ESG – a must-have for miners?

The mining industry has witnessed an increase in scrutiny over its environmental, social and governance (ESG) performance in recent years.

This has been driven partly by growing demands for ESG compliance from the investment community, coupled with the fact that failure to maintain community support can result in projects being delayed or abandoned, particularly in today's social media-savvy world, US-based international attorney Jordi Ventura tells BNamericas.

Despite the importance of ESG and the related concept, social license to operate, standardized reporting guidelines are lacking, with a wealth of overlapping voluntary codes making it difficult for companies to decide how best to proceed, according to Ventura, who has extensive experience working in the Latin American mining sector.

Meanwhile, the COVID-19 pandemic has provided the sector with an opportunity to look at ways of doing things differently and to demonstrate its important role in supporting communities and local authorities, including through donations of key infrastructure and health equipment.

BNamericas: There has been a recent increase in scrutiny over ESG issues in the mining industry. What is driving this?

Ventura: This appears to be a long-overdue positive move. It has only been a few years since the investor community started to consider a social license to operate (SLO) and ESG in the mining space a must-have to minimize risks associated with investment decisions.

Social licence and community engagement are no longer afterthoughts. Sustainable, socially-aware funding has reached a tipping point in mining company board rooms.

ESG is already a key concern for fund managers, who are facing tighter restrictions on where funds can be deployed.

It is also at the forefront for investors looking for verifiable compliance, not statements of intent. ESG-based investing has experienced a spectacular increase in a short time.

Global sustainable investment topped US$30tn in 2019 – up 68% since 2014, and tenfold since 2004.  

This has not gone unnoticed by many multi-disciplinary law firms, who have established practice areas around rising interest among investors, shareholders and consumers on prioritizing sustainability and a recognition that investments should aim at making a financial return while creating a positive change.

The bottom line for mining companies is simple – the vast majority of institutional investors are already evaluating companies’ ESG disclosures. And investors are adopting an ESG-based approach mainly because they view it as a way to enhance returns and mitigate risk.  

Those mining companies that adhere to the tenets of ESG will be the beneficiaries of sustainable and similar funds.

BNamericas: What is the difference between ESG and SLO – and how are the two related?

Ventura: In the mining industry, the three components that make up ESG include an extensive range of topics, including climate change, biodiversity, waste, water and resource use, and pollution on the environmental side, human rights, labor practices, safety, health, community and diversity on the social side, and on the governance side, corporate governance, ethics, compliance, executive pay, diversity, lobbying and approaches to taxation.

These same ESG topics also determine whether a mining company has achieved an SLO.

Both SLO and ESG lack standardized reporting guidelines. Many overlapping voluntary codes and principles also exist, which can make it difficult to determine which principles to follow.

Failure to obtain and maintain an SLO or achieve ESG standards will inevitably lead to a project’s delay, suspension or even abandonment.

To address this lack of standardization, many entities are proposing voluntary requirements as a stop-gap measure until governments develop cohesive regulatory frameworks – something that is not likely to happen for quite some time, if ever.

One of the most notable of these entities is the International Council on Mining and Metals (ICMM), which recently launched its Mining Principles.

These are an update of a set of existing ethical and sustainable standards which had been in place since 2003 (the concept of ESG was introduced in 2000).

It is also worth noting that the principles include new requirements on the transparent disclosure of progress on ESG issues, and ICMM members will be required to provide an explanation for expectations that have not been fully met.

In other words, they require accountability on the part of mining companies.

BNamericas: What are the key elements of a successful SLO/ESG approach?

Ventura: Gaining an SLO and achieving ESG both require immediate, direct and local interaction, ideally before sending in an exploration team or deciding to develop a deposit.

Understanding what social risks and challenges the company faces and what issues matter to the community are vital to the success of a mining project.

The best way to accomplish this immediate direct and local interaction is through conducting grass-roots mining legal diagnoses and SLO diagnoses.

In order to identify the risks associated with the Latin American operations, projects and affairs of mining companies, it is imperative that a buying, selling, merging or even ‘staying-put’ company conduct one or more effective mining legal diagnoses.

