Mining companies should look for methods of implementing ESG for a strategic benefit
By Robert Botts, Jr., Zane Gilmer, and Selena Samale
The mining industry may view the development and application of Environmental, Social and Corporate Governance (ESG) standards as an existential threat to its very existence — and for good reason. ESG standards measure the sustainability and ethical impact of a company’s practices and have rapidly expanded over the past several years. A focal point of ESG is environmental sustainability and the desire to reduce overall carbon footprint at both business and industry levels. As ESG is systematically woven into the fabric of the US marketplace and business practices, participants in the mining industry have a choice: Fight against ESG, which at this point would likely be futile, or find ways to implement ESG for their own strategic benefit.
ESG is Here to Stay
Since the term “ESG” was first coined nearly two decades ago, an increasing number of companies, industry associations and consumer, environmental, and other interest groups have adopted its principles and pushed for wider acceptance, both voluntarily and by regulatory or legislative mandate. To that end, governing bodies have looked for ways to incorporate ESG into regulations and legislation in an effort to force companies, however indirectly, to apply these principles as part of their business decision-making.
In March, President Joe Biden issued the first veto of his presidency, rejecting a bill that would have eliminated a Department of Labor (DOL) rule allowing retirement plan managers to consider ESG in their investment decisions. In a statement, President Biden said, “[t]here is extensive evidence showing that environmental, social, and governance factors can have a material impact on markets, industries, and businesses” and that retirement fund managers “should be able to consider any factor that maximizes financial returns for retirees across the country.”
Proponents of the bill had expressed concern that ESG investing practices that take climate change into account unfairly penalize certain industries, including oil, gas and mining. However, the House of Representatives failed to garner the votes to override President Biden’s veto.
While some may question the significance of this DOL investment strategy rule on their mining operations, Biden’s veto makes clear that ESG concepts are actively being considered by regulatory bodies, Congress and the president. The only questions now are how long before ESG and related compliance requirements become legislatively mandated across all sectors — and what those requirements will look like.
Why Mining Companies Should Care
Many companies are reluctant to take proactive steps to implement new procedures, especially when they have not been legally mandated. However, there are many reasons why mining companies, in particular, should consider adopting an ESG policy anyway. Not only can ESG policies lead to improved operational efficiencies, cost savings, and broader strategic advantages, but adopting an ESG policy before it is required by regulation or statute builds confidence with well-informed stakeholders. Companies that demonstrate a strong commitment to ESG initiatives position themselves to attract higher-quality customers, partners, investors, and employees.
Implementing ESG policies, procedures, and practices can also create new opportunities and prevent lost opportunities. Investors are increasingly looking for companies that have implemented ESG practices, not simply in accordance with their personal beliefs, but because these practices can demonstrate less investment risk in the long run. Already, financial institutions are facing regulatory pressure to implement their own ESG policies to reduce their direct and indirect carbon footprint. One of the ways these institutions accomplish this is through lending decisions, namely by putting greater emphasis on providing loans to environmentally and socially responsible companies (i.e., those who have undertaken ESG measures).
ESG compliance can be measured through a variety of indicators, such as carbon emissions, water use, waste management, diversity and inclusion (D&I), employee engagement, and labor practices. Companies can also measure their ESG compliance through external ratings and rankings agencies. These agencies provide ratings based on a company’s disclosure of ESG-related data, management processes, and performance against industry-specific standards. Because of the heavy reliance on investor capital and lender financing in both mining and energy, it is particularly important that companies in these sectors adopt ESG practices and reporting procedures to meet the growing demand from investors, lenders, and stakeholders. A proactive approach to ESG policies should be taken to maintain access to certain markets, financing and investors, allowing companies to safeguard viability and remain competitive in their industries.
ESG can also create strategic advantages on all sides of business relationships. Companies up and down the supply chain are feeling increased pressure to implement their own ESG policies and to only do business with companies that have done the same. Implementing your own ESG policy can help ensure that you do not lose customers due to lack of policy.
It is also evident that community stakeholders are paying attention when mine operators apply for state or federal permits. They want to know what the operator is doing and how they are doing it. Moreover, community stakeholders are demanding more socially- and environmentally-friendly mining operations. As interest groups become more vocal and active against mine operators that they believe are not living up to community expectations, a thorough ESG policy can go a long way in demonstrating that the mine operator stands with the community, not against it.
Another consideration in support of embracing ESG policies is the impact on the company’s own workforce. In a tight employment market like the current one, employees are seeking out their ideal workplace. Employers that can offer more to their employees have an advantage in terms of attracting and retaining talent. Younger generations, in particular, are more socially and environmentally conscious and are more likely to choose an employer that aligns with their personal views.
Finally, an ESG policy reflects the public’s opinion of a company’s business practices and can have a significant impact on the business’ reputation, brand, and financial performance. An ESG policy provides a framework to manage and measure sustainability initiatives, which can lead to a more favorable opinion from the public.
Steps to Create an ESG Policy
The development of an ESG policy does not have to be an overwhelming endeavor. Begin by developing an ESG implementation plan that includes summary statements about the company’s commitment to responsible environmental, social and corporate governance practices. The plan outline should also include a list of the types of actions the company will take to achieve its ESG goals, as well as the metrics and reporting mechanisms used to measure progress. A successful ESG policy will articulate the company’s approach to identifying, assessing, and managing ESG risks, as well as how it will engage with stakeholders to address any issues. Additionally, an ESG policy should provide a framework for how to integrate ESG into core business activities.
In planning and implementing an effective ESG policy, companies should:
• Set attainable goals and objectives — and develop policies to ensure that the goals can be met. Aggressive goals that look good on paper are not helpful in the long run if the company cannot meet them.
• Think long-term, but plan in shorter phases. Taking many small steps over the course of the medium-to-long term will make implementing ESG more feasible.
• Consider what your company is already doing that satisfies aspects of ESG. Generally, mine operators are required to develop reclamation plans in connection with their mine permits. Can some of the information in those plans provide the framework for ESG environmental goal and progress measurements? You can also consider the employment policies your company already has, such as diversity and inclusion programs. If you are already addressing non-discriminatory hiring and employment practices, you have the beginning of the “social” aspect of an ESG policy.
• Decide up front to make ESG part of future operational and business planning. This will make implementation of ESG concepts easier going forward if they are naturally part of expansion discussions.
It’s time to embrace the reality that ESG will soon be part of “business as usual.” The trends all suggest that ESG will continue to have a larger impact on day-to-day operations. The sooner a company begins addressing ESG, the better prepared it will be for the future.
Botts, Jr. is a partner at Stinson LLP. His practice focuses on business transactions and regulatory compliance and he is a member of the firm’s Energy, Environmental, Mining and Transportation Practice Division. He can be reached at robert.botts@stinson.com. Gilmer is a partner at Stinson LLP. His practice focuses on litigation and regulatory compliance. He can be reached at zane.gilmer@stinson.com. Selena is an attorney at Stinson LLP. Her practice focuses of business transactions, regulatory compliance, and corporate governance. Samale can be reached at selena.samale@stinson.com.
