Mining the ESG vein
ESG used to be an optional extra in the mining industry but governments are starting to mandate minimum standards through legislation
- The interests of communities affected by mining are increasingly being given fair weight
- Environmental regulations have become much more entrenched
- Compliance with domestic corporate norms in host countries is no longer a defence against breaking the law in a mining company’s home country
- Non-mandatory codes are being applied more rigorously
ESG was for a long time regarded by the mining industry as nice to have but not essential.
With no firm rules to live by, management could afford to decide whether the time and resources required to be good corporate citizens might be better spent elsewhere.
Activist, and more recently, investor pressure has begun to change this. Today, ESG is becoming part of the regular workstream for some of the larger mining initial public offerings (IPOs) and regularly comes up in investor roadshows, with many lenders demanding miners meet strict ESG conditions to receive financing.
With the enactment of legislation as firm backstops to lender, shareholder and customer pressure to demonstrate ethical and sustainable practices, it seems the balance is starting to tip decisively in favour of ‘good’ ESG.
Mining companies have to comply with ESG-focused regulations in both their home countries and the jurisdictions in which they operate, which can present challenges for communication and consistency – especially where there are marked divergences in business culture.
It can also be difficult to keep up with regulatory changes, especially in host nations, where government information channels may not be as open and clear as they might be.
While these are obstacles, they are not insurmountable ones and neither lenders nor lawmakers will accept difficulty as an excuse for non-compliance.
Here, we examine some of the legislative trends affecting ESG in the mining industry and suggest ways to ensure businesses keep up with evolving obligations.
There is a growing expectation that the interests of communities that stand to be affected by mining are given fair weight.
One example of mandatory ESG policy in action in a host state is the legal requirement in Nigeria for mining companies to negotiate and sign Community Development Agreements (CDAs), before commencing any development activity.
This obligation is set out in Nigeria’s Minerals and Mining Act 2007, which states that: “The Community Development Agreement shall contain undertakings with respect to the social and economic contributions that the project will make to the sustainability of [the host] community.”
This legislation, which is administered by the Nigerian Mining Cadestra Office, prevents mining companies from making unilateral decisions about how the benefits of a project accruing to local communities will be used.
Ultimately, social practices need to be guided by the needs of community stakeholders, rather than doggedly adhering to policies formulated in the boardroom.
Common examples of disjointed policies include commitments to train local people to become mine workers at the behest of government, when it may be more useful to teach portable skills – especially if the mine may not make it into production or risks being shut down.
In other cases, company shareholders may favour building a health centre, when there is a more urgent need for sanitation to reduce the causes of disease.
CDAs therefore require careful management and communication to satisfy all sides and obtain a ‘social licence to operate’.
To achieve this, companies need open feedback channels with key community representatives, not just politicians.
Environmental considerations have become much more entrenched in the mining industry’s culture than they were 20 years ago.
Governments of most countries that play host to mining projects now require detailed environmental and social impact assessments (ESIAs) before they grant environmental permits, while others also call for environmental and social management plans (ESMPs), closure and rehabilitation plans and resettlement action plans (RAPs).
The criteria mining companies need to meet in ESIAs and other assessments are generally set out in national mining codes.
Although many of the basic criteria are fairly standardised from country to country based on guidelines from international bodies such as the World Bank and the European Bank for Reconstruction and Development (EBRD), they are increasingly being tailored to local contexts.
Fulfilling conditions to receive an environmental permit may involve some negotiation, as the optimum environmental solution might not be technically or financially feasible, but compromises need to be handled delicately to avoid a company being branded environmentally unfriendly.
Companies also need to establish whether environmental permits, which are usually time-limited, give them permission to transition from exploration stage to the construction and production phases, as this is not always clear.
Equally important is to keep abreast of the latest rules and best practice guidelines on environmental management.
Recent high-profile examples of tailings dams collapsing have led to calls for international standards on tailings facilities, where none currently exist, with the aim of transposing these guidelines into national laws – a change that could have ramifications for companies’ existing waste management systems.
The right side of the law
One of the most evident outcomes from increased scrutiny in the extractives industry is that being in line with domestic corporate norms in host countries is no longer a defence against breaking the law in a company’s home country.
In the UK, for example, the Bribery Act 2010 allows British authorities to prosecute officers of UK-based companies who commit relevant bribery offences in other jurisdictions, regardless of whether ‘facilitation payments’ are considered acceptable local business practice.
At present, it is difficult for prosecutors to secure a conviction for this, unless they can prove the parent company had knowledge or suspicion that activities taking place in subsidiaries thousands of miles away were illegal, although there are calls to move closer to the US system of vicarious liability.
