As the Environmental, Social and Governance (ESG) wave continues to build around the world, many are wondering what this year has in store. According to Blackrock, the world's largest asset manager, investors plan to double their allocations to sustainable investments over the next five years, and 20% say that Covid-19 is accelerating those allocations.
The pandemic has greatly intensified the growing societal concern over rising inequality and the negative impacts of human activity on our planet. Investing towards good for the planet and society is now front and centre, and the demand for transparent disclosure on ESG performance is not letting up. Over half of institutional investors are looking for companies to disclose more details about their social or "S" factors, according to RBC Global Asset Management's annual Responsible Investment Survey.
This year, the elusive "S" in ESG maintains its position of paramount importance in the mining industry, as we see yet again. License to Operate holds on to its #1 spot in EY's annual Global Mining and Metals Top 10 Business Risks and Opportunities report. So, what "S" aspects should the mining industry be paying particular attention to and preparing for in 2021 to improve the industry's social acceptability, and attract the capital it needs to thrive sustainably?
Here's a list of the top ten "S" themes mining companies should focus on:
1. Executive compensation
Already, more than two-thirds of investors want executive pay tied to ESG initiatives, according to Edelman, a public relations and marketing consulting firm, and the number of companies taking action on this front is rising, according to a survey by Willis Towers Watson, a multinational risk management, insurance brokerage and advisory company. Half of investors expect a company's board of directors to oversee "social issues in their local community." As leadership accountability for social performance grows (versus merely being parcelled off to external relations and community engagement teams), so too does the pressure to link broader sustainability and ESG performance to senior management pay.
2. Embedding social performance
In addition to senior leadership accountability, expectations are growing for companies to mature their often still siloed approach to social performance. Moving on from just asset risk management and community-level philanthropy, companies will need to adopt an integrated approach, where a wide range of internal and external stakeholder interests are considered and fully embedded into enterprise-wide strategy.
3. From corporate purpose to investor purpose
The "social purpose" pressure that the corporate world has been feeling in the past few years is directly penetrating the investor space too. The trend will translate to greater scrutiny of companies by investors, growing weight allocated to ESG in investment decisions, and increasingly sophisticated and holistic analysis of companies' social performance.
4. Advancing a common understanding
Progress continues on the harmonization and standardization of ESG frameworks and reporting standards globally. The vision of convergence could come to fruition as soon as the end of 2021, according to Janine Guillot, the CEO at the Sustainability Accounting Standards Board (SASB), which will require ESG data to be more consistent, comparable and timely, and eliminate a company's ability to 'game' whichever metrics, rankings and ratings have been most convenient to date. Broad market resilience and long-term business sustainability will certainly be improved, but the move will also raise the playing field, presenting a challenge for some.
5. Equity, Diversity & Inclusion (EDI) becomes material
Fueled by social movements like Black Lives Matter and Me Too, and now evidenced by actions like the recent NASDAQ SEC filing (under which the majority of listed companies would be required to have at least one woman and at least one person who identifies as either an underrepresented minority or LGBTQ on their board), we can expect a greater focus on EDI, particularly pay equity reporting and senior management diversity. Note that this is arguably the mining industry's most lagging "S" area. Currently, nine out of ten investors believe strong diversity and inclusion data has a positive impact on share price, and seven out of ten already actively apply exclusionary screening criteria based on this data, according to the 2020 Edelman Trust Barometer Special Report: Institutional Investors. A leading recent example is Adobe, which in December 2020 became the first tech company in the United States to disclose unadjusted median gender pay gap data, a more stringent measure, in response to investor pressure. The company will need to do the same regarding their race pay gap before 2022.
