CAMPBELL PARRY: Mining, the ESG Cinderella story

Given the growing preponderance of environmental, social & governance (ESG) funds around the world and the increasing inability to differentiate product, one sector we have looked to include in our funds this year has been the global diversified mining sector. The market has a jaundiced view of the mining sector’s sustainability credentials, yet our research has shown that ESG and sustainability have been at the heart of efforts by the sector to improve its image in the eyes of both investors and host communities.

These days, led by the guidelines laid down by the CEO-led International Council on Mining & Metals (ICMM) and the Responsible Mining Initiative, mining companies are showing themselves to be better stewards of national mineral resources around the world. Their operations are becoming safer and more inclusive places to work. Their environmental footprint has improved over the years, with active programmes and science-based commitments to lowering greenhouse gas emissions, improving electricity consumption efficiencies and reducing water use.

And relationships with host communities are arguably better than they have ever been, driven by moves to recycle more of the value add to surrounding areas, and better embrace human rights and cultural awareness. Moves to ensure the industry’s supply chain endorses such principles should be noted.

These trends aren’t just anecdotal; we have been keeping detailed records of company and sector ESG performances for the past decade. For example, industrywide fatality rates have dropped 77% since 2010, injury frequency has more than halved (by 52%), while greenhouse gas emissions and energy consumption per unit of production are down 30% and 24% respectively.

Sector targets for greenhouse gas reduction are well laid out, pragmatic and realistic. Carbon prices are now used in corporate expansion strategies. Water consumption has declined by 12% since 2010, and more can and will be done to accelerate this improvement, as water is a critical sector input under stress globally.

Finally, gender diversity changes since 2010 across the mining sector (for example, the percentage of women in management and in the workforce) have far exceeded the same changes for all other sectors listed in Europe and North America.      

It’s not just us who have noticed this trend: an increasing number of third party ESG and sustainability ratings agencies increasingly give credit for it too. There is still work to do, but mining sector ESG scores are getting better every year, and the rate of change has accelerated. More active and collaborative shareholder engagement is helping, as exemplified by the efforts of Climate Action 100+, of which we are members. Management is more intent, and executive short- and long-term compensation is better aligned with ESG and sustainability requirements. We do not think the market gives enough credit for these positive changes.

There is a second reason to think about mining. We do not think investors adequately appreciate the mining sector’s gearing to the coming energy transition, and the pressure this will exert on the supply of critical metals and minerals. For example, renewable energies such as wind and solar contain 4-5 times as much metal per unit of output than is the case for conventional coal-fired power. An electric vehicle contains five times the metals and minerals that a conventional car does. Current 2030 and net-zero emissions targets by more than 130 countries worldwide require growth in renewable power and the electrification of transport, and given current mining company capital allocation trends it seems unlikely that this growth will be adequately catered for by new metals supply.

To fully achieve the world’s net-zero goals lithium production will have to rise 16 times by 2050, graphite 10 times, cobalt eight times, nickel and copper by three times. Just delivering China’s renewable energy programme will require the construction of the equivalent of a new 400ktpa Grasberg mine every year for the next 30 years. New mines blessed with high quality reserves are not easy to find. They are mostly found in inhospitable regions and take an average of 16 years to build. Where will all the metal come from? Recycling can help, but collection rates are poor, and the process is very energy intensive.

Technology will undoubtedly play a role, such as the ability to process lower grade copper ores using new and novel leach technologies, but such advances are unpredictable in their commercial success and aren’t expected to move the supply needle much over the next decade. With the pressure thus building, the outlet valve will be price: higher prices are required to incentivise miners to develop new sources of production for the energy transition, and this must happen sooner rather than later. 

Society’s alignment with climate change commitments requires an almost unthinkable level of global co-operation and change, but it can’t happen without the mining sector. That’s why we believe it is worth considering and including best-of-breed mining companies in client sustainability portfolios.

• Parry is head of commodities research at Investec Wealth & Investment.