How ESG Scores Influence Mining Companies

Environmental, social and governance (ESG) scores have a significant impact on the mining sector as these metrics have been increasingly used by stakeholders to assess a company’s sustainability and ethical practices when it comes to sourcing critical raw materials needed for the global energy transition.

Ranked on a scale from 0 to 100, a score of less than 50 is considered poor and more than 70 is considered good, these ratings will aid financial providers and end users in making informed decisions regarding the projects to endorse, products to purchase and they will contribute to standardising the ESG indicators within the mining and resource industry.

ESG Issues as Risks in the Mining Sector

Global Warming & Investor Expectations

Currently, there is an urgent and overt pressure on the mining industry to address the issues of climate change. In light of the United Nations Intergovernmental Panel on Climate Change, IPCC, a special report was conducted to assess the consequences of global warming reaching 1.5oC above pre-industrial levels and associated global greenhouse gas emission trajectories. The objective is to enhance the global response to the threat of climate change to prevent irreversible changes in resources, ecosystems, biodiversity, food security, cities, tourism and carbon removal.

According to S&P Global, a striking 50% of the global industrial greenhouse gas emissions have been linked to a mere 50 heavy fossil fuel companies. This underscores the pivotal role of the mining and mineral sectors as significant contributors to environmental sustainability challenges. As such, these industries find themselves under growing pressure to improve their ESG performances. 

Accenture’s Global Institutional Investor Study of ESG in Mining found that 63% of investors would be willing to divest or avoid investing in mining companies that fail to meet their decarbonisation targets or fail to pursue sufficient decarbonisation activities. Through the growing concerns on environmental sustainability, more and more investors are placing importance on these mining companies to engage in ethical and sustainable business practices, in which a good ESG score is essential in the decision of investors to provide resources to the entities.

Reporting Tools & Methodological Challenges

ESG reporting serves as a proactive tool used to provide a forward-looking measure to assess an entity’s readiness for emerging ESG risks and opportunities. Nevertheless, traditional mining company ratings rely on algorithms that often overlook ethical considerations and disproportionately emphasise historical performance. In addition, there appears to be a notable lack of transparency and coverage in the methodologies employed by these ratings. Because of these limitations, current rating agencies are typically backwards-looking and fail to capture a mining company's plans for integration with local communities throughout the lifespan of mines and beyond.

Capital & Investment Implications of Poor ESG Ratings

The days of mining investors and financial providers focusing solely on profitability are long gone. The mining and mineral industry now faces heightened scrutiny on issues ranging from the emission of greenhouse gases and its impact on climate change, impacted local communities, biodiversity and water usage as well as human rights. Alongside good financial forecasts, the demand for minerals that go into clean energy technologies is expected to increase six-fold in the next 20 years. This means addressing ESG issues is critical in ensuring the sustained success of the mining and mineral industry.

Companies that fail to achieve a desirable ESG score run the risk of diminishing the company’s share price. In the case of Vale, a Brazilian iron ore producer, that experienced a dam disaster in one of its mine, Córrego do Feijão, which resulted in the death of over 250 people faced not only a 10% decrease in share price but also was removed from Brazil’s ISE corporate sustainability index. This underscores that the inability to meet ESG considerations will have detrimental impacts on a company’s performance.

As seen in Norway’s Wealth Fund, investors are setting minimum ESG thresholds to finance investments, where they would no longer invest in firms that mine more than 20 million tonnes of coal per annum or generate more than 10 GW of coal power per year. Furthermore, according to a recent report by McKinsey, it suggests the cost of capital for mining entities with lower ESG ratings would be 25% higher than those with better scores as investors and lenders are becoming increasingly focused on ESG considerations when making investment decisions.

This shift in investor attitudes means that companies must find measures to meet emission reduction targets and improve ESG performance. The failure to meet these objectives will hinder their reputation and performance, ability to attract investments and secure project financing at a lower rate.

What can mining companies do?

It is clear that ESG considerations are no longer optional or a point of differentiation at this point, it is now a minimum operating standard, especially in the mining and metals industry. Net-zero targets along with the demand for energy transition will drive demand and enormous annual growth in market value. This shift will require more mining, not less, and having strong ESG drivers as well as having effective and proactive stakeholder engagement processes and enhanced relationships with communities will become critical for the continued success of mining & metals companies.

In the realm of environmental considerations, ‘E’, the focus on lowering scope 3 emissions has intensified among mining and metal investors, aligning with the broader goal of achieving net-zero emissions by 2050. In response, mining companies are urged to adopt a comprehensive approach, striving for sustainability at every stage, from project inception to mine decommissioning. This can be done through various ways, including shifting from a linear ‘take, make, and waste’ model to ‘take, make, recover and reuse’ will enhance core revenue and maximise the value of end-of-life materials. Recycling materials will reduce supply costs and hedge against volatility in raw material pricing. As such, this process can be used to attract sustainability-focused customers.

Focusing on ‘S’, the rising demand for critical minerals will mean mining companies will have to develop more mines, often in previously unmined regions. As they seek to expand, they must have procedures in place to ensure human rights issues are not violated. This is done by developing appropriate policies, governance structures and tools to mitigate human rights risks within areas of operations and across their supply chains. Issues surrounding corruption, and bribery that play out across mining sites that extend to the enterprise level should be focused on in greater detail to ensure sustainable extraction of critical materials. By focusing on these details, mining companies can foster an environment of transparency, and ethical business practices to safeguard those affected against human rights violations.

Focusing on ‘G’, good governance is at the centre of ensuring ESG issues are addressed. This means that there should be a shift of focus towards more robust commitments with clear and quantifiable targets, with greater transparency in reporting. This way, investors and stakeholders can critically assess whether the mining company in question is making sufficient strides in adhering to good ESG principles and implementing effective ESG measures. Such practices promote accountability and foster trust between the company, its investors and the broader community.