Even if a mining company is cleared of wrongdoing, the reputational damage of an investigation can prove catastrophic for the business.
Meanwhile, the EU’s Fifth Money Laundering directive, which is due to be implemented in all EU member states (and the UK, regardless of Brexit) by 10 January 2020, has extended the remit of anti-money laundering (AML) legislation to cover transactions related to oil and precious metals.
This means that many mining companies domiciled and/or operating within the UK and the EU will be required to conduct forensic due diligence on counterparties, to ensure that the source or intended use of funds do not fall foul of AML restrictions.
Conflict minerals legislation, seeking to ban procurement of certain minerals – tin, tantalum, tungsten and gold (3TG) – from war zones, has been in the works for some time, both in Europe and the US.
ESG Reporting and the mining sector
• Data: while many mining companies still come in for criticism on ESG, it is not always the case that they are doing it badly. Sometimes they are just not reporting their activities in a way that satisfies external monitors. Management teams need to ensure they generate the right sort of data to inform their reporting, especially as guidelines continue to be updated.
• Strategy: management plans need to be iterative and flexible enough to adapt to changes in project technicalities or the priorities of the host community or government. Governments can be both capricious and inflexible, but this is a risk that mining companies need to accept.
• Cycle-proofing: resource cycles can make it difficult to deliver on promises, but every effort needs to be made to maintain community relations, regardless of commodity price movements.
• Push for best practice: the mining sector currently lacks a level playing field when it comes to ESG adoption. This should be an impetus for wider adoption of better practices, rather than a motive for rejecting ESG.
Since 2010, Section 1502 of the Dodd-Frank Act has required US publicly-listed companies to check their supply chains for 3TG, if they might originate in Democratic Republic of the Congo or its neighbours, take steps to address any risks they find and report on their efforts every year to the US Securities and Exchange Commission (SEC).
The EU’s Conflict Minerals Regulation is set to come into full force across the bloc in January 2021 and similarly obliges EU companies to check they are not procuring 3TG from conflict zones or ‘high-risk’ areas.
Broadly speaking, these legislative developments all oblige mining companies to conduct enhanced end-to-end due diligence on their supply chains, and evidence suggests regulation in these areas is only going to get tighter.
Companies should have policies and procedures for compliance and staff need to be trained on how to implement these policies.
This will help minimise the risk of non-compliance and prosecutions and reduce any fines in the event of a breach.
Notwithstanding the existence of bilateral investment treaties (BITs) between their home and host nations, mining companies should be prepared for political circumstances to change.
National governments are increasingly moving to guarantee that domestic stakeholders receive an ‘equitable share’ of resource project spoils to help fuel economic growth, even if most of the risk and cost of developing them are borne by foreign investors.
Domestic legislation designed to promote equitable ownership includes South Africa’s black economic empowerment initiatives, which compel 26% of shares in mining assets to be distributed to disadvantaged local people (and 30% of shares in the case of new mining rights granted after the the 2018 Mining Charter came into effect).
In Tanzania, new laws including the Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act, 2017 and the Natural Wealth and Resources (Permanent Sovereignty) Act, give the government power to renegotiate contracts with investors on terms more favourable to the state.
While many mining companies assume that including international arbitration clauses in their contracts with counterparties means they have ticked the box for transparent dispute resolution, this approach can look like a disregard for local laws and customs.
Failure to take account of local laws in contract drafting can lead to litigation in local courts, especially as communities become more empowered to challenge this practice.
While not wholly avoidable, the risk of becoming embroiled in paralysing disagreements, or being accused of disregarding a host state’s right to share the benefits of a mining project, can be minimised by careful drafting and fully thinking through how proceedings will work in particular jurisdictions.
Until fairly recently, there has been little rigour in the way non-mandatory codes are applied, and even less understanding about what to look for as evidence of good ESG.
There has also been criticism that different sets of international principles are disconnected and enforced by too many disparate organisations.
Bodies such as the United Nations Environment Programme (UNEP) through its Principles for Sustainable Insurance (PSI) initiative and the World Gold Council through its Responsible Gold Mining Principles is lobbying for insurance providers to take responsibility for enforcing standards, by requiring clients to uphold ESG principles in order to receive cover.
But putting corporate philosophy into practice is challenging, especially as emphasis has shifted to the outcomes of ESG policies, rather than the length of ESIA reports.
And while it is becoming accepted that good ESG reduces project risk, demonstrating its value as a financial metric continues to be difficult.