Why small and mid cap mining companies need to understand and report against sustainability
Updated: Jan 26, 2022
Globally, the number of companies reporting against sustainability standards is increasing rapidly. This is a result of investor and customer demands, stronger government commitments related to a company’s environmental and social impacts which has translated into both pressure and regulation, and an increasing focus on the supply chain. Eighty percent of large and mid-cap companies worldwide now report on sustainability according to a report from KMPG (Oct, 2020). The graph below shows the global increase in sustainable reporting over the last 8 years.
Statista, 2020: Companies who report on sustainability worldwide from 1993 to 2021
The mining industry, as the first stage in many supply chains, is a sector under pressure to report against sustainability standards. The nature of extracting ore from the earth’s crust is high risk for both the environment, the labour and those living around sites of extraction and processing. Large-cap companies are said to be leading the way in sustainability reporting (Conde, 2017; Dashwood, 2014). However, this is not true amongst mid-cap and small-cap companies. Our research revealed that for SMEs in the metals and mining industry, ESG disclosures and sustainability reporting is far from standard practice. In fact, less than half (48.6%) of mid-cap and only 33.4% of small-cap mining companies report on sustainability, and of those, not all report according to recognised standards.
TOS, 2021: Metal and mining companies reporting on ESG
The low numbers are primarily due to regulatory requirements and investor pressure for sustainability disclosures falling more on larger companies. Additionally, sustainability reporting takes time, resources, and specific competencies. This challenge is exacerbated by the large array of reporting frameworks that exist, and lack of clarity on methods and conversion factors that should be used to generate the required outputs. The variety of methods and data leads to challenges in comparability. Furthermore, much of the sustainability reporting done to date is indicative of the corporation, rather than at a project level. The problem with this, is it does not reflect clearly how the project and mining site itself impact the planet and local communities. Without this information, it is impossible to identify hotspots where improvement is required and what is working and what is not.
Below are key reasons why solutions and tools to facilitate sustainability reporting for the small and mid-cap companies in the mining sector are required:
Inclusion or exclusion in high value supply chains
Reporting will, and is already, becoming a key requirement for small and mid-cap mining companies who wish to have their minerals contribute to and be included in supply chains. For example, the EU due diligence director has made sustainability reporting mandatory, rather than voluntary, for anyone in the supply chain; a rule that was first put forward in May 2017, and has come into effect as of January 2021.
The regulation lays down supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected and high-risk areas. EU importers of tin, tantalum, tungsten, and gold must check that the minerals or metals they buy do not contribute to conflict, forced labour or other illicit activities. The regulation requires importers to follow the five-step framework established by the OECD:
· Establish strong company management systems
· Identify and assess risk in the supply chain
· Design and implement a strategy to respond to identified risks
· Carry out an independent third-party audit of supply chain due diligence
· Report yearly on supply chain due diligence
The EU is not the only governmental body laying down the law when it comes to sustainability reporting at the start of the supply chain. 2022 sees the introduction of the UK’s rigorous Extended Producer Responsibility (EPR) regulation, an environmental policy that makes producers responsible for the entire life cycle of the products that they introduce on the market, from their design until end of life (including waste collection and recycling). This will result in reporting from the very start of the supply chain. The UK’s new Sustainability Disclosure Requirements (SDR) roadmap also sets a definitive direction of travel for greening the financial system and achieving the UK’s ambitious net zero target. However, a lot more work is required to ensure investors have the right metrics to make informed and accurate decisions. The roadmap creates increased pressure for investee companies, who will need to provide the right metrics for investors to align with the green taxonomy in the SDR and report against their disclosures.
