The intersection of ESG and mining companies

ESG (environmental, social and governance) has become a key focus of the investment business over the last five years, with most fund managers noting an increased spotlight on ESG matters and the need to do even more.1 The flow of assets has been enormous, with more than $35 trillion globally now in ESG assets.

Many ESG funds are dominated by big technology names, which do not naturally have an association with some of the key issues such as climate change and renewable energy. One of the less intuitive, but very impactful, aspects is the way that mining companies have become some of the most ESG-conscious companies.

Mining companies are among the most ESG-aware

Given the nature of mining operations, the absolute level of ESG scoring for mining companies tends to be lower—mining operations face risks of the release of hazardous materials, which can pose potential risks to human life and the environment. Additionally, some minerals are found in countries with challenging issues around human rights.

Because of this, we have seen significant improvement and engagement from mining companies on ESG issues—whether it be environmental protection, ensuring safe labor practices or water management. A recent Ernst & Young global mining survey showed that a significant number of mining executives ranked ESG, decarbonization and the license to operate as the top three risk factors for 2022. To date, voluntary disclosure and engagement has been the main mechanism through which this has occurred—but we are seeing a push for compulsory disclosures, with the European Union already introducing several initiatives to force disclosure.

Will the clean energy transition lead to skyrocketing demand for commodities?

Mining companies find themselves in a unique position. In addition to the pressure to adhere to ESG principles, one only needs to look at the price of most commodities to appreciate there is also pressure to significantly increase production. This is being driven by the increasing push for a clean energy transition—including U.S. President Joe Biden’s desire to see electric cars account for half of all vehicle sales by 2030 and the U.S. economy to reach net-zero emissions by 2050—and the conflict in Ukraine and the pressure that has put on the supply of certain commodities.

Let’s zoom in on the resources required in the clean energy transition. The increase in expected demand for some of the resources required is truly phenomenal. The International Energy Agency estimates that the demand for lithium could increase by more than 40 times between 2020 and 2040, while cobalt and nickel are projected to experience growth of around 20 times for the same period.

What are some of the social risks of the clean energy transition?

Some of these resources needed for cleaner energy will require operating in lower income regions with vaguer rules of law. The Economist estimates that more than half of the estimated windfall from the clean energy transition would go to autocracies.2 For example, the Democratic Republic of the Congo has 46% of the global cobalt reserves, and produces 70% of the total global output. This poses a challenge to the S in ESG for mining companies.

Mining companies have become much more sensitive to the countries that they operate in, given the increasing focus—both from investors and an increasingly populist political class. A good example of this has been a new copper mine in Peru, operated by Anglo American. There were several conditions imposed for the company to gain consent and an environmental license, including the construction of a new water reservoir that provided farmers with a reliable water supply. Additionally, funding was to be provided for a development fund and a commitment to hire local workers and utilize local suppliers.

Will ESG constrain the ability of mining companies to meet demand?

This leads to the big question: will ESG pose a constraint on mining companies’ willingness and ability to produce the resources to meet this growing demand?

Given the boom-bust nature of the mining industry historically, and the preference of companies to skimp on investment and return cash to shareholders, there is already a high hurdle to overcome. However, amid the improvement in disclosures and engagement across the mining sector, in addition to a greater focus on ensuring operations minimize environmental risk, we think the ESG outlook for mining is getting better (particularly for those resources needed for the transition to clean energy).

The other possibility we see is that the mining sector utilizes other sources of capital. Tesla, for example, has indicated that it would purchase the future production of nickel mines in a number of countries including Australia and the United States.

The bottom line

The rise in popularity of ESG investing, coupled with an expected surge in demand for minerals, places mining companies in a truly unique position moving forward. Ultimately, as the transition to alternative energy sources gathers speed across the globe, mining companies are likely to find themselves under the glare of the ESG spotlight for years to come.


¹ Source: FT ‘The Assets that Matter’ survey

² https://www.economist.com/finance-and-economics/2022/03/26/the-transition-to-clean-energy-will-mint-new-commodity-superpowers