to be at the forefront of the minds of miners. PWC’s Mine 2022 reports that strengthening the social license for mining companies and their communities starts with forming genuine partnerships that truly respect and benefit local communities and the rights of indigenous people.

• The influence of ESG principles and the social license has grown to the extent that they impact the cost of capital that global mining companies will incur in funding their operations
• Global mining companies will henceforth need to pay careful attention to their ESG conduct as ignoring this could have perilous consequences for their social license
• Censure and sanctions are becoming a real risk for global mining companies that are lax with their stance on ESG with some even losing projects in the past from violating their social licenses
• Empirically it has been proven that ESG-compliant and conscious global mining companies generate superior value to their agnostic peers

The miners of the future according to PWC will be community-centred with the focus being on providing skills, decent jobs, worker protection, social and economic development, inclusion, and fairness. For those mining companies that look to create and leave lasting legacies in the communities where they operate will need to place paramount importance on environmental stewardship which can include but is not limited to responsibly addressing biodiversity conservation, tailings management, water quality, and mine closure. Mining companies that will succeed in the pursuit of their ESG strategies are those that recognize that they each have a role in improving their social license.

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In terms of achieving net zero carbon emissions, the largest mining companies in the world have several options – each with merits and demerits – they can explore. Mining companies can either divest, decommission, reduce emissions in existing operations, and/or offset assets that produce high greenhouse gas emissions (GHG).

Achieving net zero presents a dilemma because many of the largest miners have made their goal of reaching net zero by offsetting current emissions either through purchasing carbon offsets or investing in solutions that mitigate climate change.

Divesting assets, which is something Anglo Americans did with their coal assets which they spun off into a pure play standalone coal miner, will decrease a miner’s GHG emissions on a standalone basis. This move simply makes the emissions another person or entity’s challenge. The transfer of assets to third parties increases the risk that those assets may not be de-commissioned promptly or appropriately and will continue to contribute to GHG emissions far into the future.

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Taking the case of Anglo Americans the divestiture of their coal assets created a formidable coal player which has since doubled in value and is on course to deliver record dividends from mining a commodity widely viewed as dirty.

Given the substantial value that these coal assets are creating, it is not reasonable to expect them to be wound down or decommissioned in the future. While they are generating value the assets will consequently increase GHG emissions. This leads to a moral quandary of sorts for investors: will they be happy to hold shares in a company that is responsible for increasing emissions of GHG into the atmosphere, yet is highly lucrative?

The International Council on Mining and Metals (ICMM) indicates that nearly 20 per cent of operating mines will likely close in the decade ahead. To manage closures and decommissioning sustainably, miners will need to collaborate with stakeholders on financing, post-mining, land use goals, and transitional support for employees and communities. This is a significant opportunity for miners to establish trust and move the needle on net zero ambitions.

Tax collection is another area miners can enhance their social license in their communities. Taxes are and will be a priority for governments, especially with the need to fund fiscal deficits that are required to mitigate the impact of the pandemic. Stakeholders will consequently keep a close eye on how the largest mining companies respond to this growing scrutiny. Mining companies must continue to prioritize tax transparency and governance as a key focus within the business.

Doing good is now noble business towards a green future

There are rewards for miners that commit themselves to live up to the creed of ESG principles. PWC reports that being part of an ethical supply chain, protecting the environment and dealing fairly with communities can help miners win new business and create a premium for their products. S & P Global in 2021 began to report on what they called the green aluminium index which shows that customers are willing to pay an extra US$10 – US$15 per ton for aluminium that is produced sustainably. These “green premiums” according to S&P will continue to grow as consumers become more discerning about supply chains. ESG performance it is said, going forward, will affect the cost of capital. Banks and investors are beginning to show a strong propensity to cut ties with projects that are viewed as unsustainable or unethical.

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Conversely, ESG-compliant companies can often access cheaper capital through mechanisms such as green bonds or sustainability-linked loans.

ESG should be considered part and parcel of what a mining company is in its essence. When a company has inculcated ESG in its culture and strategy it will lead to sustained outcomes that will drive value and growth while strengthening the environment and societies PWC said.