Language, cultural, and geographic barriers – as well as misunderstandings that arise between the civil law environment of Latin American countries and the common law expectations of North American attorneys – can make an effective diagnosis difficult.

But the absence of an effective and thorough mining legal diagnosis when entering into a transaction has resulted in companies leaving significant amounts of capital on the table, and often leaving companies without the protections they need to conduct business with confidence.

Incredibly, most multinational companies typically do not conduct any meaningful due diligence when making an acquisition in Latin America.

Mining legal diagnoses will seek to identify legal risks faced by a company’s endeavors.

This includes uncovering issues that should have been, and need to be, resolved, and proposing corrective measures.

Similarly to accounting audits, an independent mining legal diagnosis team will not replace in-house or regular outside counsel, and will provide a fresh set of eyes to ensure clients’ affairs are in order.

Having independent counsel supervise the mining legal diagnosis allows the mining company to effectively make use of the attorney-client privilege, which will enable issues or problems to be corrected in a timely manner without fear of having government officials, NGOs, competitors, or others becoming aware of the fact that the issues existed in the first place.    

SLO is based on the idea that companies need not only obtain regulatory permission, but also social permission to conduct their affairs.

SLO does not refer to a formal agreement or document, but to the real or current credibility, reliability and acceptance by local communities and other stakeholders impacted by companies and their projects.

In order to maximize the likelihood of obtaining an SLO, there is a need for immediate, direct and active on-site interaction with those communities that will be affected by a company’s operations.

It is vital that a mining company knows, as soon as possible, as part of the preparation ahead of any Latin American endeavor, what risks and challenges it faces and, more importantly, what issues matter most to the community that will be impacted by operations.  

This need is particularly compelling when viewed against the backdrop of the instantaneous global communications in today’s world.

Through the advent of social media, communities in even the most remote locations are connected into worldwide information systems and support networks.

To complicate matters, social media has enabled individuals and groups far removed from the physical location of a project to identify as stakeholders and become invested in, or feel as if they are a part of, a community’s issues.

Social media provides massively distributed, unfiltered access to virtually unlimited communication outlets, and almost anyone can disseminate information, create interest, criticize a company’s activities and create global alliances.

An SLO diagnosis is a tool that will provide a basis for ‘doing the right thing’ for all stakeholders impacted by a project – communities, governments and regulators, shareholders, employees – as well as providing for the needs of future generations.

It paves the way for a company to achieve a financial return while creating positive changes.

Although mining legal diagnoses and SLO diagnoses are effective tools in a variety of settings, they are most effective in asset acquisitions and the synchronization of operations.

There is a plethora of M&As in the precious metals space at the moment, and that creates a situation where management of ESG risk by attorneys is vital.

In terms of synchronization of operations, a smooth transition in the acquisition of an asset or where a company is adapting ESG practices across several divisions will require attorneys skilled in this space.

Both asset acquisitions and synchronization of operations will need some level of mining legal diagnoses and SLO diagnoses to ensure they are devoid of ESG risks, and these can only take place on-site.

They occur at the local, grass-roots level, during the early stages of a project.

If too many insurmountable legal issues are found, or if there is no viable path for a company to ultimately obtain an SLO or ESG, that project may be postponed or abandoned.

Knowing at an early stage that a project is not viable can save incalculable amounts of wasted investment.

BNamericas: How has COVID-19 affected the situation regarding ESG/SLO in mining?

Ventura: As EY recently said, the pandemic has created the opportunity for sustainable transformation because it has fueled an increased openness to change.  

COVID-19 has brought the mining sector closer and proven what the industry can accomplish on its own with the communities, even with a lack of formal requirements or guidelines in place.  

Over the last few weeks, donations by ICMM members have caught headlines, but these only scratch the surface of the support and resources being delivered at a local level.

This includes working with authorities in areas close to operations and helping them prepare and respond to critical infrastructure needs.

We have seen companies donate facilities for use as field hospitals and testing centres, provide access to clean water, sanitation, food and care packages, as well as investment in online education programmes, supply of medical transport vehicles and donation of ventilators and personal protective equipment.  

Some members are reviewing their terms for local businesses, for example, reducing the time to pay invoices, or extending loan schemes to cushion the economic impact.