Sustainability Strikes the Mining Industry
Source: The Gold Report (4/25/08)
As sustainable development issues gather momentum, they're beginning to influence the most important stakeholders of multinational corporations. Rather than risk alienating key constituencies such as banks, portfolio managers and shareholders or the countries in which they operate, companies are adding environmental and social stewardship initiatives to their agendas.
It takes a glossary to follow the terminology covering the many manifestations of sustainability. But hidden in the dense tangle of intertwined acronyms—Socially Responsible Investing (SRI), Environmental, Social, and Governance issues (ESG), and Equator Principles (EPs)—lies a simple assumption. Everyone benefits when companies take better care of human and natural resources.
Although it's not exactly a groundswell, more and more mining companies are taking a hard look at the environmental and social consequences of their activities. Pressure is mounting for them to become better stewards of the world's increasingly scarce natural resources. Then there's that other scarce resource: money. Credit's endangered status is pushing the hurdles to securing loans to new heights. Today, more and more banks are adding "extra financial" criteria to the gauntlet companies must run in order to fund their projects.
Banks Are Taking Note
The Equator Principles (EPs) is a voluntary set of guidelines for assessing environmental and social risks in financing projects, originally adopted by 10 banks, led by Citigroup, ABN AMRO, Barclays and WestLB. By April 2008 that list has grown to 60 financial institutions. In a recent interview, Sharon Maharg, the Regional Head of Sustainability Management for Latin America and the Director in Global Origination and Syndication, Capital Markets at WestLB, told The Gold Report: "We are committed to financing only environmentally and socially responsible projects. This is called SRI but it also encompasses reputation risk management. Our department evaluates and assigns ratings to over 1,400 companies. High SRI ratings are extremely valuable for the large mining companies. Companies also benefit from building a reputation with the leading project finance banks, and these tend to be the ones that follow the equator principles. Fostering such relationships helps mining companies to get financial support for their projects."
In some developing nations, environmental and social guidelines are not as stringent as they are in Organisation for Economic Co-operation and Development (OECD) countries. This prompts banks "to look far more closely at the social and environmental risks in the transaction because they cannot rely on the country's laws," explains Maharg.
Even if companies don't have an actual SRI rating, a reputation for managing risks responsibly helps them obtain financing for their projects. Maharg's mission is to convince companies that taking these issues seriously can have significant financial benefits. She also points out the pitfalls of ignoring these issues. "For instance, if a company has no health and safety practices in place, and an accident happens, you gain a bad reputation that will affect share value."
A recent McKinsey study on "CEOs on Strategy and Social Issues" stated that over 90% of CEOs surveyed said they are doing more to include ESG issues than they were five years ago. Although 72% of CEOs surveyed said that ESG issues should be incorporated into business policies, only 50% actually have working policies regarding these issues. The report cited environmental concerns as the number-one trend shaping society's expectations for businesses. Increasing environmental concerns were listed by 61% of CEOs, while 38% listed greater demand for and limited supply of natural resources as the top two trends driving societal expectations of businesses.
Scoring Points with Portfolio Managers
Some portfolio managers have started to factor ESG considerations into their investment decision-making. The way a company handles its social and environmental responsibilities can reveal a lot about the quality of the management and, ultimately, impact the value of the stock. In a recent interview with The Gold Report, Dr. Hendrik Garz, German Equity Strategy and Socially Responsible Investment (SRI) at WestLB in Dusseldorf said: "Fiduciaries of important funds are looking for a new approach to manage their investments…we use ESG performance indicators to grade companies. The big issue is that these performance indicators are not comparable or sufficiently standardized to allow investors to easily benchmark companies."
Dr. Garz cites another obstacle facing ESG implementation. "Many managers of large S&P 500 firms are too focused on short-term optimization of quarterly numbers. This quarterly reporting framework leads to short-term oriented behavior and has not resulted in larger returns for investors nor improved the fundamental performance of companies. Maybe you have done absolutely the right thing with respect to the three-year horizon, but then you underperform in the first three months and you're out of business. It's very simple. Short-term decision-making drives out the long-term ESG considerations."
At this point, there is no hard and fast correlation of ESG factors and stock performance. "Statistically, ESG-based investments do not outperform to a significant degree. Nor do they underperform," admits Dr. Garz. He explains that "you have to look at two dimensions to optimize your portfolio: risk and return. You can significantly improve your performance by looking at these issues…so on a risk-adjusted basis, you perform better than the market, and that's more than many traditional investment strategies are able to deliver."
Europe and the U.S. take very different approaches to ESG matters. In the U.S., adopting ESG principles is voluntary. Europe has a regulatory stance. Garz believes that "Europe embraces these codes faster because more asset managers there have a sophisticated and systematic approach towards ESG." He says that the European Federation of Financial Analysts Societies is working to set up standards. All portfolio managers and financial analysts are members of the Society of Investment Professionals in Germany (DVFA) and have strong relationships to the companies. "They have set up a corporate governance index—more or less a blueprint for behavior, a code of conduct for German companies listed on the stock exchanges, so it has an impact on the mainstream investment community in Germany."
Garz considers the Mercer and the Asset Management Working Group of the United Nations Environment Program Finance Initiative to be one of the most significant initiatives in the area of sustainable investments. This and the Global Reporting Initiative (GRI) are closely linked, UN-driven initiatives that are conducting research and promoting sustainability.
Pledging to Practice Sustainable Mining
Mining companies recognize that their industry suffers from a negative public image with regard to environmental impact. They realize that it's in their interest to address sustainability issues and to implement stricter guidelines and best practices.
Some mining companies have pledged to adhere to voluntary codes and initiatives in the interest of promoting responsible mining and sustainable development. ResponsibleGold.org, an information source for consumers of gold products provided by the world's leading gold producers, lists mining companies on its website who ascribe to a variety of sustainability principles and codes. Among those listed are: AngloGold Ashanti, Barrick Gold, Kinross Gold, BHP Billiton, Ltd. Newmont Mining Corporation, Rio Tinto, and Freeport McMoRan.
Newmont Mining Corporation devotes an entire section on its website to sustainability and clearly ties adherence to these principles to the well being of the company. "Beginning with geologic exploration, our success is tied to our ability to develop, operate and close mines in a manner that provides long-term value. Long-term value has evolved into a broad set of concepts that are now referred to as sustainable development or sustainability."
Resource Protection Is Gaining Ground
Companies around the world that host mining activities are intensifying their efforts to protect vital natural resources. In a recent Mineweb article, Environmental and Natural Resources Secretary Lito Atienza predicted that the mining sector in the Philippines would increase five-fold. But he cautioned that there are strict sanctions associated with mining in his country. Atienza: "the government's effort to attract mining investment is matched with the enhancement of environmental safeguards. Protection of the environment is of primordial importance to us. Development must be achieved by practicing measures that ensure proper protection of our natural wealth."
Atienza has been encouraging mining companies operating in his country to improve their community consultation and development programs. "Mining companies must consult and engage their host communities in charting the social development program they have for them. As the mining project advances, so must the people within and around it. This is the intention of the social provision of the Philippine Mining Act."
Investors would do well to take sustainability seriously. Maharg advises them to do due diligence in three key areas with regard to mining companies. "Investors should look at the company's track record for occupational and environmental health and safety and community investment. They should learn about their training programs for workers and their emergency response plans and should ask whether the mining company has good communications with the community."
Sustainability is obviously building a strong base of support but it still has a long way to go in gaining widespread acceptance. Disbelievers point out that banks continue to finance environmentally and socially questionable projects. Mounting concern over scarcity of natural resources might trigger a change in market behavior but nobody expects it to happen overnight.