IMARC: Demystifying ESG to increase value creation for minors


Environment, Social and Governance (ESG) is an objective used to assess a company or an investment and its exposure to environmental, social and governance risks. This includes the physical risks of climate change, the reputational risks of lack of action, and the regulatory risks of government action. Alignment with ESG principles means that a company understands and, hopefully, optimizes its risk profile.

Environment, Social and Governance (ESG) is an objective used to assess a company or an investment and its exposure to environmental, social and governance risks. This includes the physical risks of climate change, the reputational risks of lack of action, and the regulatory risks of government action. Alignment with ESG principles means that a company understands and, hopefully, optimizes its risk profile.

For resource companies, expectations of business behavior are changing rapidly. More investment capital is being redirected to more responsible entities, and sustainable investment now exceeds A $ 35 trillion globally, including growth of 25% over a two-year period in Australasia. For companies attending Australia’s largest mining conference, the International Mining and Resources Conference (IMARC) in 2022, the stakes have never been higher with the need to get it right and be transparent.

Increasingly, companies are scrutinized by a growing legion of environmentally committed investors who keep companies at a higher moral and ethical standard; a standard that places corporate responsibility side by side with – sometimes even higher – than government responsibility in driving the social, political, economic and public health agenda.

This has seen an increase in the production of the ESG report which varies considerably across sectors, commodities and jurisdictions. The value of producing one is clear, but it seems actions speak louder than words for those who choose not to produce an ESG report.

Investing from an ESG perspective

Pacific Road Capital natural resources expert and managing partner Matt Fifield uses ESG reports to first assess whether companies are savvy enough to note that investors want to see companies produce ESG reports.

“ESG has become a buzzword, especially in the area of ​​reporting. However, the fact that a company cares enough about producing a report shows that they have thought about it, that they are alive enough to know that people are interested in knowing this stuff and that they care about it. be transparent, ”he said. .

Overall, as an investor, if a company produces an ESG report, it means that the company recognizes the importance of ESG. That said, ESG reporting over the past few years has gone from being desirable to being crucial in attracting and retaining capital and investor support.

In the mining sector, formal adoption and integration of ESG standards is generally inversely proportional to size. Large integrated companies already operate within robust ESG frameworks. However, small producers, many of whom are at the forefront of key growth areas such as critical minerals and energy transition, often lag well behind large, diversified companies in systematizing crop management. ESG risks and disclose it to external stakeholders.

This is however changing; Pacific Road conducts an annual survey of publicly traded mining companies on key exchanges with market capitalizations ranging from US $ 100-2 billion on their ESG disclosure and reporting and can confirm that there have been marked improvements in year on year in ESG reports.

“Our analysis shows that small and mid-cap companies are increasingly aware of the growing importance that the investment community places on ESG performance, convinced that a strong ESG performance will improve value creation in the short and long. term. Fifield mentioned.

A business that commits to producing an ESG report also implies that the business is serious about creating short and long term value while mitigating risk. While it’s not necessarily true that unrelated ESG companies have something to hide, this could raise huge, if not decisive, concerns in the investment community.

Different regions of the world require different areas of interest; Bribery and corruption policies, for example, are essential in less developed countries, while First Nations and water policies are more important in others. The ESG report, when compiled correctly, provides an investor with excellent insight into the most important risks.

In today’s world, an ESG report gives an investor access to everything: capital from investors and strategic partners, clients, governments and a wide range of external stakeholders. Particularly in a post-COVID world, the mining ecosystem has become more connected, and having an ESG report is an essential means of engaging with these stakeholders.

“Over time, too, we believe that ESG will be a key factor in creating value for miners. Ultimately, consumers will pay more for commodities that are ethically sourced and high performing, and as a result, investors will see premiums for companies that perform well from an ESG perspective. We’re not there yet, but we believe that one day a good ESG will have a direct impact on results, ”said Fifield.

The key ingredients of an ESG report

Pacific Road Capital believes that an ESG report should comprehensively communicate the material risks of a minor’s operations and explicitly state how these risks are managed. Matt Fifield and his team have provided the following list for guidance:

  • Disclosure of risk: It should be recognized that the relative importance of risk is different for different operations and when these operations are in the continuum of maturity, from the first explorer to the stable producer. The investment community wants to see that a company has thought through the risks, identified them, and is savvy enough to know where those risks could affect their business.
  • Policies: Although dry, companies should provide advice on their ESG policies and specify the performance standards they use to frame and measure their individual performance. This shows that the business is well run and offers some comfort to an investor.
  • Main reporting areas: identify areas of ESG interest such as disclosure, corruption, human rights, indigenous rights, tailings, air and water and rehabilitation, health and safety , economic and community contributions and diversity as important.
  • Comprehensive disclosure is an important starting point, with the belief that ‘what you measure is what you get’, supported by ensuring that board and management incentives are linked to ESG performance metrics . It shows that a company is sincere and takes its responsibilities seriously.

It is also important to use public forums such as conferences to talk about ESG practices, collaborate and learn from peers.

“We attend as many conferences as possible. Our next big conference is IMARC in 2022, where we’ll see as many presentations and talk to as many companies as possible about the importance of this kind of transparency and disclosure in their commitment to ESG, ”said Fifield.

Standardize socio-environmental disclosure

Traditional environmental or sustainability reports tended to use basic information on, for example, water quality, air quality, noise pollution, etc., then reported improvements in year after year.

An ESG report is expected to do much the same thing, but with the understanding that standards are an ever-changing beast. For example, a catastrophic failure of a tailings storage facility at Vale’s Corrego do Feijao mine in Brumadinho, Brazil on January 25, 2019, put tailings safety at the forefront.

This resulted in the collaboration of several multilateral environmental and investment stakeholders (including the participation of Pacific Road) to formulate a global tailings standard that has been adopted across the mining sector.

More recently, the effects of climate change have been highlighted with a global focus on decarbonization. Going forward, Pacific Road believes that as issues and priorities change, companies will have a continued need to monitor and assess their role in the evolving ESG landscape and their ability to lead and influence the market. change within this landscape. Without disclosure, management teams and boards are unlikely to think about their ESG footprint or how they can improve.

“Disclosure opens dialogue and supports the process of continuous improvement. Companies that do not integrate ESG into their mindset and culture do so at their peril and will find it increasingly difficult to raise capital as investors seek to generate sector returns at risk mitigated, ”said Fifield.

Matthew Fifield will share further information on ESG investing at the upcoming International Mining and Resources Conference (IMARC) in Melbourne from January 31 to February 2, 2022.

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