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ESG factors take center stage for mining sector

Environmental, social, and governance (ESG) presents critical challenges to the mining industry. Plan how to respond to new laws, requirements, and customer expectations.

06/09/2021 · 5 minute read

The mining industry is increasingly addressing environmental, social, and governance (ESG) issues as a matter of urgency, as protection of natural resources continues to shape the global business agenda.

Reputation and performance at stake

As the industry grapples with the effects of extreme weather on its sites, equipment, energy supplies, and transportation routes, the attention paid to the corporate social responsibility of mining groups around the world is ever growing.         

A mining company unprepared for the transition to more sustainable practices, as climate change takes hold, is not only putting its reputation and operations at risk, but also jeopardizing future performance and investment opportunities.

While there is no conclusive list of ESG risks for the mining sector to consider, they usually include a blend of the following environmental, social, and governance factors.

Environmental

Criteria examining a mining company’s impact on the planet generally cover its approach to measuring and managing air, water, and soil pollution. These criteria extend not just through the life of a mine, but also to post-production activities, during reclamation. 

The processes for ensuring efficient use of key resources, such as water, are further gauges for measuring a company’s environmental credentials. Organisations, for example, can align to the Carbon Disclosure Project (CDP) water disclosure initiative to address water management.

Other factors for a mining company to consider when building a sustainable business strategy, include: the impact the organisation has on biodiversity; its energy consumption and gross CO2 emissions; and its vulnerability to catastrophe, in both physical and logistical terms.

As demand increases for exploration, mining, and processing of raw materials critical to the clean energy transition, mining companies have an opportunity to integrate and enhance environmental policies, congruent with global initiatives.

Social

Criteria examine how well a company treats and values its employees and broader communities. Factors can include: an organisation’s labour management policies; its health, safety, and wellbeing commitments; the impact it has on the local community; and the labour standards of any suppliers.

These questions are a few of the many focal points for the mining industry, with specific consideration given to employee health and safety, and a company’s compensation policies in the event of mining-induced displacement of people.  

Governance

Governance criteria assess a company’s corporate governance practices. These focus on board structure, in particular board diversity, transparency, and the company’s relationship with governmental and regulatory bodies, as well as NGOs. 

A company’s ESG record will be improved by alignment to the following frameworks:

  • Responsible Gold Mining Principles.
  • UN Guiding Principles on Business and Human Rights.
  • UN Guiding Principles Reporting Framework.
  • International Council on Mining and Metals’ 10 Sustainable Development Principles.

Survey finds low levels of preparedness for ESG factors

Mining sector participants currently vary vastly in their readiness for the transition to sustainability.  

In a recent survey by Marsh, 90% of respondents in the mining industry ranked climate change and ESG as either an important, or the most important, issue for their operations.

However, 44% of respondents said they have an ineffective process, or no process at all, for identifying, responding to, and implementing changes based on climate threats and ESG-related factors.

The survey also found only 11% of mining organisations had conducted a comprehensive stress test on financial impacts from climate threats across current and future operations.

This survey demonstrates the urgent need for action where climate change has a material impact on financial performance. As the transition to sustainability gains pace, there will be a greater need for organisational agility to respond to new laws, requirements, and customer expectations. 

Conclusion

Protecting natural resources across the planet is essential to building long-term economic stability and prosperity.

However, while decarburization provides opportunities for growth and diversification, the strategy simultaneously presents an inherent risk to carbon-based industries, along with the communities and regions dependent on them.

A shift in carbon use considered through an ESG lens can help enable a just transition. For example, the implications of the energy conversion on rural socio-economic dynamics can be managed while simultaneously ensuring ESG principles are wholly integrated into the future energy industry.

Key actions to take include:

  • Assess the implications of ESG for your organisation by utilising industry data, risk indices, physical climate models, and key stakeholders’ perspectives.
  • Analyse and establish the means to control the physical, transition, and reputational risks associated with ESG for your organisation.
  • Analyse the requirement for external reporting.

If you have questions on your ESG and climate change risk, please contact your Marsh advisor.

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