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Extracting opportunity from adversity in the mining sector in 2023

Extracting opportunity from adversity in the mining sector in 2023
Kim Polley

By Kim Polley, Managing Partner

This piece was also published in Daily Maverick

In the last 12 months, the world came out of a heightened state of pandemic panic and headed directly into climate crisis consciousness. Amid a tornado of messages predicting the end of the world it’s no wonder that people are scrambling to find someone to blame. And predictably, big business makes an outsized climate catastrophe target.

Practically speaking, stakeholder expectations around safety, environmental management, decarbonisation and corporate responsibility have become increasingly difficult to navigate. For the mining sector, this is driving an urgency to address external perceptions of business operations with proactive ESG strategies, particularly when investors are looking to understand societal value beyond the financials. Key, in this context, is an appreciation of ESG’s potential to unlock value and mitigate risk for responsible miners.

Protecting people pays dividends in the mining sector

Health and Safety is a long-standing issue for the mining industry – and is also one that materially impacts social licence to operate as it carries potential for significant community impact. There are now increasing expectations of shared value outcomes from mining projects. Any misstep can impact the ability to access capital, or even result in a complete loss of license – particularly in light of the increased use of social media, which makes potentially negative publicity more globally visible than ever before.

Achieving optimal health and safety levels has been especially taxing in the last two years as maintaining business continuity during Covid-19 came at a high cost. Mines faced added expenses relating to new health protocols, the introduction of testing equipment, and ensuring that the workforce is supported appropriately. At the same time, the pandemic has heightened stakeholder expectations around how miners prepare for, manage and monitor all high-impact risk exposures.

On a positive note, in Africa, the pandemic re-emphasized that a mining operation is an extension of the community in which it operates. Mining companies must now demonstrate the highest levels of integrity, transparency and collaboration to maintain good relationships with host communities. This was evidenced by how mining companies and communities collaborated to fight the pandemic, working together to limit, as much as is possible, losses in production.

A tougher environmental climate for miners

Mining companies are facing sharper scrutiny of the way they handle environmental issues, including pollution, waste-water management, habitat protection and site remediation. This growing emphasis on ethics and sustainability is being driven by customers, investors, regulators and industry initiatives – as well as a genuine desire among some companies to conduct their operations in a more sustainable way.

Decarbonisation strategies are becoming a focus too, and some of the larger players have already outlined their plans to decarbonise operations. However, for many in the mining sector, especially for junior miners, costs can seem prohibitive. But perceived inadequate progress towards net zero, may threaten their ability to access capital in an increasingly tight market. Mining companies that power their operations with renewable energy, operating electric or hydrogen-powered truck fleets and integrating recycling in their value chains, will be best placed to sell low-carbon premium minerals.

Although the mining industry has a chequered history when it comes to environmental management, it has an important place in a responsible investment portfolio. Because of the significant contribution mining makes to many countries’ GDP, the success of the much-needed global transition towards clean energy may, to some degree, depend on the mining sector.

Going to the source

Responsible sourcing should be at the top of the agenda for multinationals. The issues within this are multiple, ranging from deforestation and land appropriation to modern slavery and indigenous rights abuses… to name a few. An example of this is the responsible sourcing of conflict minerals, which interestingly, is one of the great contradictions – or tensions – of the global transition to clean energy.

This is because many green technologies – which we advocate for in our war on climate change – rely on the use of minerals sourced in high-risk areas with poor human rights practises. One of the most significant examples of this is cobalt, an essential component in the cathode of rechargeable lithium-ion batteries that are used to power electric vehicles and store renewable energy. Cobalt is sourced mainly in the Democratic Republic of Congo, a country recognised as being at the centre of many a conflict minerals debate.

While we are starting to see stronger supply chain governance for certain minerals, these initiatives have not yet been expanded to include most of the minerals and metals central to green energy technologies. And green technologies are critical to the success of our global movement to counter the effects of climate change.

It’s a balancing act. While a wide array of stakeholders are calling for mining companies to go beyond legislative requirements and implement a broader approach to responsible sourcing, how we practically implement that approach is going to be interesting to watch.

Mining the opportunities

Amid these challenges, miners have an opportunity to deliver value to external stakeholders while maintaining strong performance. Attaining these ambitious, but achievable, goals begins with miners taking responsibility for helping to overhaul the image of the industry. That means engaging sincerely on the value they are adding to local communities and economies, and working to ensure that key stakeholders are taken along on the journey.

That also speaks to increasing transparency around ESG – both in terms of what an investor’s ESG evaluation criteria looks like and what companies are actually doing to address their responsibilities. Because, let’s face it, a key commercial driver for mining companies to implement stronger ESG measures is the ability to attract capital. And investors are increasingly integrating ESG into their investment process to help secure capital during fundraising, to identify risks during due diligence, to capitalise on opportunities post-acquisition, and to facilitate credible information disclosure on exit.

Part of the process may involve educating the investment community, which arguably still places too much weight on the traditional disclosures model. The fundamental flaw is that currently this still relies on information provided by the company, which is polished to as rosy a glow as possible.

Rather, we should be looking at the realities around that business as a contributor to how we measure real ESG contribution. This includes monitoring the conversations about a business in the media and on social media, the quality of its management of ESG issues, what the company’s internal polices or process flows indicate about its ethos, how effectively and transparently it responds to an ESG crisis, as well as giving much more credit for sustainable social value-creation: result rather than commitment.

Shared value initiatives that extend to a host community’s ability to thrive beyond the miner’s operations or presence there should be prized. Doing ESG better by approaching it more holistically and robustly, that’s the opportunity for responsible miners. It’s a win-win-win for people, planet and profit.

Get in touch to find out how we can advise on ESG in the mining industry

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