Mining companies – with the exception of coal – aren’t expected to share the same fate as fossil fuels when it comes to being dropped from the portfolios of large institutional investors who are increasingly prioritizing Environmental, Social and Governance (ESG) disclosures.
But for an industry that is already categorized as “high risk” on the ESG spectrum, miners do need to up their game. That means more women on boards for the notoriously male dominated industry, rigorous tailings management, active engagement with indigenous communities, and an emphasis on “authentic reporting” over “pretty sustainability reports.”
Those were some of the takeaways from an expert panel hosted by National Capital Markets and featuring Tony Makuch, President and CEO of Kirkland Lake Gold, Alison Schneider, Director of Responsible Investing at leading Canadian fund manager, Alberta Investment Management Corporation (AIMCo), and Heather Lang, Executive Director of Sustainable Finance Solutions at Sustainalytics, one of the world’s largest independent providers of ESG research and ratings.
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“The [mining] industry is at an interesting crossroads. I don’t think there’s a risk of broad-based exclusion of mining companies and I see the industry as different from fossil fuels, but I think the reality is it’s going to be under more scrutiny from responsible investors and from lenders in light of the high level of exposure it faces,” said Lang of Sustainalytics, who underscored that the key to offsetting the risks is a “level of management that is commensurate with the level of exposure.”
Part of that increased scrutiny includes greater reporting transparency of ESG risk across all assets in a company’s financial statements, says Schneider of AIMCo, which has $119 billion in assets under management. Cherry picking a particularly ESG-friendly mine and showcasing it in a sleek sustainability report won’t satisfy institutional investors, she says.
“An integrated overall assessment across the portfolio, to get a sense of what’s actually going on… that’s what investors are actually interested in,” said Schneider. “What’s really important is authentic reporting that…actually exposes what [they’re] trying to do. Are [they] trying to make the world a better place, or not? It’s going to be complex, it’s not always going to look perfect in the ESG scores, but are [they] trying to get better, trying to improve things on the ground? I think that’s what’s important.”
A push for a consistent international reporting standard
That’s easier said than done for many miners who grapple with the twin challenges of anti-mining activists eager to capitalize on shortcomings, and a dizzying array of ESG frameworks and metrics that has prompted the OECD to warn in a report released in October that the current fragmented and inconsistent approach could undermine investor confidence in ESG scores, indices and portfolios.
These concerns have fueled a push for a consistent international reporting standard, but until that happens, AIMCo’s Schneider recommends public issuers look to the Sustainability Accounting Standards Board (SASB) for materiality guidance and the Task Force on Climate-related Financial Disclosures (TCFD) for specific climate guidance.
For its part, Sustainalytics, which has identified 10 overarching material ESG issues, recently made its corporate ratings public, in a move that mirrors mainstream corporate credit ratings and brings greater transparency to ESG scores. If an issuer doesn’t have a rating, says Lang, ask for one.
For Makuch of Kirkland Lake Gold, which has been one of the world’s best performing gold miners in the past year, the key to effective ratings that meet the needs of investors and truly reflects the reality on the ground, is collaboration with industry.
“The challenge is trying to make sure that [the metrics] are relevant to specific industries. From our perspective it’s good that [ESG is becoming] a leading indicator of performance. But if that’s the case, don’t just trust what’s being reported. You have to go and see the operations and talk to people. I think that’s the big opportunity in changing the perception of industry and getting standardization of reporting metrics,” said Makuch, who noted that he has yet to see ESG metrics embedded into analysts’ financial models. “In order [for ESG reporting] to be relevant, we need to work together to [establish] what are people looking for, what do we actually do, and how do we measure it and how do we report on it.”