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Drilling down on ESG risks in the mining sector

Investors need to be aware of the multiple sustainable initiatives and how they work.

That minerals and metals are highly valuable commodities is common knowledge. But not many people are aware of the material and immaterial costs of the mining process. Everybody knows that gold and silver is used for jewellery, but less known is that much of the electronics for computers and mobile phones, bicycle materials, cars, cookware, and pipes are dependent on mining practices. The Organisation for Economic Cooperation and Development (OECD) recently announced a new project to promote responsible investment in the mining sector through enhanced due diligence. This article explains some of the difficulties that investors can face in the process of conducting fair and proper Environmental Social and Governance (ESG) assessments of their potential investment targets. Frequently, neither government institutions nor companies or local communities themselves are properly equipped to respond to the social challenges faced by the mining sector, i.e. land rights, security forces, child labour, forced labour, (fatal) accidents and human health. Furthermore, as a result of environmentally risky practices like acid drainage, tailing fatalities and excessive water consumption, mining affects the environment no matter where it occurs, through, for instance, loss of habitat and contamination of surface and ground waters. In sum, mining practices risk violating ethical, social and environmental standards to the detriment of surrounding communities and landscapes.To mitigate the risk of direct or indirect involvement in controversial activities, mining companies should respect internationally accepted standards with regard to the environment, human and labour rights, ethical behaviour, and governance. The process of globalization enhanced the rising power and influence of corporate enterprises, which resulted in a complex context for governance issues. The historical model of nation states enjoying the monopoly of power is no longer valid. The revenues of major mining companies are often larger than GDP in the poorest developing countries. For these countries, mining contracts have a major impact on their development. Issues like corruption, weak national rule of law and law enforcement mechanisms, which are common in developing counties, challenge mining companies to ensure compliance with social and environmental standards. How far or how deep this due diligence process must go will depend on individual circumstances. Parameters for measuring the severity of controversial business activities include the location of the mine (industrial versus developing country), its size (large companies or small-scale miners), what products are being mined (gold or uranium versus gypsum or sandstone), what processes are used (underground versus opencast mining), and prevailing social and ecological conditions. A basic due diligence process should include a social and environmental impact assessment, the development and implementation of social and environmental policies, and the monitoring of
social and environmental performance. As a response to increasing public pressure on companies to take responsibility within their spheres of influence, many sector initiatives are being developed to promote improvement of mining companies’ ESG-performance through the formulation of concrete guidelines. An example of this is the International Council on Mining and Metals (ICMM), which was already established in 2001 to act as a catalyst for performance improvement in the mining and metals industry. ICMM members have committed to the Sustainable Development Framework, which comprises three elements: a set of ten principles, public reporting and independent assurance. In recent years, transparency standards have also been developed for the sourcing of minerals and other natural resources by mining companies themselves. Consequently, transparent disclosure is gradually becoming common practice. Last month, the Alliance for Responsible Mining announced that it had launched the first third-party independent certification scheme for gold, in conjunction with Fairtrade Labelling Organisations International (FLO). Non-industry stakeholders active in the sector have a responsibility to ensure that mining operations comply with international social and environmental standards. Strict conditions for mining permits should avoid that mining operations locate in environmentally fragile areas and take valuable natural resources out of the country without the national government and local communities gaining as well. A positive trend in this regard is renegotiating mining contracts in order to establish better conditions regarding royalty and tax payments. Non-governmental organisations (NGOs), onthe other hand, have an important role in raising awareness about possible violations of ethical standards. Organisations, such as Mines & Communities and Global Action, can be an important player in addressing reprehensive practices. These different actors also

“Frequently, neither government institutions nor companies or local communities themselves are properly equipped to respond to the social challenges faced by the mining sector.”

cooperate in multi stakeholder initiatives to address responsible mining practices. Two examples are the Global Reporting Initiative (GRI) and the United Nations Principles for Responsible Investment (UNPRI). The GRI recently incorporated a Mining and Metals Sector Supplement that addresses sector specific topics for comparable disclosure on economic, environmental, and social performance. As indicated by the OECD project, also financial institutions should promote responsible investment in the mining sector through enhanced due diligence. SNS Asset Management implemented a Responsible Mining Framework, which provides practical guidance for its ESG-research department to assure that mining companies invested in are not involved in controversial mining practices. However, there are limitations to this type of ESG-research. A major challenge in the assessment is the collection of information. It can be difficult to make a meaningful
comparison between mining companies due to a lack of accessible and objective information. While most NGOs and research groups are focussed on few large mining companies, there is often a lack of substantial information to assess smaller mining companies. Combined with huge differences in transparency about mining contracts as well as a lack of disclosure of detailed and site-specific information, it remains difficult for investors to make a fair and proper ESG-assessment of potential investments. The improvement of standardised and detailed public disclosure of social and environmental policies, contracts and performance by mining companies is essential. Another limitation is related to scope. Mainstream investors’ impact on banning controversial mining practices worldwideis limited because of their focus on companies listed on the stock market. This implies that illegal small-scale mining, which is often related to the most striking forms of poor treatment of workers and communities, falls out of most investors’ direct spheres of influence. However, due to investment in companies that use resources from this small scale mining projects, such as electronic companies, these malpractices can occur in the indirect sphere of influence of investors. In order to be able to address these issues as well, investors should be well informed about supply chain practices of, amongst others, telephone, computer and automobiles industry companies. Here again, the need for accessible and objective information is apparent.
Marieke de Leede and Kristel Verhoef, the authors of this article are both ESG analysts at SNS Asset Management