Implementing ESG During A Recession

As part of the energy transition, mining and metal corporations have started placing a greater emphasis on upgrading their environmental, social, and governance (ESG) credentials. But will they be able to stick to their promise as a worldwide recession approaches?

ESG - Environmental, social and governance
ESG – Environmental, social and governance

As part of the energy transition, mining and metal corporations have started placing a greater emphasis on upgrading their environmental social and governance (ESG) credentials. But will they be able to stick to their promise as a worldwide recession approaches?

The mining and metals sector, which was previously demonized in discussions about environmental sustainability, is now recognized as a vital component of the solution. Investors and consumers are becoming more aware of the industry’s importance as a supplier of essential raw materials for the global energy transition as well as an important stakeholder in the value chain.

The way mining and metals corporations position themselves in anticipation of the energy transition, especially in light of a potential recession, will determine their viability and might make or break their competitive edge over the course of the next ten years. Boards should think about how to strengthen current environmental social and governance (ESG) frameworks to make sure that they are resilient against the potential economic realities of the future.

To achieve this, it is critical to ensure that ESG is fully included in the long-term business strategy as means of contributing value as opposed to an optional expense to be eliminated.

Evaluating The Resiliency Of ESG In A Recession

Environmental social and governance are likely to be an important areas of concern for stakeholders during a potential recession. ESG investing, according to a recent article in The Economist, “is a dysfunctional system [that] needs urgent repairs.” Nevertheless, it aims to hold “firms and their owners accountable for their negative externalities.”

The high-profile ESG engagement priorities of BlackRock and State Street, along with the more than 5,000 investors who have signed the Principles of Responsible Investment, serve as evidence of the depth and breadth of investor commitment in this area. Related proxy voting and activism trends also serve to highlight this commitment.

Risks and opportunities can both be produced by environmental social and governance variables. For some time now, boards in the mining and metals sector have been working to address a wide range of ESG issues such as how to reduce greenhouse gas emissions and energy use, the working conditions in supply chains, tailings management, worker and community health and safety, and adherence to ever-increasing reporting requirements.

However, during a downturn in the economy, leaders will need to choose which of these themes to emphasize, specify the goals to be met, and outline the anticipated timelines—all against the backdrop of unpredictability in the market and the economy.

Many people continue to believe that choosing a more sustainable future requires making a trade-off between attaining corporate growth and profit. They consider environmental social and governance-related expenditures – such as capital costs for energy-use reduction, choosing renewable energy, paying living wages and so on – to just cost rather than investments.

Companies will face intense pressure to handle environmental social and governance factors while maintaining quarterly expectations both before and during any recession. Boards must make sure governance standards continue to be in line with market realities because the greater the challenge an executive team has, the more tempting it is to take shortcuts.

Is ESG Mandatory Or Optional In The Mining And Metals Industry?

A rising corpus of research is revealing how important it is to take ESG issues seriously in order to increase resilience, long-term business performance, and investment returns. Businesses with high environmental social and governance credentials can outperform their peer groups and the general market.

Mining and metals businesses are investing extensively in efforts to cut emissions or meet other goals in the hopes of seeing a return on their investment in the future. Decarbonization investments, for instance, need high upfront capital expenditures but these might be compensated by tax breaks and enticing financing arrangements. Decarbonization initiatives can also increase energy efficiency which has a direct bearing on operating costs and margins. They also lower the possibility of adverse stock price ramifications or regulatory penalties.

Net-zero targets and the energy transition will fuel demand – and tremendous annual growth in market value – for metals and essential minerals like nickel, lithium, and copper. These factors will also drive demand for energy transition technologies and minerals. ESG drivers – including solid social licenses, appropriate divestitures, and tax transparency – will all be crucial for a company’s sustained success as the transition to net zero will demand more mining, not less.

A worldwide economic downturn could lead to increased cost-cutting initiatives in mining and metals thereby affecting both operations and capital expenditures at a time when further investment commitments are needed to satisfy rising ESG expectations from different stakeholders. Chief financial officers are under pressure to manage businesses’ capital spending plans as they venture into uncharted terrain by allocating funds to initiatives with hefty price tags, protracted timelines, and often elusive returns.

The difficulty of achieving the ideal balance is increased by the fact that businesses frequently make these investments before new legislation is put forward or before consumer preferences alter. From a financial standpoint, it involves striking a balance between necessary spending and possible losses brought on by ignoring or improperly managing ESG aspects. ESG is now the minimum operating standard, particularly in the mining and metals industry. It is no longer optional or a source of differentiation.

