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Developing social climate spurs ESG activity

Jon Duncan Old investing group head of Old Mutual Investment

JON DUNCAN Using ESG goals and green finance can enable mining companies to create opportunities to reduce energy and water consumption or carbon emissions while improving operational performance

30th July 2021

By: Anna Moross

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Proactive action in environmental, social and corporate governance (ESG) initiatives highlights the increasing importance of companies showing transparency and accountability in the ever-evolving social climate, explains Old Mutual Investment responsible investing group head Jon Duncan.

He cites the landmark judgment against Royal Dutch Shell – handed down in May 2021 by a Dutch court – stating that the company must dramatically reduce its carbon emissions by 2030.

The fact that the legislature weighed in, and the number of shareholders who concur with society and science is substantial, shows that proactive ESG activity is needed to combat climate change.

From the perspective of company management, this judgment sends a very clear signal that being proactive and trying to determine trends in line with a broader long-term systemic shift is advantageous to the company, says Duncan.

From a reputational perspective, the goal is to “get ahead” and, ultimately, on the right side of history regarding the long-term ESG issues associated with decarbonisation.

Duncan believes that similar litigation in South Africa is unlikely in the foreseeable future, particularly in the short term: “Until South Africa's nationally determined carbon emmissions contribution and decline curves are more visible, and the ‘hard lines’ around emissions in our economy are clear, I do not believe we’re going to see any sort of successful litigation similar to the Shell scenario.”

However, there is still a push towards greater ESG in South Africa, owing to ESG issues becoming more material to investors’ decision-making processes .

Investors’ increased attention to ESG-related matters and data, Duncan believes, is owing to the identification of ESG as a convenient categorisation of a broad, complex set of locally relevant sustainability issues, in addition to the improved risk and return of having better-quality ESG policies in place.

“There is growing recognition of the connectivity between the social, biophysical and market systems and, for allocators of capital over time, this interconnectivity can have a material impact on the quality of return. The new paradigm for investors is solving for risk return and ESG impact. We see growing interest from retail investors who want to orientate their capital with these kinds of principles in mind.”

From a strategic ESG perspective, Duncan adds that it is important for miners to get their commodity mix right, as it could play an important role in their primary long-term sustainability risk.

“Fossil fuels will face headwinds, while minerals used to support the low-carbon transition will likely face tail winds, including copper, iron-ore and minerals used in battery technology.”

Additionally, miners could become more resource efficient by managing the carbon intensity of their operations.

Using ESG goals and green finance can enable mining companies to create opportunities to reduce energy and water consumption or carbon emissions while improving operational performance, enhancing community and regulatory relationships, and managing closure viability.

“Green bonds provide an opportunity for miners to access debt that is ring-fenced for activities that are aligned with green economy outcomes such as energy, water and resource efficiency,” says Duncan.  

Additionally, when companies have good ESG ratings, the likelihood of being included in ESG indices increases, which, in turn, supports a reduction in the cost of capital, compared with peers who are excluded from such indices.

It is also evident that ESG practices are good proxy measures for the overall quality of company management. This is evident in some mining companies that have better ESG performances outperforming industry peers in the market over the long term.

Duncan says this is because “good management teams are typically focused on long-term sustainability outcomes such as managing portfolio positioning, cost efficiency, licence-to-operate issues and regulatory risk, as well as worker and community relations”.

Addressing ESG issues can enhance financial outcomes by reducing stranded asset risk, lowering input costs, reducing regulatory fines, supporting worker productivity and reducing community-related stoppages, ultimately improving profit margins, he concludes.

Edited by Nadine James
Features Deputy Editor

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