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ESG factors key for making investment decisions

The mining sector is increasingly exposed to economic, social and governance (ESG) risks. This includes concerns around emissions, water use, deforestation and community relations. 

ESG reporting obligations, and institutional and other investor interest in what resource companies are doing in this space, are rapidly multiplying. 

This article first appeared in Mining Review Africa Issue 6, 2020
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Alongside these developments, actual and perceived non-compliance with ESG regulations and best practices have engendered activist shareholder protests and action against the parent companies of global mining groups. 

ESG requirements are evolving from loose guidelines to mandatory, ccountry-specific obligations to report and comply. Relevant legislation includes the Prevention and Combating of Corrupt Activities Act, 2004 (PCCAA) in South Africa.

Further, many (often overlapping) voluntary codes and principles also exist, which can make it difficult, particularly for smaller companies, to determine exactly which principles to follow. 

When considering which of the voluntary codes to subscribe to, mining companies should remember that, by complying with applicable mandatory ESG requirements, they are likely already complying with certain of the voluntary codes, in which case it would be possible to sign up to such codes without increasing the overall existing scope of their ESG strategies.

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In addition, considerations around which of the voluntary codes will likely become hard obligations in the future will be relevant, as well as whether its investors are focused on certain codes in preference to others.

Shareholder activism on the rise

Investors and lenders are increasingly focussed on ESG factors when making investment decisions. This means that, in many cases, in order to access capital, miners will need to demonstrate commitment to ESG concerns. 

Many larger investors will have in-house specialists in this area, but there are also indices and ratings which rank companies according to their actual or perceived strengths. 

Alongside the increased investor focus on ESG, certain lenders are also now prescribing to particular principles that a company must meet in order to receive funding. 

This places scrutiny on miners’ management plans and how these will assist the company in meeting its key performance indicators.

Other bodies, including the World Gold Council, are lobbying for insurance providers to become more involved in the ESG movement, in particular by requiring mining companies to uphold ESG principles in order to be eligible for insurance policies. 

ESG factors have also led to a rise in shareholder activism, whereby existing investors use

In order to stay competitive in the market, it will be important for miners to properly engage with ESG and to build (and in some cases, publish) a clear and robust ESG strategy which speaks to both the mandatory and voluntary ESG standards and codes but which also works for their individual business and overall strategic priorities.

Richard Blunt, Susannah Davies and Jo Hewitt, Baker McKenzie

About the authors:

Richard Blunt is a partner in Baker McKenzie London’s Corporate Department, where he leads the Energy, Mining and Infrastructure Group.

Susie Davies is a partner in Baker McKenzie London’s Corporate Group and is a member of the Energy, Mining and Infrastructure team.

Jo Hewitt is a partner in the Corporate Department of Baker McKenzie London, and advises clients on a wide range of corporate law matters.