The $2.1-billion environmental damage that Russia has claimed from major Norilsk Nickel (Nornickel) for a fuel spill in the Arctic indicates growing environmental, social and governance (ESG) financial exposure of commodity companies operating in the emerging markets, says Fitch Ratings.
In a recent note, the ratings agency states that the magnitude of the Nornickel incident is comparable only to that of Brazil’s Vale's tailings dam collapse in 2019.
Fitch says the importance of the “environmental factor” will continue to increase, as new, previously unanticipated environmental risks start to materialise.
Nornickel’s preliminary investigation indicates that the fuel spill could have been caused by thawing permafrost, which destabilised supporting structures. Almost two-thirds of Russian territory is in permafrost areas, and this is where many commodity companies operate (including gas producers Novatek and Gazprom).
Citing information from the George Washington University, Fitch says climate change will affect 20% of structures and 19% of infrastructure assets located in Russia's permafrost areas by about 2050.
“This will require significant spending on infrastructure and stricter focus on environmental controls and safety.”
Fitch has revised Nornickel’s ESG relevance score for the waste and hazardous material management, ecological impacts sub-factor to ‘4’, which means it is relevant to the company’s long-term foreign-currency issuer default rating.
The agency estimates the environmental provision will be equal to a quarter of Norilsk Nickel's 2020 earnings before interest, taxes, depreciation and amortisation (before the provision).
At the time of the Vale dam disaster in 2019, Fitch downgraded Vale’s rating to 'BBB-' from 'BBB+'. Vale had paid out $1.4-billion and had $3.4-billion of provisions outstanding as at end-June 2020, related to the incident.
However, as the company has taken steps over the past 18 months to reduce the risk of dam failures and to mitigate the implications for the environment and people in the surrounding community should they occur, Fitch has lowered Vale's ESG relevance scores across ESG factors and upgraded its rating to 'BBB' from 'BBB-' on September 1, 2020.
Nevertheless, Fitch says elevated environmental scores for metals and mining companies are still rare in emerging and developed markets.
Only two other rated companies have an ESG relevance score of '4' for this factor. Peru's Southern Copper’s score is related to the Buenavista copper sulphate solution leak that caused damage of about $150-million. The US's Alliance Resource Operating Partners' score is related to its exposure to emissions regulatory risk as a coal miner.