The Mining Indaba 2023 which took place last month in Cape Town, from February 6 to 9, highlighted efforts of all sectors to reduce or eliminate activities that have a negative impact on the planet and its environment.

Qualification and Quantification of Environmental, Social and Governance (ESG) Risks and Uncertainties Across the Mining Lifecycle continue to gain more prominence and relevance as the business world becomes even more uncertain.

Companies are facing increasing pressure from investors, customers, communities and regulators to monitor, manage and address ESG risk. The Russia-Ukraine conflict has also exposed how corporations’ risks go far beyond areas in which they have direct control.

In a moderated panel discussion Professor Eric Lilford and Siyakhula Sonke Empowerment Corporation (SSC Group) founder Fred Arendse discussed ESG-related issues affecting miners, including the requirement to disclose, in a transparent manner, ESG metrics to all stakeholders, including investors and banks as well as to government bodies and communities.

Common ESG risks include those related to climate change impact mitigation, environmental practices and duty of care. From a social and governance risk perspective, elements may include respect for human rights, anti-bribery and corruption practices, as well as compliance to relevant laws and regulations.

Prof. Eric Lilford

Q1.      We have rules and regulations governing the performance of mining operations against ESG outcomes. However, ESG has taken on a life of its own, reaching beyond formalised rules and regulations. What do you see as the most important, inadequately regulated components of ESG in the mining sector?

Fred Arendse

A1.      It is not uncommon to see headlines stating that mining is destroying South Africa’s environment because mine waste is still the largest source of pollution. For example, the impact of the coal fields on scarce water resources, owing to heavy metals leachate has become untenable. Although it now has become a tourist attraction the Big Hole in Kimberly is possible the largest example of an unrehabilitated mine, not to mention the mine dumps scattered all over Gauteng and beyond.

The Big Hole and the mine dumps may be historical examples but not that much has changed because there are there are too many loopholes in legislation governing the mining sector. To add insult to injury mining corporations are not held accountable for social impact their operations have on the community at large and more specifically those in the immediate surrounding areas. Although it could not be said that  the mining industry as a whole is negligent, the distinction between responsibility and order of the day has not been clearly delineated and when matters get out of hand it remains incumbent on the government to spend taxpayers’ money to try and resolve issues while local communities suffer the consequences of air quality issues and water contamination.

Then there are the informal mining activities, which because it is unregulated remains under the radar until something happens, should still be addressed from and ESG perspective. Although some mining companies buy mining output from them they still do not take any responsibility for these miners on a social and level. The overall result is that this sector is the most dangerous mining activity of all and when above ground the environmental impact is far reaching, leaving mosquito breeding excavations far and wide.

We can only hope that the capacity of the Department of Minerals and Energy to monitor, oversee and regulate the industry will increased and improved in the near future because the current incapacity is leading to the systematic destruction of the environment in general as well as ground and surface water resources in large parts of our country.

Q2.      In what areas of ESG are we failing (industry, government, social, financing (equity and debt), etc)?

A2.      Although the answer to Question 1 already highlights areas of failure which points to industry, government and society, however, this has an impact on financing as well, whether equity or debt. Globally, ESG has risen to the top of the regulatory agenda with the result that for financiers ESG is unequivocally measured with defined environmental, social, sustainability, and governance system of measurement resulting in the coined phrase, “sustainable finance”.

For banks and insurers, the financial risks of climate change are in sharp focus as regulators set out expectations for stress testing and climate risk management. Asset and fund managers and asset owners are required by regulators and investors to embed sustainable investment throughout their businesses and to consider the full spectrum of ESG.

In this regard the difficulty of mining companies to access funding in the form of investment or debt can be two-fold, either their adherence to accepted ESG practise and/or ESC reporting because ESG reporting is used as a form of risk management addressing business, sustainability, and social issues. Financial institutions are now offering financial products that are focused on ESG, the challenges they face is not that ESG data is not available, but it is far from standardised an can be ambiguous and open to interpretation, not least because of a lack of regulatory direction and from a finance or investment perspective.

Q3.      ESG is being used as a means to force change and do things differently (e.g. investors, financiers, unions/employees, communities, other stakeholders). This creates a power-shift away from Boards and shareholders and towards other stakeholders. Is this the new norm?

A3.      Environmental issues have an impact on all levels of society and business and as a result large-scale trends shaping the ESG investing world have become well recognized. Climate change risk and the road to net zero, the growing existential threat of biodiversity loss, social inequalities, regulation and, lately, debate and controversy over greenwashing and what ESG should be. As a result, ESG initiatives have become a strategic imperative for nearly all organizations over the past year. Increased focus and pressure from investors, regulators, employees, and other stakeholders make ESG a topic that is not only critical at the board level, but also essential to cascade throughout organizations operationally.

            However, while most companies made some level of commitment on issues such as human rights, anti-bribery and corruption and environmental protection, there is much less evidence of companies systematically implementing their commitments. ESG risk management measures often fall short of the standards that companies have set themselves.

Q4.      Under the ESG banner, do you believe that all commodities/minerals producers (coal, oil and gas, platinum-group metals, copper, diamonds, lithium, etc) are treated equally? Locally and globally?

A4.      ESG is an extremely complex subject and to determine whether all commodities/minerals producers are treated equally on a local and global level would need an investigation on a number of levels, namely legislative, financial, social acceptance, country, type of operation, type of commodity/mineral and demand. This list could still go on.

