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Article by Archana Nair
The transition to a low-carbon future has been around for quite some time. However, the urgency of addressing and fighting climate change has directly impacted the dominance of the energy transition in global news coverage. Central to this, however, is the need to ensure a balanced supply of critical minerals and metals for a plethora of sustainable solutions ranging from clean energy projects to electric vehicles. Therefore, the vital role of the metals and mining industry in the energy transition cannot be disregarded. Against this backdrop, the International Energy Agency (IEA) stipulates that the mining sector’s demand for key minerals, such as lithium, nickel and aluminium, is expected to triple by 2040. The IEA also claims that a carbon-neutral world by 2050 will require 35m tonnes of green metals a year. Despite this prominence, the need to align with regulatory pressures for improved Environmental, Social and Governance (“ESG”) reporting is equally important to asses both the opportunities and risks associated with mining projects.
Why talk about ESG?
Put simply, ESG is a term used to describe, measure and understand the impact of a business on the environment and society. The purpose of ESG standards is to stimulate investments in companies or business activities that contribute to desirable ESG outcomes. Moreover, authentic, unambiguous and validated sustainability initiatives also help consumers make choices predicated on accurate information. This, in turn, motivates companies to shift their activities into sustainable practices, thereby enhancing transparency and accountability within business operations. Hence, the effective implementation of ESG efforts with a lifecycle lens is crucial to long-term value creation and development. Over time, various ESG reporting standards have evolved, each with its own scope and reporting requirements. Examples of commonly used standards include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD).
ESG within the mining sector
The rising profile of ESG within the mining sector is attributed to a marked increase in investment in mineral exploration and production, primarily stemming from the energy transition. The emergence of responsible investment instruments, such as the United Nations Principles for Responsible Investment (PRI), has initiated a change in investment practices wherein investors directly rely on ESG factors to examine risks and better manage returns. This also denotes a shift from the traditional investment practice, which is solely based on financial statements. Investors are now focused on taking a more holistic outlook where economic considerations are balanced with competitive advantage, ethics and culture of a mining organisation.
Apart from the investment management portfolio, ESG reporting plays a pivotal role in the sustainable development of the mining sector, which not only works to the benefit of the mining companies in terms of raising capital and maintaining a reputation but also fosters the protection of the local communities within which such projects are carried out. A 2023 Mining Report by PricewaterhouseCoopers (PwC) found that mining companies with higher ESG ratings outperform the market and provide higher shareholder returns. This evidences the pertinency of ESG disclosure within the sector.
There is currently no universal standard for assigning E, S and G issues for the mining industry, and they may often overlap with one another. As a result, assignment typically depends on specific properties of investors, businesses and their stakeholders (stakeholders are usually defined as members of groups without whose support an organisation would cease to exist and can include governments, NGOs and local communities). At the same time, equal weightage should be placed on the fact that no two mining ventures are the same, leading to a variance in risk and opportunities. This, in turn, means that material issues will differ across projects in the mining sector, leading to some amount of fluidity. Nonetheless, common issues included under the ESG agenda in the sector are as follows (note: this list is not exhaustive)-
Environment: Climate change (including risks, opportunities, impacts and management), carbon footprint, ecosystem services, hazardous substances, mine closure, mine waste/tailings, air noise, and energy management.
Social: Human rights, community/worker health and safety, labour practices, mine closure/restoration.
Governance: Legal compliance, anti-bribery, transparency.
How can lawyers help?
The influx of work within the mining sector from a decarbonisation perspective might be challenging but also creates several opportunities from a legal standpoint. Consequently, a multi-disciplinary approach is indispensable. Lawyers are well-versed in various ESG developments and can help mining companies stay on top of numerous compliance and regulatory issues. Advice provided can range from promoting sustainable finance practices to human rights issues in supply chains within the mining sector. At the same time, lawyers may also aid with conducting the necessary due diligence crucial for securing ESG-based financial commitments. With the ESG transformation, especially within the mining sector, particular competencies of lawyers such as detail orientation, strategic thinking, drafting, negotiation and project management, amongst others, will be invaluable in maximising ESG business outcomes. Accordingly, early engagement and collaborative efforts with lawyers can also help curtail costly litigation risks resulting from issues like ‘greenwashing’.
The growing momentum of energy transition significantly relies on the adequate supply of metals and minerals. Despite this, the prestige of ESG within the metals and mining industry to ensure its sustainability cannot be impaired. Ergo, a balancing exercise must be undertaken where the sector itself is sustainably developed to survive and thrive in a new energy world.