Environment, Social and Governance (ESG) Risk Management for Mining Projects: Turning Risk into Competitive Advantage

/ 12 May 2022

Interview with Risk Insights published in Mining Business Africa

“Mining companies can turn the risks that Environment, Social and Governance (ESG) issues pose on their operations into competitive advantage through improved reporting on key materiality factors which impact the sector, impact investors and other critical stakeholders. Active management of critical ESG reporting will translate into positive investor sentiment and ultimately into long-term sustainable returns. Credible data from reliable ESG ratings can support well-informed business decisions which, in turn, will allow sustainability to materialise into an invaluable asset. Data analytics provides management and the Board with a tool to assess its internal capacity and risk appetite, thereby allowing it to set its risk tolerance levels based on budget, available resources and strategy.”

Findings of the latest Ernst and Young Survey allay any misgivings – if they had been any - that mining companies in Africa may have had about the significance of sound management of Environment, Social and Governance (ESG) to the long-term sustainability of their operations. The survey, Top 10 Business Risks and Opportunities for Mining and Metals in 2022 Report, highlights that top global mining executives rank Environment, Social and government (ESG) as the number one amongst risks and opportunities businesses will face over the next twelve months. The results were drawn from data collected from a yearly survey involving over 200 global mining executives. Others in the top three are decarbonisation and Licence to Operate (LTO). Interestingly, LTO topped the list in the 2021 report.

The report resonates with the viewpoint of Mr Andrey Bogdanov, Principal and Interim CEO of Risk Insights (Pty) Ltd, a Johannesburg-based boutique professional risk management data analytics firm. Risk Insights has extensive experience and expertise spanning fields as diverse as capital markets, risk management and data science. The firm`s professional Data Science Lab using cutting edge techniques has built the first AI-powered machine learning ESG rating tool for Africa by Africans. In 2020, the company was awarded the prestigious World Economic Forum Award in Agile Governance. Risk Insights provides ESG sustainability ratings to diverse clientele across the Globe.

Four aspects in reliable reporting

Risk Insights notes that ESG reporting is a relatively new requirement in South Africa as well as across the continent, although the mining sector, especially large blue-chip entities, have had ESG policies and reporting embedded in their operations for several years. For this reason, Mr Bogdanov says the firm is keen to utilise its Data Science Lab comprehensive data sets to address growing requirements of mining companies for international best practices in ESG reporting, their materiality disclosure and ranking within their respective peer groups to assist in positioning mining companies to fully materialise competitive advantage related to ESG as the world moves toward carbon neutrality. He is certain that, through comprehensive reporting, mines can formulate and implement strategies which will make their operations more sustainable going forward. Specifically, he cites three fundamental aspects which can facilitate reliable ESG reporting: the leading role of the board and management (top-down approach); the business re-engineering process; and engaging experienced experts, as ESG is a complex subject matter.

The board and management at the forefront

ESG reporting must be detailed, relevant, material, transparent and easy to track to be credible, and so, it is not surprising that it takes up more time and resources. Accordingly, Bogdanov recommends that, for ESG reporting to be more embedded in an organisation’s operations, its setup must follow both ‘top-down’ and a bottom-up approach. “ESG should be driven from the board and management level into the entire organisation and entrenched into the culture of a company while education needs to be provided to all levels in the organization,” says Mr Bogdanov, underlining a mindset change as a critical process, as it can determine the effectiveness of ESG’s aligned strategies and policies.

Business engineering process

Successful ESG reporting relies on a rigorous business engineering process, which culminates into the change in the culture of an organisation. ESG affects several parts of an organisation’s value chain, to name a few, supply chain management and measuring carbon footprint Scopes 1, 2 and 3 (both direct and indirect emissions). Specifically, what is reasonable from four perspectives – the company, the industry and the employee and society. Certain processes within the mining company may be responsible for more emissions and therefore to assist reporting and impact the trade-off charts using data analytics for measurement and monitoring could differentiate one mining company against another.
Robust business engineering processes result in strong, transparent and effective reporting thereby mitigating risk and creating opportunity and competitive positioning. ESG reporting is translated in the integrated reports as well as voluntary and mandatory disclosure of companies.

Engaging credible experts

Given the complexity of ESG and its impact on the various stakeholders and the value chain, engaging and employing specialists with a credible track record in the field is key. Hence, it is critical to engage specialists who can train, develop and educate on ESG matters and ensure embedding it into the organisation on all levels,” advises Mr Bogdanov. One of the risks that Risk Insights has noted in South Africa is a repurposed approach when it comes to appointing individuals on ESG related positions which have very little experience or training on ESG.

Core business imperative, not an option

Indeed, all told, the importance of sound ESG reporting in the current operating environment cannot not be overstressed as the world devises strategies to protect the planet and contribute towards carbon neutrality. Ongoing developments have rendered sustainability into a core business imperative, and not an option.

Stakeholder accountability

Increasingly, stakeholders are holding mining companies accountable for environmental and social practices (or malpractices). “Miners need to be able to demonstrate their contribution to a sustainable future, and the most practical way is through sound management of ESG issues,” comments EY Africa energy and natural resources leader, Wickus Botha, referring to the growing prominence of sustainability as revealed in the recent survey amongst global company executives.

Direct bearing on bottom-line

What makes ESG rating more relevant is its bearing on the bottom-line of a business. From a brand and reputation perspective, it translates into financial measurement through share price and market capitalisation. For instance, ESG scores can impact an organisation’s valuation. Impact investors apply larger discounts on companies that have lower ESG scores.

“Having a good ESG score means that a company embeds the principles of inclusivity and stakeholder management into its strategy, operations and human capital management making a company more sustainable. It translates, via brand and reputation management viewpoint, into a competitive advantage affecting the cost of capital and cost of debt of a company,” Mr Bogdanov points out.

Positive legacy

Finally, by doing more to ensure the long-term, sustainable economic and social growth of the region in which they operate, mining companies can leave a positive legacy beyond the life of the mine.

Prioritising ESG more

By and large, the burden is on mines to turn the risks that ESG factors pose to their operations into competitive opportunities and positioning to demonstrate their commitment to sustainable business practices. Risk Insights would like to see “South African leadership actively translate value as conscious leadership into good for current and future generations. Leadership must pivot to change the world and the ways we operate when it comes to CO2 emissions, water pollution, taking care of communities, inclusivity and much more. Mining is one of the closest to earth industries”.
The timing for mining companies to enhance their commitment to sustainable business practices could not have been better, as recent global events indicate. COVID-19 pandemic has caused social inequalities in regions where mining companies operate, in addition to disasters in different regions linked to climate change. These events, amongst others, have reinforced the need for mines to go beyond their ‘traditional’ regulatory obligations and drive social equality initiatives, asserts Botha.

Risk Insights has blazed a trail with Africa’s first machine learning and Artificial Intelligence (AI) ESG sustainability rating tool - ESG GPS. So far, ESG GPS has been used to rate all listed companies in South Africa, Nigeria and Kenya.