International law firm White & Case says 45% of decision-makers believe environmental, social and governance (ESG) issues will be the biggest risk to the mining and metals sector this year.
The firm reports in its 'Mining and Metals 2021' survey that the global mining and metals sector is facing one of its most challenging transitions yet.
Twenty-five per cent of the 68 participants to the survey said miners would face the most scrutiny on pollution created by operations.
Just 7.5% of participants said that Covid-19-led demand destruction would be the biggest threat to the sector this year, while only 13.6% saw its impact on supply chains as the biggest risk.
It appears that copper is the most favoured to outperform this year, with 36% of participants picking it to be the standout metal of the year, matching last year's prediction, more so than gold, the second-most favoured metal in the survey.
White & Case explains that this resilience amid Covid-19, combined with surging commodity prices and a focus on shareholder returns, appears to be encouraging generalist investors back to the space.
Only 21.6% of respondents to the survey expect generalists to remain wary of the sector, down from around a third in the previous two years.
Some 78.8% expect ESG issues to play a greater role in investors' decision-making, while ESG performance is also seen as the industry's second-most important priority for this year, after ensuring production can be maintained in the face of the pandemic.
White & Case’s survey participants believe the surge in gold deals will likely continue this year.
More than 40% said they expected precious metals to be the sector most likely to see consolidation this year, almost double the number of votes for base metals, which came in second.
White & Case elaborates that, what started as being seen as an existential threat when Covid-19 hit the world, with stock prices collapsing to the lowest since the commodity crisis in 2015, soon morphed into a resilience story for the industry.
“The majors proved incredibly robust, being able to keep the world’s biggest mines operating and, in most cases, their staff safe. Global supply chains held up for the most part and China managed to keep its industrial engine humming, driving demand for metals and commodities.
“As the year drew to a close, copper and iron-ore traded at the highest levels since the 2013 commodities boom, while gold rose above $2 000/oz for the first time.
"Anecdotal evidence suggests that the resilience of the industry, combined with growing investor excitement about the metals needed for the green revolution, brought generalist investors back to the sector for the first time in years, while the biggest miners continue to promise to deliver record returns back to shareholders.”
ESG matters are not new to the mining sector. While essential to our modern world, the mining space, by its very nature, is always going to face very intense scrutiny on this front, says White & Case.
“But even by recent standards, 2020 set a new bar for what is expected and, perhaps most importantly, for what is not acceptable.
“Perhaps the biggest story in the industry last year – aside from the pandemic – was the departure of Rio Tinto executives following accusations of failing to act on information that two heritage sites had greater significance than initially realised,” the firm points out, referring to the miner blasting near and destroying significant cultural sites, including in the Pilbara region of Western Australia.
Then CEO Jean-Sebastien Jacques and two key deputies were forced to step down in September after backlash from investors that criticised the company’s initial response to the blasts and tame penalties.
The departure of a CEO who had delivered record shareholder returns and overseen the company’s share price hitting multiyear highs added further evidence of the increasing importance investors, communities, regulators and other stakeholders place on ESG matters, says White & Case.
The firm's 2020 survey had flagged this risk, with almost half of respondents choosing local community impact as the area of mining and metals that would face the most scrutiny from both investors and regulators.
This year, about 78% of respondents expect ESG issues to hold greater sway in investors’ decision-making, while ESG performance is also seen as the industry’s second-most important priority for this year, after ensuring production can be maintained in the face of the pandemic.
As one respondent said, “investors are driving change at a pace that far outstrips regulators,” while another more colourfully put it, “ESG has hit the investor community like a train and will drive material change in behaviours in the near term that will impact the sector in many regards”.
Accessing equity may be more challenging, which could restrict project ambitions and change how financing packages are structured, the respondent said.
The survey highlights emissions and pollution as the most important ESG issues. Many major mining companies have set targets to become carbon neutral by between 2040 and 2050 in terms of their own operations; however, White & Case points out that just one mining company, Glencore, has included in its carbon neutrality strategy the pollution created when the materials they mine are used by their customers.
One important point raised in the survey, according to the law firm, was the feeling that the sector must be front-footed in explaining its crucial role in the energy transition, and to define precisely what sustainability means for the extractive sector.
Otherwise, there exists the risk that the cost of capital could increase for the sector as a whole as regulators could demand a higher return on capital employed for sectors not deemed sustainable – without perhaps having the full picture.
This, of course, needs to be done properly, with one respondent noting that “improper efforts to influence corporate governance and cost increases resulting from knee-jerk ESG efforts” need to be challenged.
Such a crucial element of a company’s strategy cannot be seen as a box-ticking exercise; as another participant noted, “mining brands and culture need to be business-to-consumer friendly while remaining business- to-business focused.”
This will help maintain strong relationships with stakeholders ranging from governments, influential equity and debt holders in addition to local communities, all of which will help the effort to attract an increasingly ESG-minded institutional investor base.