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ESG: Harnessing this vital business management tool

The integration of environment, social and governance (ESG) pillars into mainstream extractive business investing and governance is already well established.

In fact, in 2019, an estimated US$ 20 trillion in investment assets globally were linked to some form of ESG data and reporting.

Reporting on environment, safety and other sustainability elements by business is not new. The demand for reporting of non-financial information was moulded in the 1990s as Sustainable Development and before that, in the 1960s, was included in social responsible investment (SRI).

This article first appeared in Mining Review Africa Issue 6, 2020
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ESG is a new tool in sustainability integration for business, it is not however, the same sustainability reporting and the two should not be confused.

The risk/opportunity and financial value associated with ESG has been recognised as a tool for business management. The growing interest around ESG has been mainly for transparency in investor and senior management decisions. The key is whether information is suitably understood and acted upon.

This is often missed by service providers and the investment committees and company boards using this tool. This means understandable presentation of information and interpretation is key and requires an understanding of the business being reported on and audience receiving the information.

Limitations and pitfalls

As good as ESG is for informing business/investor decisions, there are limitations and pitfalls inherent to its reporting that must be recognised. For example, the overlapping nature of some aspects, as is the case where governance elements will often overlap with social and environmental.

Potentially, this causes some duplication which is often “screened out” to keep reporting concise and resulting in information being presented in only one area of the report.

Reporting may be weighted towards a particular ESG element and based on historical rather than current information. An example would be a heavy focus on social development or anti-corruption. This can make the reporting biased and/or insensitive to new and changing issues outside of the normal.

In an environment where significant and rapid change is becoming more likely, ESG reporting based on historical perspectives can be limiting. This is well illustrated using two examples, the mining sector’s focus on tailings management failures and the recent COVID-19 pandemic.

COVID-19 slips through the net

Tailings management in the extractive sector has always been part of risk management. Since the earliest memories of the Merriespruit Tailings Dam failure in 1994, business have had risk profiles of these facilities.

However, not until the recent Vale Brumadinho dam disaster and the subsequent issues raised about management visibility, decisions and governance on high risk aspects did they become mainstream for ESG.

Driven by NGO pressures, investment risk demand and proactive business immediately initiated improved governance and ESG reporting in this area. One year on, and most extractive entities have tailings risk, governance and exposure embedded their ESG reporting. Has this addressed the issue? Yes, but reactively so and only because of highlighted understanding of this risk.

The COVID-19 pandemic is another matter entirely. Since the initial indications of an outbreak in China late in 2019, there have been drastic changes within the corporate arena regarding operations, exposure control and business function.

These only became significantly apparent by March 2020 when country responses such as lockdowns and restrictions in trade emerged. However, the impacts of disease on business are not new and HIV/AIDS and others are already recognised ESG elements of several mining companies.

So did ESG Reporting pick this up? And if it did, was this in time and with sufficient response? Unfortunately, not, and COVID-19 has managed to slip through the ESG net.

There have been timely responses i.e. the Public Investment Corporation who have asked for supplementary COVID-19 reports on business preparedness and impacts as soon as the World Health Organisation (WHO) announced the pandemic status of the disease. A valid response but retroactive.

The way forward

Recognising that ESG is only as good as the parameters used and the capacity of the audience to understand these is important. In many cases ESG reporting uses only lagging indicators.

This is often compounded with too many or the incorrect level of indicators being used which then “hides” the critical elements for the ESG audience. This could be argued to be the case for the tailings example given.

How then should this be addressed? We cannot expect every eventuality to be envisaged and then catered for in ESG Reporting. The solution to ensuring ESG remains a practical and effective tool for business lies in three key areas, namely:

  • Effective service providers:  This requires the personnel doing ESG reporting to be connected to both the business and trending developments and assist the client in establishing the right balance of reporting and parameter selection.
  • Leading indicators: Emerging trends and risk indicators must be built into ESG reporting. This needs to be dynamic as some trends and risks will move quickly and not persist on the ESG agenda.
  • Investor and senior management enablement: Knowing that not all audiences are specialists or focused on all aspects of ESG is important. ESG reporting is not just data, but should also include a level of interpretation for the reader.

Read more about COVID-19

ESG Reporting is critical to business management. ESG is also more than a static report reflecting a point in time and should be constantly reviewed and continuously evolving as it is meant to recognise the business in the contexts of its operating environment.

AUTHORS: Fulufhelo Makhani and Richard Garner, The MSA Group

About the authors:

Richard Garner is the head of Environmental Services at The MSA Group. He has over 20 years’ professional experience covering both mining and other industries.
His exposure includes mining projects, sustainability reporting and ESG management and environmental and safety due diligence reviews and audits.

Fulufhelo Makhani is a Junior Environmental Scientist at The MSA Group.
Her experience extends to environmental authorization applications, report writing, stakeholder liaison, management systems, air emissions monitoring and environmental auditing.