ESG in the Mining Industry: Meeting Investor & Economic Demands

The metals and mining industry is responsible for about 8% of the global carbon emission. Consequently, Environmental, Social, and Governance (ESG) considerations have become a central part of business decisions for mining companies. However, the global pursuit of sustainability presents both challenges and opportunities for the mining industry.

Pan African Resources (PAR) is an African-focused gold producer. The company owns and operates a portfolio of gold mines in South Africa with a production capacity of over 200,000 ounces of gold per annum. Pan African Resources seeks to develop safe, high-margin, long-life, and sustainable gold mines.

TLDR

  • Mining companies must meet Environmental, Social, and Governance (ESG) expectations from various stakeholders, crucial for long-term success and resilience.
  • Environmental focus includes reducing carbon emissions, protecting biodiversity, and efficient resource management, with investors keen on decarbonization and environmental protection.
  • Social aspects cover stakeholder engagement and benefits to local communities, emphasizing human rights and relationships with local populations.
  • Governance involves managing resources sustainably, transparent reporting, and complying with legal standards, with strong governance reducing operational costs and reputational risks.
  • Addressing ESG concerns can expand business opportunities, increase shareholder value, and secure a responsible reputation in the mining investment industry.
  • ESG compliance benefits include easier capital access, premium product pricing, increased shareholder value, and stronger community relationships.
  • During economic downturns, balancing ESG and financial goals is challenging, with alternative energy investments and strong governance mitigating risks like electricity disruptions and political instability.
  • In South Africa, mining companies face compulsory regulatory ESG obligations, with compliance enhancing long-term stakeholder value and financial performance.

ESG in the Mining Industry

Mining companies answer to many stakeholders with specific ESG expectations. These include investors, customers, suppliers, employees, governments and communities. While there are tradeoffs to be made in the short term, addressing ESG concerns is important to business resilience and long-term success.

Let’s explore the ESG themes and what Pan African Resources is doing about them:

Environment

This part of sustainability addresses the impact on the natural environment as it concerns efforts to reduce carbon emissions and protect biodiversity. It also involves the management of waste and natural resources.

Regarding the environment, investors want the focus to be on decarbonization efforts as South Africa has a carbon tax and the country is one of the highest per capita polluters as most of its power supply is from coal-fired power stations. Mining companies can cut down emissions and reduce or avoid the carbon tax burden by increasing the use of renewable energy in their operations to reduce their carbon footprints. As a result, decarbonization efforts can save the company money and improve its investment case compared to its peers. Investors also want to hear how mining companies are managing water and waste as part of environmental protection and sustainability efforts.

As part of its environmental protection efforts, Pan African Resources uses solar energy to power an increasing number of its operations as it works to reduce its carbon footprint. They have built a solar power plant that provides 30% of its electricity demands at the Elikhulu surface retreatment operations at Evander, with further plans to build an additional solar plant that can generate 8.75MW to power its Barberton Mines and also have plans for a further 40MW through wheeling. The company has also rehabilitated more than 22 hectares of land from its depleted mining areas. Additionally, Pan African Resources continues to invest in efficient water management and water recycling, where a recycling plant producing 3 Megalitres per day of recycled underground water has recently been commissioned.

Social

The social component of ESG concerns stakeholder engagement and awareness of the economic and social benefits that a mining company delivers to people in the areas where it operates. It covers everything from providing proper working conditions for employees to ensuring workplace diversity and supporting host communities through infrastructure and local economic development.

Pan African Resources uses its best endeavors to comply with South Africa’s human rights conventions and international standards, including the United Nations Guiding Principles on Business and Human Rights. The company also enforces a zero-tolerance policy on discrimination and harassment and upholds a work environment free from bias.

A comprehensive safe production intervention strategy has been implemented to enhance workplace safety, including revitalizing incident reporting, empowering employees to halt unsafe activities, re-energizing task observations, and enforcing compliance through consequence management. Additionally, the company has set medium-term targets to improve safety performance by at least 3.86% annually from 2023 to 2030, aiming for a 24% cumulative reduction compared to the previous seven years which will improve its already industry-leading safety statistics in South Africa.

On the social front, Pan African Resources actively supports development in its host communities, including funding and refurbishing schools like Sheba Primary and Ngwane Secondary School, and health clinics. The company also realizes that its mines cannot employ everyone in the community and not everyone wants to work on a mine and has commenced with alternate employment options, such as the large-scale agriculture projects (Barberton Blueberry farm) that employ up to 300 workers (mainly women) on a seasonal basis. In addition to paying competitive salaries and providing safe working conditions for its employees, the company also recognizes the importance of employee well-being, offering access to fitness coaches and encouraging participation in sporting events to foster a healthy and motivated workforce.

Governance

This part of the ESG deals with management and oversight practices. It covers the management of the company’s resources and compliance with up-to-date local and international legal and regulatory requirements. Strong governance and reporting transparency are important to the long-term sustainability of a business as they can help reduce operating costs and the risk of reputational damage to a company.

Weak corporate governance, on the other hand, can expose a company to fines and reputation damage. Consequently, investors want to hear what a company is doing to tackle corruption, and bribery and comply with regulatory obligations. They also want to know the measures the company is taking to ensure the efficient management of its resources and maintain the social license to operate.

As part of its sound governance policy, Pan African Resources is committed to the highest standards of reporting and ethical behavior, with a zero-tolerance approach to bribery, corruption, and commercial malpractice. The Group’s code of ethics, anti-bribery, and anti-corruption policies guide ethical conduct and are enforced through training, awareness campaigns, and disciplinary procedures. An anonymous whistle-blowing hotline supports transparency, and the Group’s compliance with the King IV corporate governance framework is regularly assessed, reflecting its dedication to ethical leadership and corporate responsibility.