            As seen with coal, the main driver is demand and if the demand is there several factors will be overlooked. In other words, coal should be the bad brother and if one travels through the coal field one does not even have to see the mines to know that coal is being mined in the area because of coal dust pollution. Discard coal dumps are leaching heavy metals into ground water while releasing methane, a Greenhouse Gas 25 time more harmful than carbon dioxide at trapping heat in the atmosphere. So, locally coal is not receiving equal treatment because of demand, which would set a trend for other minerals commodities as well.

            Cobalt, a critical mineral for Lithium Ion battery manufacture, being mined in the DRC tells another story, which is specific to a country. Tesla is seen as a symbol of clean and green energy and they are under this banner one of the biggest Lithium Ion battery manufacturers and users. Cobalt is mined under atrocious conditions in the DRC resulting in large scale environmental devastation. The same could be said for other commodities/minerals in other parts of the world.

            However, the main drivers behind these terrible mining practises, namely the buyers do not care and worst of all ESG, is not considered because out of sight is out of mind. So, these commodities are treated differently to others.

            To sum up, the answer is no!  

Q5.      Identifying potential ESG outcomes can be challenging for companies, where ESG outcomes may be positive (asset) or negative (liability). Do you believe that stakeholders appreciate the uncertainty of the potential outcomes?

A5.      The full appreciation of uncertainty is based on the level of knowledge and understanding of the issues which would bring about the uncertainty. Environmental and social issues and the governance put in place to manage these issues will have a direct impact on the appreciation of ESG uncertainties.

            The environmental component is probably the best known and understood part of ESG and is a field of study for large numbers of well-educated and experienced scientists. This can include carbon foot printing, energy sources, recycling, hazardous emissions or waste disposal, just to name a few topics. By now the risks associated with environmental issues are well understood and legislation around environmental management is well developed so it would be fair to say that uncertainties around the environmental aspect of ESG would largely be appreciated.

            The importance of protecting the people that live on planet earth is equally as important as protecting the environment which they live in. Social issues covered by ESG include diversity, gender equality, mental health, forced labour, healthy and safe working conditions, parental leave, healthy living conditions, to name but a few. The complexities at play between human nature and the infinite number of variables present environment they work and live in combined with the natural volatility of human nature makes the social aspect of ESG extremely complex. Proof of the fact that although there is some appreciation of the uncertainties associated with the social aspect of ESG is the endless issues companies must deal with daily and the occasional outbreaks of work-related social unrest.

Q6.      Stakeholders are known to “invest in ESG”. This being the case, what do you believe to be an ESG-investment return? Is there an ESG return?

A6.      ESG investing had its origins in values-based investing, in many cases reflecting ethical or religious views. Over time, it has evolved to include a wider range of strategies and investment products. These vary from strategies that seek to minimise the negative impact of companies or portfolios, to those that seek to maximise positive impact.

            Abrdn, a global  investment advisory firm has concluded that it will not be investing in Russia or Belarus for the foreseeable future, on ESG grounds as it cut back on its exposure to both counties.  Major money managers, many of them inclined to ESG such as Norway’s sovereign wealth fund, as well as Britain university pension fund have announced that they are disinvesting in   Russia following its invasion of Ukrain.

            To expand these views further: Investing in ESG is more than good intentions. It's about creating a tangible, practical plan that achieves real results. Success is not about climate change, diversity, and disclosures alone. It’s about embedding these principles from investment to sustainable innovation. Bringing together your best people and smartest technology to go deeper and to act swiftly. Enabling the biggest challenges of the day to be challenged while capturing the best opportunities of tomorrow. As a result, those who invest in ESG sees tangible returns on their investment in the form of growth and sustainability.

Q7.      When we aim to quantify ESG, whose perspective should we take? Government? Industry? Community? Employees? Other stakeholders?

A7.      ESG is all encompassing and to quantify ESG based on the perspective of one sector would be a mistake. Defining ESG performance is the most important step. Making environmental, social, or governance issues better means different things to different people. There may be differences in values, or one cause is better suited to a company than another. ESG performance can also be hard to quantify. Even if a company takes actions intended to be greener, how exactly can one measure something like reducing pollution? There are various ways ESG considerations are measured. Therefore, the term stakeholder says it all and when one wants to quantify ESG the following has to be considered:

Sector-Specific ESG Topics.

Sector Benchmarking.

Stakeholder Specific Factors.

Q8.      The biggest elephant in the ESG room is related to Intangible Uncertainties, or Unknown Unknowns. Have you considered these aspects in any detail? How do you accommodate them (qualification and / or quantification)? What tools or methodologies do you use to quantify Unknown Unknowns?

A8.      Business leaders face complex and uncertain situations every day: What will sales be like next year?8Will our new product succeed? What will the competition do? But the most challenging circumstances are often completely unexpected, because we never even knew to look for them.  They are the Unknown Unknowns.

            Unknown Unknowns pose a tremendous challenge as they are essentially to blame for many of the unwelcome surprises that pop up to derail projects. However, many, perhaps even most, of these so-called Unknown Unknowns were Knowable in advance, if managers had merely looked in the right places. In other words, an Unknown is there because of a lack of knowledge and although should one not look at the right place this knowledge would not be obtained, but the unknown aspect could be reduced to some extent by a process of elimination. Once an Unknown is identified it may have a high level of Uncertainty, meaning that much of its characteristics would be Unknown. However, by interrogating the Unknown, which has now become Known much of these Uncertainties can be eliminated.

            There are a number of tools that have been developed to assist with the elimination of unknown unknowns. The first was known as the Johari window and another well-known tool the Rumsfeld Matrix is one several matrices developed by risk assessment companies to resolve the issue of the unknown unknowns.