Historically, investing has been driven by quick gains with less impetus on social and environmental risks. However, as consumer behaviour changes, there is an increasing awareness to invest responsibly in the green economy.
GERARD PETER spoke to JON DUNCAN, head of responsible investment at Old Mutual about how this impacts mining companies seeking investment.
Duncan started his career as a civil engineer and has a Master’s degree in Environmental Science. Before his foray into the financial space, he worked for a mining engineering company as an environmental consultant.
He now heads Old Mutual’s Responsible Investment Programme which is focused on driving the systematic integration of environmental, social and corporate governance (ESG) issues across the entire company.
Old Mutual currently manages about US$1 billion in ESG indices which are listed market investments.
Duncan has seen an increasing appetite for these investment products as customer habits change. And while the ESG indices that Old Mutual has been putting into the market have also taken a knock because of current volatile worldwide markets, the impact has been less than benchmark figures.
According to Duncan, previously, ESG policies may have just been a compliance box-ticking exercise for many companies but this is now changing.
“There is an emerging narrative that businesses who will do well in the future will be those that whose profit streams are aligned with green economy outcomes such as low carbon emissions, resource efficiency and being socially inclusive.”
He adds that this economic transition has been in part being hastened as a result of COVID-19 and that the investment policy environment is now tilting towards green economy outcomes.
“COVID-19 is an exogenous shock to the market system – it something that is external, unlike liquidity or other inside market risks.
“This is a clear indication that our economy is susceptible to risks that emanate from the biophysical, social and governance system. For some time, we have muddled our way through poor governance and have accepted that it is both a function of the market and society but this pandemic is a very stark and powerful reminder that the market needs to take these exogenous risks into account.”
Still an appetite for mining
Now, while mining’s reputation may be tainted when it comes to the effects of operations on the environment and communities, Duncan says that this does not dissuade ESG funds from investing in mining.
“When it comes to mining, we don’t have a hard binary exclusion approach. Rather, we look at what commodities companies are mining and how well they mine those commodities.
“As a consequence of the transition to a greener economy, there are some commodities that are less favourable such as coal while battery metals will attract more investment.”
Read more about coal
Following a strategic commodity review, mining company’s operational ESG risks are then scrutinised, taking into account factors such as how its mining rights were acquired, if its tax disclosure is appropriate, its health and safety track record, how it provisions in terms of mine closures and the extent to which it delivers on its social and labour plans.
Duncan explains that a company’s ESG rating is also a proxy measure for management quality.
“Companies with good management teams that are thinking about systematic risks, externalities and societal and governance risks are better positioned to have a stronger competitive advantage,” he states.
For investors, he advises that there are two parts to responsible investing. The first is deciding what the ESG risk is investing in a mining company and looking at the pricing and the risks and returns.
“Once you invest, the second part is engaging with the company. Go to the AGM, engage with management; basically, do not be an absent landlord.”
Furthermore, he advises that a mining company must first get its strategy right from a commodity perspective and then ensure that the strategy appropriately prices all externalities, both environmental and social, and that executive reward is pinned against this long-term ESG risk.
“Going forward, societal expectations regarding the way mining companies operate will remain in focus and if anything, will be enhanced through our collective experience of COVID-19.
Read more about COVID-19
“As a long term investor, we know that investing in a way that creates short term returns while eroding long term system resilience is unstainable.
“Fortunately our experience shows us we can do both – generating appropriate risk adjusted returns while putting capital to work in a way that supports ong-term sustainable social and environmental outcomes ,” he concludes.
Read more about Old Mutual’s Responsible Investment Programme