mining

ESG, a rich seam for investors in the mining sector?

Hudson Sandler was delighted to participate in a highly topical webinar during the Natural Resources Forum ESG Week, on the challenges and opportunities in the mining sector against the backdrop of ESG growing in importance as a major theme for the sector.

The Managing the ESG Narrative and Investor Expectations in the Mining Sector’ debate was chaired by Rebecca Gudgeon, Partner at Hudson Sandler and head of HS Sustain, alongside Ayuna Nechaeva, Head of Europe and Primary Markets at the London Stock Exchange Group, Ben Cleary, Portfolio Manager at Tribeca Global Nature Resources Fund, Iancu Daramus, Senior Sustainability Analyst at Legal & General Investment Management, and Alexandra Gundobina, Sustainable Development Partnership Manager at EN+ Group.

The webinar discussed the importance being placed on environmental, social and governance (ESG) considerations by investors in the mining sector, and how businesses are responding to increasing demands for ESG disclosure and progress in improving the sustainability credentials of their businesses.

The metals and mining sector has a crucial role to play in the global transition to a low-carbon economy, with one reason being the necessity of metals such as aluminium and steel, and rare earth minerals such as lithium and cobalt in the construction of renewable energy infrastructure. Indeed, many large companies in the sector are beginning to emphasise their role as a catalyst in the transition as part of their sustainability messaging. Despite some companies being able to reinvent themselves in this manner, the sector’s reputation still continues to struggle due to unfortunate incidents such as the Brumadinho Dam Disaster and more recent events such as the Norilsk Oil Spill and Rio Tinto’s destruction of an Aboriginal site in the Juukan Gorge. The panel discussed the current ESG narrative and investor expectations in this context.

With the setting of sustainability targets comes the possibility of failing to achieve them, which happened recently with Kraft Heinz not meeting any of its sustainability targets, and begs the question: is investor pressure leading companies to set unrealistic ESG targets? Iancu Daramussaidwe had seen great progress overall in the sector regarding health and safety, with the industry uniting around setting a goal of zero injuries and fatalities, and therefore there is no reason why companies cannot set the goal of carbon neutrality. Furthermore, he argued that companies need to move beyond short-term thinking in strategy planning, as setting progressive ESG goals earlier may require more initial expenditure but reduce costs greatly down the line, making investments more cost-effective in the long term.

Until the Covid-19 pandemic, climate change, and the emissions reductions required to curb its significant adverse effects, was generally the focus for investors taking ESG considerations into account. The global lockdowns which became commonplace in 2020 and had a huge knock-on effect on economies, had brought the ‘social’ aspect of ESG into the spotlight, due to organisations around the world being forced to adapt to survive. The panel discussed whether the ‘S’ would remain in the spotlight following the pandemic, with Alexandra Gundobina commenting that her own company EN+, and many other metal producers and miners had long been concerned with providing the regions they operate in with positive social impacts, and that the pandemic had emphasised the need for bespoke localised applications of more broad-stroke global sustainability targets and standards. Iancu also highlighted the importance of companies disclosing their lobbying activities, as often these did not match up with their sustainability messaging and should be a focus post-pandemic.

Good governance is the key to any successful sustainability journey, but as an umbrella term it can have multiple different interpretations, with companies prioritising different aspects of it. The panel talked about the virtues of these different priorities, with Ayuna Nechaeva remarking that board diversity was absolutely essential for good management decisions and achieving wider ESG goals, due to the diversity of perspectives a board with a balance of genders and cultural backgrounds can bring. Iancu discussed the trend of linking management remuneration to ESG KPIs, which while possibly improving ESG performance, was questionable from a moral perspective as executives should not necessarily be rewarded financially for ensuring no one dies at their mining operations. Ben Cleary remarked that investors had a role to play in this regard, stating that asset managers needed to be more cognisant of issues associated with the governance part of the ESG acronym, by exercising their vote at shareholder meetings. Alexandra highlighted the important work EN+ was doing in driving sustainability discourse in Russia, and the necessity of collaboration within the industry in order to achieve the goal of net-zero emissions in future.

Finally, the panel discussed the ESG trends we are likely to see in 2021, with the overall sentiment that ESG is very much here to stay, and will drive positive progress. Iancu highlighted the role pension funds will increasingly play in demanding sustainability disclosure from companies they are invested in, and Ayuna stated that we will see an increase in more ethical governance approaches based on board diversity, hopefully leading to better management decisions. Ben finished on an optimistic note for the metals and mining sector, arguing the industry had made great strides in its ESG disclosure levels and general performance, and we would likely soon see these efforts being recognised in the valuations of metals and mining companies. The debates will continue, but ESG has clearly cemented itself as a key consideration for every company in the mining industry, and highlighted the need for collaboration to ensure an acceleration of the world’s transition to a low-carbon economy.

Written by Hugh Falcon

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