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.
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.