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Rebooting the Mining ESG Narrative

Sustainable Finance January 26, 2021
Sustainable Finance January 26, 2021

 

At our 2020 Global Metals and Mining conference in Florida, a resounding message came through from leading industry producers and investors: the industry needs to do a better job of telling its ESG story. In the months since then, it’s a message that has only intensified.

As one of the world’s leading bankers to the industry, we recognize the opportunity for our clients to address the concerns of all stakeholders, from investors to society at large. We also recognize our responsibility as a bank to ensure the necessary flow of capital to a sector that will supply the metals needed to build a world that addresses climate change. The metals & mining sector is, and will continue to be, critical to the transition to a lower-carbon economy. 

Accelerated by the COVID-19 pandemic and increased urgency around the 17 UN Sustainable Development Goals, the rapidly growing discipline of Sustainable Finance and the momentum in ESG and responsible investing are driving innovation in sustainable finance products.

Interestingly, behind increased ESG scrutiny of mining lies an opportunity to reboot the narrative by employing sustainable finance tools as mile markers to highlight strategy and accomplishments, particularly in areas that go beyond core risk mitigation.

ESG: From Value Protection to Value Creation

ESG has come to be recognized as a key strategic pillar to long-term success in the mining sector. Like few other industries, the license to operate in mining is contingent on securing the approvals of governments and the support of communities and often global NGOs focused on sustainability issues ranging from human rights to environmental stewardship.

Major advances have been made by the industry in recent decades to address ESG at corporate and operational levels. On the environmental front, miners are working to improve tailings safety, reduce water and energy consumption, and cut GHG emissions through several measures, including shifting to hydrogen-powered trucks, electrifying mine sites and increasing renewable energy.

The growing focus on social impacts contributes positively and significantly to the long-term development of local communities and societies beyond the life of a project; more progressive miners are adopting plans to help communities thrive after a mine closure.

On the governance side, we see the growing prevalence of standalone Sustainability Committees providing appropriate and independent Board oversight and, increasingly, linkages between sustainability targets and executive remuneration. Additionally, over the last decade, there have been focused efforts on increasing the diversity of directors and management.

But despite these efforts, the industry does not always receive the recognition it deserves for these advances.

Sustainable Finance Tools

Enter stage left sustainable finance instruments that provide access to capital while helping metals and mining companies demonstrate adherence to best practices as defined, for example, by the Initiative for Responsible Mining Assurance (IRMA) and the International Council on Mining and Metals (ICMM), and achieve recognition for when they go beyond risk management strategies, create value and have a positive impact.

The range of tools is varied and growing.

Green, Sustainability and Transition bonds can highlight efforts to develop technologies and projects that promote environmental sustainability, have tangible benefits and are directed toward investments in de-carbonization, water efficiency, renewable energy build out, biodiversity conservation projects or clean transportation.

Similarly, social bonds underscore development to support host communities around mining sites, in areas including education and training centres, health infrastructures and local small business support programs.

The latest tools in the sustainable finance debt market, sustainability-linked loans and bonds incentivize improvement of corporations’ sustainability profiles through setting targets and performance objectives. These tools are gaining notable traction in the sustainable finance market as a way to represent and articulate the companies’ overarching sustainability strategies.

The industry as a whole has yet to harness the potential of sustainable finance, with only a few examples of companies turning to these instruments. But miners’ interest is growing, piqued by the potential to use them as a narrative platform to link financing to sustainable outcomes, demonstrating accountability and contextualizing their investments in sustainability.

Accelerating Innovation

Whether it’s the bank loan or fixed income markets, sustainable finance is booming, reaching $1.8 trillion in the debt market alone as of June this year, according to Bloomberg’s NEF. The discipline has seen significant innovation in recent years as banks have rushed to accommodate investor appetite across sectors, and that innovation is only expected to accelerate over the coming years amid the publication of new guidelines and principles, boosting the market’s robustness and credibility.

A made-in-Canada transition taxonomy, as well as one being drafted by the ICMA, are progressing to establish transition principles and standardize a new class of labelled financial products and services for “hard-to-abate” industries.