In the US transparency around mineral supply chains has also been in the limelight, with a White House report issued earlier in the year (June, 2021) declaring the greater need for supply chain transparency and governance recommendations made with respect to regulations governing sourcing of critical minerals. With regards to Cobalt specifically, the report says, “The primary supply chain concern with the existing cobalt supply stems from the combined issues that over half of the reserves of cobalt exist in the DRC, where alleged mining and labour conditions are well outside of international practice, and that China has a dominant position in cobalt mining and processing of materials extracted from the DRC.’. When considering this example, we reflect that a large portion, as much as 15 to 30 percent of the Congolese cobalt is produced by artisanal and small-scale mining.
Investor Demands and the Cost of Capital
Finance has been driving requirements for reporting requirements, requiring investees to report, and only investing in responsible companies. Companies without sustainable supply chains will attract less investment and see share prices fall in the next decade. A survey of UK and US investment managers has found more than eight in 10 (85%) of investment managers believe businesses that fail to implement supply chain sustainability initiatives will see prices fall in the next 10 years. Considering more than 80 percent of environmental and social effects are in the supply chain, it is a critical factor in environmental, social and governance (ESG) investing.
In the US for example, money invested in ESG funds more than doubled in a year between 2020 and 2021. More than 700 ESG funds were launched and ESG assets are on course to exceed US$53 trillion by 2025 – that would equate to more than a third of the expected US$140.5 trillion of assets under management at that time. To add, this month (September, 2021) bodies representing many leaders in the UK's financial sector have called for a planned new global body overseeing sustainability-related disclosures from businesses to be based in London, following a bid from Canada.
There will be a greater supply of capital for projects with good sustainability rankings and scores and therefore a lower cost of capital.
Direction of Travel is to Increasing Consumer and Regulatory Expectations around Disclosures
The economic system projects are operating in is evolving, with an increasing challenge to a narrow focus on sustainability. In line with growing investor demands, societal and governmental demand for a transparent and sustainable supply chain will see the trend for better and more granular reporting increase. In the coming years, the implementation gap between commitments made by companies and investors and the actual occurrence of these actions on the ground will close and the requirement to measure and demonstrate progress will intensify.
Over the next five years we believe that the rigor, regulation, systems, and competencies will have developed to such an extent that many of the current issues in reporting will be ironed out. Sustainability Accountants will sit alongside financial accountants and tools will be developed to collect and interpret sustainability data. Many of the challenges we are facing today are likely to be worked out.
Improving Non-Financial Performance
Having data that enables mining and other natural resource companies to benchmark their projects against others and against competitor projects is a way to indicate gaps where improvement can be made. This measurement then enables companies to move forward with a clear and focused strategy to improve their impact on people and the planet. Having a clear measurement of non-financial environmental and social impacts is the only way they can be managed and improved in the future.
Furthermore, in the future we will see reporting done at project level in the mining industry, rather than corporate level, which is a popular way of reporting today. This allows impact to policy, rather than impact focus and removes the reporting from the site of the impact – the mine and its surrounding environment and communities.
Expansion from a Narrow Focus on Carbon
The development of sustainability reporting has, in large, been driven by climate change and the contribution the companies are making to greenhouse gas emissions. This focus has led to increasing sophistication in carbon accounting. As we look forward this carbon focus is likely to expand to a whole of biosphere focus. The importance of other factors such as non-carbon air emissions, water, biodiversity as key part of combating climate change is going to come to the fore. Sustainability reporting will be the frame for understanding a projects wider climate change impact. he low numbers are primarily due to the lack of regulatory requirements for SMEs to report on such issues as well as the fact they do not have the resources and capability to undertake reporting exercises. To add, there are a large array of reporting frameworks that exist, and a lack of clarity around input methodologies, resulting in outputs that are incomparable with other projects or against competitors. Much of the sustainability reporting done to date is indicative of the corporation, rather than individual projects. The problem with this, is it does not reflect clearly how the project and mining site itself impact local communities. Without this information, it is impossible to know what solutions are needed in the future to bring the best impact to future generations. Below is an outline of the key reasons why a solution is urgently needed to democratise sustainability reporting for the small and mid-cap companies in the mining sector.