It is crucial for the company to align its strategy to environmental social and governance priorities as part of its overall business strategy through annual reports, proxy statements, sustainability reports, or other public materials after the management determines the appropriate level of corporate investment in ESG.

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A Consistent Focus On “E”

Fifty-nine percent of investors, according to the 2022 Accenture Global Institutional Investor Study on ESG in Mining, want miners to pursue decarbonization aggressively and be industry leaders in this endeavor. In the mining and metals sector, almost 63 percent of investors said they would be prepared to sell their holdings in mining companies that fall short of their decarbonization goals or don’t undertake enough decarbonization initiatives.

According to this report, mining and metals investors assess “essential” environmental projects as those that reduce scope three emissions, aiming for carbon neutrality by 2050, produce energy-critical metals, and produce no coal. Seven out of ten of the main mining and metals corporations publicly stated that they wanted to be carbon neutral by 2050.

Other pertinent variables included diversifying the board, management, and staff; investing in cutting-edge technology and digitalization; and having a great safety record.

By switching from “take, make, and waste” to “take, make, recover, and reuse,” core revenue will be improved, and the value of end-of-life materials will be maximized. Recycled resources will go down the cost curve, lowering supply costs and providing insurance against fluctuations in the price of raw materials. Likewise, businesses can leverage their circularity procedures to draw in clients who are concerned about the environment.

Companies are finding it harder to get funding if they don’t have a systematic plan for closing significant environmental social and governance gaps or if they can’t demonstrate any real results. This may also make it difficult to enter the stock market, secure licenses or insurance, recruit employees, or keep one’s social license to operate.

For instance, mine development projects must include ESG and sustainability best practices at every level, from planning to mine decommissioning, as well as throughout the supply chain, in order to be bankable. If they are unable to persuade investors that ESG remains a priority, mining and metals companies may also find it difficult to obtain other sources of funding during a crisis.

The Significance Of “G” During A Recession

For succeeding with ESG, solid and creative corporate governance approaches are essential. ESG must be integrated into corporate processes and structures in order to meet set objectives. In this approach, ESG should be viewed as a source of value addition and competitive advantage rather than a risk that needs to be managed or an expense that needs to be cut.

In a downturn, good governance is especially important. Alberto Calderon, CEO of AngloGold Ashanti, has declared: “Improving operational performance and regaining cost competitiveness against our counterparts provide greater value for us in the medium term.”

Focus has shifted from ESG compliance and reporting to stronger commitments with quantifiable goals and increased reporting openness. Increased regulatory compliance requirements, such as those set forth by the Task Force on Climate-Related Financial Disclosures, have also played a significant role towards this end.

Additionally, mining and metals corporations want to switch their reporting from a broad corporate level to a more detailed mine-site level. According to a Responsible Mining Foundation analysis that examined 38 large-scale mining corporations, few mining companies have truly incorporated the UN Sustainable Development Goals into their business strategy, even though many of them reference them in their sustainability reporting.

Reduced business risks related to an organization’s ESG footprint might lessen the possibility of regulatory expenses, reputational harm, or loss of the social license to operate. The destruction of historic Aboriginal heritage sites in Australia and the deadly dam collapse in Brazil are two examples of how the latter can have a detrimental influence on shared values.

Furthermore, focusing on the “G” and maintaining ESG as a top board agenda item, particularly during a recession, can aid in managing costs, enhancing stakeholder engagement, diversifying supply chains, enhancing performance in comparison to peers, and aiding in the “war for talent” in order to build a sustainable and resilient company. Mining and metals firms can strengthen their balance sheets, experience more stable values, and make better long-term investment decisions.

An Essential And Continuous Journey

Inevitably, environmental, social, and governance considerations will alter the business environment for the mining and metals industries. A company is unlikely to thrive if it permits itself to become an ESG laggard, especially if peers are setting the bar high.

ESG projects may experience some short-term erosion during an economic downturn as companies look to cut expenses. Still, the focus on ESG concerns will only be revitalized and strengthened over the long run. All stakeholders must place their ESG strategies front and center, with the same focus paid to ESG as to the extraction of minerals, if the mining and metals sector hopes to be recognized as a leader in the effort to reach net zero and complete the energy transition.

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