Innovations outside of the industry could also be illustrative to metals & mining. For example, K2A, a Stockholm-listed Swedish housing company, launched a Green Equity Framework earlier this year. The framework acts as a tool to assess and eventually classify K2A under shades of green, taking into account that the methods and materials it uses for building make for lower carbon dioxide emissions than other more traditional real estate developers. It remains to be seen how effective K2A will be in attracting more ESG investors under the new framework, but, at the very least, it puts the right information in front of investors, showing how the company fits into a sustainable and low-carbon economy. Like green bonds, it is another step toward accrediting the issuer’s claims, and has been reviewed via a second opinion by CICERO, one of the globally-recognized external reviewers in the evaluation of green bonds.

Along the lines of activities and investments green mapping, we could see the concept of a total company report card emerging, encompassing a holistic and balanced view of E, S and G performance and benchmarking along with financial considerations, including positive performance beyond the risk mitigation baseline.

What is clear is that sustainable finance is a growing discipline, spurred by innovations which could help companies tell their ESG stories in a world where capital is increasingly screened through an ESG lens.

Opportunity Set

As the fight against climate change is prioritized by governments, it creates both an opportunity and risk for metals & mining. The opportunities lie in companies accessing the ESG investor pool by communicating effectively and being recognized for the critical role the industry will play as economies transition to a lower carbon future.

In a 112-page paper published by the World Bank in May, Minerals for Climate Action: The Mineral Intensity of the Clean Energy Transition, investigators showed how the move to clean energy technologies and deployment of renewable energy and battery storage technologies – especially solar, wind and geothermal – will require a significant increase in metals & mineral provisions , employing everything from base metals like copper and aluminum to new age and rare earth minerals. The report predicts, for example, that graphite, lithium, and cobalt production will need to be ramped up by more than 450 percent by 2050—from 2018 levels—to meet demand.

Clearly, developing this increased supply of raw materials will require the deployment of significant capital, requiring a credible and verifiable narrative around the companies that produce them. More advanced sustainability mapping tools will be needed to give ESG-focused investors the peace of mind to allocate their capital to best-in-class companies and projects that are aligned with ESG mandates. The tools will track evidence of decarbonised and environmentally sustainable operations as well as transparent accounts of how potential social risks associated with this acceleration in production are managed. In time, those tools may also provide for a 360° scorecard of a company, encompassing a holistic view of ESG performance together with financial performance.

Too Big to Ignore

Assuredly, the size of the ESG capital pool is too large to be ignored, as investors apply an ESG filter across asset classes and investment products.

The pool of ESG minded investors is rapidly increasing, with the number of adherents to the Principles for Responsible Investment growing daily, comprising over 3,000 signatories representing ~US$103.4 trillion of Assets under Management as of March 2020. Research firm Opimas estimates that the value of assets under management directly leveraging ESG data to drive investment decisions has doubled over the past four years, to over US$40 trillion this year.

In 2019, BMO Financial Group pledged to mobilize $400 billion in sustainable finance by 2025, including $150 billion in financing for clients pursuing sustainable outcomes. This $150 billion will include bringing transition bonds to market, helping our clients finance the investments they need to make in their businesses to transition to a lower-carbon future.

What is clear is that across industries, investors are increasingly examining companies’ ESG culture and performance when evaluating opportunities, forcing a proactive approach from operators. This is especially true for mining, still considered one of the riskiest industries by leading ESG risk providers like Sustainalytics or credit rating agencies like Fitch Ratings. Investors are actively engaging the industry to drive transparency, resulting in projects such as the Investor Mining Tailings Safety Initiative, supported by BMO Global Asset Management, which has sought to improve transparency in the sector on the management of tailings dams.

To fully embrace this transition, the industry must take hold of the narrative and put as much effort into demonstrating its benefits to society as it does to documenting risk mitigation.

Increasingly, metals & mining investors will turn to sustainable finance to create toolkits to identify well-positioned miners with sustainably-run operations that are aligned with a low-carbon profile and which adequately mitigate for ESG externalities.

The opportunity set will lie in the industry’s ability to credibly and independently prove its commitment to ESG principles, recognize its shortcomings and effectively use sustainable finance tools to communicate lasting value creation and socioeconomic benefits beyond value preservation.


Top Ranked Bank in The Wall Street Journal Sustainability Survey. Learn more here.

 

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Dan Barclay Chief Executive Officer & Group Head, BMO Capital Markets

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