Managing Investors ESG Expectations

Compliance with ESG matters can affect a company’s ability to obtain operating permits, raise capital, attract talent, and work with host communities and regulators. Companies can leverage best ESG practices to expand their opportunities, increase the value of their businesses, and secure their reputation as responsible conglomerates.

ESG issues in mining are getting increasing attention from stakeholders. For example, investors want to know how a mining company is managing ESG risks and exploiting ESG opportunities, meaning growing ESG expectations require mining companies to balance profit goals and sustainability efforts.

As ESG has become important to gaining investor confidence and community acceptance, companies that get it right on ESG matters can reap many benefits. As such, companies with strong ESG credentials can access capital on more favourable terms, build a strong workforce and maintain operational stability through reduced disruptions because of their good terms with communities and regulators.

However, ESG achievements that are not known to stakeholders are of little help to a company. That is why proper ESG reporting is important and begins with understanding the expectations of the different stakeholders and also sets a company apart from its peers that are lagging in ESG compliance initiatives and reporting.

While addressing ESG matters can add to a company’s costs, it can also open up many profit opportunities. Investors want to hear the steps a company is taking to capture the economic opportunities brought about by the shift to sustainability.

Mining operations can have huge impacts on communities. As a result, mining companies can highlight how they are respecting the cultures of the local people and supporting sustainable development in their host communities.

Funding of education, healthcare, sports, and infrastructure programs can help a mining company build and maintain a strong relationship with its communities. Such community support programs can put a company in good favour with investors.

Why Mining Companies Should Get Involved in ESG

With the increasing attention focused on sustainability, there are many benefits for mining companies to get involved in ESG in everything they do. These are some of the benefits the mining industry can unlock from making ESG part of their business.

Improved access to capital

Mining is a capital-intensive operation. Companies with strong ESG credentials can access funding more easily or raise capital at generous terms. For example, a growing community of investors wants to invest in sustainable businesses. As a result, ESG-focused companies can tap into this investor pool and obtain funding.

Moreover, many lenders are providing sustainability-linked loans with favourable rates. Therefore, companies with strong ESG credentials can raise cheap capital and gain a financing advantage over the competitors.

Premium prices for products

An increasing number of consumers are willing to pay more for sustainable products. As a result, low-carbon mining products can fetch premium prices on the market, delivering strong margins for mining companies. Therefore, strong ESG practices can help a company build a more loyal customer base. As a result, strong ESG performance also produces higher financial returns.

Shifting from fossil fuels to renewable energy can additionally help mining companies improve their energy efficiency and cut costs. With improved energy efficiency, companies will see higher margins.

Increased shareholder value

Sustainability-minded investors know where to place their money for the best returns. Companies with higher ESG ratings have been found to deliver higher returns than the broader market, delivering up to 10% more value.

Improved relationship with the community

Social license to operate is important for mining companies. Sustainability-focused companies can build strong relationships with employees, communities, and regulators. Additionally, strong ESG credentials can help mining companies improve relationships with customers and suppliers, which can give them an edge in the competitive market.

How Does ESG Work in An Economic Downturn

ESG matters require financial investments and management time. In an economic recession, companies are under pressure to manage ESG factors and financial expectations. An economic slowdown may force budget cuts, yet companies face a growing demand to increase ESG funds allocation.

In South Africa, mining companies have two major challenges as they work toward sustainability: electricity supply disruption and political instability.

Electricity load shedding

In South Africa, electricity “load shedding” is a common occurrence. This is the practice of the power utility interrupting the electricity supply to avoid overwhelming the power system when demand is too high.

Load shedding has a big impact on the operations of mining companies. Mines may be forced to stop some production processes or resort to backup power. That can result in reduced output, increased production costs, and reduced profit margins. The impact of load shedding is particularly more serious on underground mine operations.

Apart from lost production and revenue, load shedding also affects the safety of underground mine workers, as the safety of workers operating underground is put at risk when the electricity that runs the hoisting or ventilation system they use goes out. Mines have had to install backup systems and generators at their own costs to mitigate these effects, further increasing production costs and reducing the economic life of the orebodies.

Political instability

The South African political scene has been fairly unstable in recent years. The clamor for regime change because of dissatisfaction with the delivery of basic services and poor government performance and divisions within the ruling party ANC poses serious political uncertainty risks to the mining industry in South Africa.

There is also a growing political push to nationalize certain industries. Particularly, some political actors have pushed for the nationalization of mines and land. Despite these challenges, mining companies in South Africa with strong ESG practices can weather the economic and political storms. Increasing power plays by unions add to instability, as seen recently when the AMCU union illegally held mine management and rival unions, hostage, underground in order to be recognized as the dominant union.

Is ESG Compulsory for Mining Companies?

Mining companies globally are increasingly required to address sustainability matters. In South Africa, the mining industry is subject to a range of compliance and regulatory requirements to ensure sustainable mining practices.

These are some of the ESG-related regulations and compliance requirements that mining companies in South Africa are subject to:

  • NEMA: The National Environmental Management Act (NEMA) details the requirements for environmental management plans, environmental impact assessments, and environmental licenses.
  • MHSA: The Mine Health and Safety Act (MHSA) outlines the requirements to ensure the health and safety of mine workers and communities.
  • MPRDA: The Mineral and Petroleum Resources Development Act (MPRDA) details a range of requirements for mining companies, including ESG obligations.

Additionally, stock exchanges in South Africa have ESG reporting requirements for the listed companies. For example, the JSE has an ESG compliance reporting mandate for the listed companies.

ESG as a long-term goal

Companies with strong ESG practices can create long-term value for their stakeholders and maintain a social license to operate. Moreover, companies with strong ESG credentials perform better financially and attract higher market valuation than companies that do not have progressive ESG strategies in place.