6. Rights moving up on the agenda
At present, over three quarters of the world's largest publicly traded companies in the extractive sector don't even score 50% on the 2020 Corporate Human Rights Benchmark (a transparent and comparable benchmark, measuring the human rights performance of the largest publicly traded companies in the world across 100 indicators, grounded in international and industry-specific standards on human rights and responsible business conduct, including the United Nations Guiding Principles on Business and Human Rights (UNGPs)). Meanwhile, the bar on human rights best practice continues to rise, more ESG regulations are being adopted the world over, and public awareness and conscious consumerism are expanding. The pandemic has exposed and exacerbated systemic human rights weaknesses and poor practices throughout global value chains and we can certainly expect to see attention to them grow. The focus will be on companies demonstrating both a willingness and commitment to take human rights seriously, as well as improving human rights due diligence. Areas of particular focus will include labour, community health, artisanal miners, cultural heritage, community water access, land rights, indigenous rights, Free, Prior and Informed Consent (FPIC) and native title.
7. Contributions to broad-based prosperity and community resilience
Although much ESG focus still remains on negative screening, driven by the recognition of broad material and reputational risks, we are now witnessing a maturing towards valuing and quantifying positive social impact to bring about deliberate positive change. Covid-19 and its economic fallout have already undone decades of human development progress globally, and the pressure on businesses to propel lasting solutions to humanity's grand social challenges will grow, alongside the progressive popularization of impact investing vehicles like social bonds and thematic Exchange Traded Funds and mutual funds. Mining's opportunity for community-level impact is especially profound as the industry operates in some of the most remote corners of the world.
8. From corporate reporting to performance at the face
The push is on to move from commitments and processes made at a corporate level, to impacts and outcomes on the ground. We will see scrutiny gradually trickle down to what is happening day-to-day at the asset or project level, with eyes on the mundane and unglamorous "doing," not the pretty corporate sustainability reporting. Expect flashy colourful Sustainable Development Goal (SDG) icons in those reports to no longer cut it. Rather prepare, for example, for Key Performance Indicators that examine tangible incremental action to material SDG progress.
9. Opportunity for distinction between companies, not industries
Our whole industry needn't be painted with a single negative brush. The mining industry is home to some great ESG performers, embracing standards like the Initiative for Responsible Mining, the Copper Mark, International Finance Corporation Performance Standards, the United Nations Guiding Principles, and Responsible Minerals Assurance Process, while some companies haven't begun their journey yet. Plenty of boards and C-suites still haven't woken up to the emerging opportunity. In the meantime, there's a large and rapidly growing pool of capital looking for a home with strong ESG performers meeting the world's current and future mineral resource needs.
10. Distinction between leading versus lagging indicators
Already commonplace in many sustainability planning strategies, we will see the two types of social performance indicators, leading and lagging, separately, with heightened emphasis on leading indicators. When it comes to ESG, companies will be expected to look further increasingly at the road ahead, through the windshield, not the road travelled in the rear-view mirror.
The ESG world is undoubtedly an uneven playing field, with different jurisdictions and investors demanding different standards. However, the macro and micro trends point broadly to the above points. Covid-19 has inherently presented itself as an "S" issue, plainly teaching us how interconnected human health, the environment and the wellbeing of our economies are. Take steps now, not just to comply tomorrow, but to make social performance your true competitive advantage in a volatile world, and revel in the business benefits and resilience that good social performance births.
And while your metrics are important (and will be increasingly so), remember that "the map is not the territory" - know the limitations of your data, as you gradually bring social performance metrics into your business decision-making. There is a tendency to assume good ESG metrics mean you've got good sustainability or social performance, which isn't necessarily the case. Metrics neither constitute nor replace the workplace culture, practitioner knowledge, employee wellbeing, mutual trust and respect, or authentic human relationships, which form the backbone of your company's social performance. Indeed, this is even more critical to keep in mind during this era of forced social distancing, wherein face-to-face engagement, which fosters trust and builds relationships, has become even more challenging.
Your ESG metrics are a means to an end, not the end itself. The "end" is an industry where "license to operate" doesn't figure in our lists of the Top 10 business risks. The end is a company that is both socially acceptable and responsible, making the world an objectively better place. It is a company that the most talented employees are proud to work for, communities are proud to have in their backyard, and that investors are proud to invest in, profitably powering our brighter future.
-Elizabeth Freele is a conscious capitalist, futurist entrepreneur, management consultant, and impact investor dedicated to building better-world-business. She is the founder and CEO of 4P-Solutions Inc.