Mining companies need to adopt ESG principles

Like many other sectors of the economy, the mining industry is finally realising that it needs to take a stance on environmental issues. Not only do governments and the public demand it, but increasingly, so do investors.

After years of campaigning the vital issues of climate change, pollution, and carbon emissions have finally, and deservedly, reached the top of the global agenda. The European Union has pledged to be carbon neutral by 2050, and many private sector actors are waking up to the importance of environmental policies too.

So, it’s no surprise that concepts such as ESG (Environment, Social, Governance: a set of criteria to judge a company’s impact on these three issues) and sustainable growth have begun to dominate messaging from many firms. ESG is also quickly becoming an important criterion for institutional investors as they decide which projects to back, and which to pass on.

“I see a big shift in how seriously ESG considerations are taken into account. Covid-19 has reminded us all of the vulnerability of our societies and economies. Additionally, it has heightened awareness of our responsibilities to mitigate global risks, including those related to climate and the natural environment,” says Agnieszka Gajewska, partner at PwC Poland and leader of the PwC public sector and infrastructure practice in Central and Eastern Europe.

Mining and energy

When it comes to the natural environment, some of the worst polluters are in the mining and energy sectors.

According to recent analysis by McKinsey and Co., the mining industry accounts for four to seven per cent of global greenhouse gas emissions, mainly scope one and scope two emissions (from mining operations and power consumption, respectively). Additionally, a large share of global emissions, around 28 per cent, comes from the scope three indirect emissions which occur along the value chain of a company and include both upstream and downstream operations.

Put into concrete numbers, according to the same McKinsey analysis, the mining industry generates the between 1.9 and 5.1 giga tonnes of equivalent CO2 emissions annually. Most of this comes from coal mining, but metal production is a contributor as well.

Metals such as nickel are becoming much more important with the rise in popularity of electric vehicles (EVs). Nickel is an essential component in EVs as it forms a key a part of the electric battery cathode which enables electrification.

With the increased demand for such metals, the environmental impact of their mining and production is also becoming a focus of both the companies engaged in mining and production and other social stakeholders such as regulators and environmental campaigners.

And it’s not just emissions of CO2 that are an issue with metal mining. Sulphur dioxide emissions are a major concern in the industry, as quantities of the gas are released during the smelting of ores that contain sulphur.

When sulphur dioxide combines with water and air it forms sulphuric acid, the main component of acid rain which can cause deforestation and acidify waterways.

Taking action

With so much in the balance, it is clearly time for both the public and private sectors to take action.

According to Ms Gajewska, this is precisely what is happening, now that a lot of countries are setting very ambitious climate goals.

“The shift towards sustainable growth started before the Covid-19 pandemic, with growing momentum from both the public and private sector on commitments to ‘net zero’ targets and addressing challenges such as single-use plastics, waste management, modern slavery and others,” she explains.

Private sector companies are increasingly finding themselves pressured by many different stakeholders to adopt ESG methodology and pledge to uphold climate change mitigation goals.

These stakeholders don’t just include regulatory bodies and environmental activists anymore. Banks and investors, too, are increasingly taking into account a company’s ESG track record when they make their decisions. This means that for the private sector, taking ESG seriously now has financial implications too.

“There is a general desire by stakeholders to see banks being responsible in their activities and as well supporting initiatives to help manage climate change. Consequently, we see bank management clarifying and setting objectives on these topics – such as restricting the amount of lending and investment to companies in more problematic sectors, helping their clients to manage transition risks, raising financing for green and social purposes, and controlling their own environmental footprint,” says Pauline Lambert, executive director at Berlin-based Scope Ratings.

Acceleration of ESG trends

Ashim Paun, global co-head of ESG Research at HSBC, says he too has seen an acceleration of the ESG trend in economies both developed and emerging.

“With many larger economies now legislating for ‘net-zero emissions’, there is little doubt that major changes are underway or coming to the ways in which we generate electricity, travel and transport goods, power industry, heat buildings and even produce food,” he tells Emerging Europe.

According to Helena Mueller, the co-founder of Doconomy, an impact-tech start-up tackling climate change, investors are taking notice of ESG and the related issues when they make their decisions. Especially important for problematic sectors like mining and energy is that many investors are choosing to exclude or under weigh them.

“Investors are also increasingly setting net zero targets for their portfolios as well as assessing Value at Risk based on scenarios of internalization of external costs, which will lead to real and lasting change in problematic sectors and will over time change capital flows from fossil fuel dependent to green and smarter solutions,” she explains.

Staying ahead

So, it’s no surprise that, in those same problematic sectors, companies are increasingly trying to stay ahead of the rising interest and importance of ESG practices.

In Russia, Nornickel, a nickel and palladium mining and smelting company, which largely operates in the north of the country, has been working on what it calls a holistic ESG approach and a sustainable growth strategy.

“As one of the largest metals and mining companies globally we do recognise the increasing focus of various stakeholder groups on the topics of ESG and more specifically environment,” says Sergey Dubovitsky, senior vice president at the company.

According to the company, it is already in the lowest quartile of the carbon dioxide emissions intensity curve and is committed to maintain this leadership among metals and mining businesses in the future. Concerning SO2 emissions, Nornickel is launching what it calls a Sulphur Programme 2.0, aimed at eliminating the legacy impact of sulphur dioxide.

“By 2025, we plan to launch facilities to capture gases at copper smelters, achieving a total reduction in emissions of 90 per cent, or 10 times the regional level,” Mr Dubovitsky adds.

And according to Nornickel CEO Vladimir Potanin, the company will invest more than 5.5 billion US dollars in its environmental programme, of which 3.6 billion US dollars (around 2.9 billion euros) will go into the Sulphur Programme 2.0

Challenges and opportunities

Still, even with the commitment many companies are showing, there will still be challenges for the mining sector on the road to achieving a more environmentally friendly way of doing things.

“ESG simply cannot be managed as a side activity, but needs to be rooted into the whole of business operations,” Ms Gajewska tells Emerging Europe. “For many companies that means rethinking their businesses – or even reinventing themselves – and this may be challenging.”

But there are opportunities and room for optimism. One reason to be optimistic is the shift toward electric vehicles, as fossil fuel emissions are still the biggest contributor to greenhouse gas emissions. A shift toward batteries, even with the issues posed by mining and smelting metals like nickel, would still end up as net positive for the environment.

“For the mining sector, there are opportunities not only to reduce the footprint of the companies involved, but also support solutions leading to a decarbonised world. As an example, the electric economy will require lithium, cobalt, nickel and rare earths. There are also additional opportunities coming from circular business models,” Ms Gajewska explains.

With ESG and sustainability on the agenda, it’s clear the mining and energy industries are going through a change. What they will look like on the other side will depend on how they balance the need for more metals and more energy with the goals of decarbonisation and limiting harmful emissions.

One thing, according to experts in the field, is clear. Companies who adopt ESG strategies today are companies that will thrive tomorrow.

“We consider companies who implement ESG strategies as those who are taking steps to ensure their longer-term viability. In the short-term, this may entail some costs but can also bring benefits such as increased customer loyalty and better funding costs,” Ms Lambert concludes.

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