How miners can pass their ESG exams

As many miners will testify, there has been a rather burdensome focus on ESG data and disclosure in recent years. They must navigate multiple, and sometimes conflicting, disclosure frameworks accompanied by an alphabet soup of acronyms and needless jargon.

Miners, especially those with operations in more than one jurisdiction, must report under multiple frameworks to satisfy heightened and more stringent reporting regulations. Accurate and verifiable data are required to support their corporate sustainability claims, prove they are taking tangible steps toward their targets, and avoid accusations of ‘greenwashing’ or ‘greenhushing.’

The demand for timelier and detailed ESG data is resource-intensive and many miners simply aren’t focused on what counts. Their internal ESG professionals — passionate, engaged people committed to making a difference — are increasingly incentivized to focus on data collation and completing humdrum ESG questionnaires that magically produce an ESG score.

No wonder it feels like ESG disclosure and getting a rating has become the “exam-passing” hurdle for sustainability in our industry.So perhaps we need to pause and ask whether all this data drives improved ESG performance or progress on mine sites.

ESG data and disclosure are not discretionary and are critically important, but only to a certain level of detail. Ultimately, number-crunching becomes purely accounting and has little to do with authentic ESG performance, especially in the mining industry. For many miners, especially juniors, there is an unavoidable labour trade-off between gathering ESG data and being able to act on it.

Increasingly, scarce resources are being poorly spent on inconsequential data-chasing exercises or wearying debates over the optimum way to slice and dice the ESG data that does not result in better performance or outcomes on mine sites.

More granular ESG data, analysis and disclosure will likely fail to create the desired change for our industry or increase societal trust, even becoming counterproductive: If we’re ending the freefall part of a skydive, we should be trying to pull the ripcord for the parachute, not studying our altimeter and figuring out whether we’re going 100 or 120 miles an hour.

Inscrutable ratings

Wishful beliefs contend that strong ESG ratings can somehow miraculously help miners develop both “brand” awareness and build confidence with different stakeholder groups, even helping secure a social licence to operate. Although there is growing integration of ESG data into the decision-making processes of conventional investors, many are still struggling to approach ESG as a strategic value driver, instead treating it as a reporting, compliance, and marketing issue.

Their continued reliance on relatively shallow, incomplete, and one-dimensional ESG data provides limited insight into a miner’s real ESG strategy, risks, impacts or opportunities, primarily due to a lack of contextualization and informed analysis. Often investors do not get the whole story, especially when they rely on inscrutable ESG ratings that are data-driven or derived by overlaying qualitative factors – and where there is still no single source of truth given the huge biases and inconsistencies of the ESG rating agencies’ approaches and scores. ESG is not a competitive sport where the score is the only thing that matters.

The simple fact is that bona fide ESG comparability is unattainable in our industry without proper context and narrative, to facilitate more meaningful interpretation and make educated decisions about investments and capital allocation. There is no shortcut, and it is nonsensical to have some random standardized criteria to be judged against and then awarded a score.

It is not a beauty pageant. To get such a complete picture requires one to gain first-hand insights into a company’s ESG culture, strategy, risks, operational practices, and jurisdictional context from mine sites to the corporate office.

ESG data is not an end in itself, it is simply a tool to help us deliver on sustainability objectives. It needs to be examined:
Is complete, reliable, and verifiable ESG data truly available from mine sites and corporate offices?
Do miners have consistent measurement methodologies, uniform conventions and accepted definitions that are customary in the finance world?
How often do miners rely on proxies instead of actual site-sourced ESG data?
What does the disclosed ESG data and actual data tell analysts, and do they genuinely care?
How do investors ensure the long-term viability of their assets, rather than focusing on short-term value extraction?
Do we know the right ESG data to evaluate company performance or determine what long-term positive impact miners make?

If the answers to some of these questions lead us to stop and ponder, then could we perhaps be making erroneous choices, adopting a haphazard approach, or overlooking vital elements of what ESG really is?

The award-winning business journalist Simon Caulkin summed up the work of academic V.F. Ridgway as: “What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organization to do so.”

While miners continue to be scrutinized and try to steer themselves based on more and more ESG data, compete for higher ESG ratings, and achieve some predefined targets, their actual ESG performance increasingly misses the mark. The reality is that even if something is measured, it only really is acted upon if the output is deemed important – which historically has seldom been the case with ESG.

The ESG landscape is dynamic and evolving, and efficient ESG data management and reporting are struggling to keep pace. In addition, many ESG-related issues are recondite, abstract, and difficult to quantify, especially many social and governance aspects. For instance, it is easy to brag about a “social licence” in an annual sustainability report full of deftly written text and photos of community faces, but who defines it and how does one measure it?

So arbitrarily attaching a score to many ESG issues is essentially just an opinion that in reality is neither meaningful nor consequential. As the eminent sociologist William Bruce Cameron profoundly stated, “Not everything that counts can be counted, and not everything that can be counted counts,” which should be a reminder to us all.

Where data falls short

Based on such arguments, it is clear that enhancing existing ESG data practices is necessary, but it is not the sole solution for several reasons. First, ESG data is patchy and typically fails to establish boundaries or thresholds, thus allowing compensation for sub-standard behaviour. Aggregated ESG scores offer an incomplete and obfuscating narrative, as it is possible to offset poor site biodiversity performance with commendable social or corporate governance practices. Even worse, we may tolerate ESG risks deemed not “financially material.”

Focusing solely on such an economic stance and neglecting ethics will not help build the elusive societal trust we so desire. Before each crisis, was cultural heritage financially material to Rio Tinto; tailings management financially material to Vale; sexism, racism, and harassment financially material to BHP; labour relations financially material to Newmont; or legacy issues and human rights financially material to Barrick? It is worth remembering that this term is from financial sector parlance and denotes issues that may not harm financial performance but can still be inherently undesirable.

Second, virtually all ESG data is retrospective, focusing on past ESG performance. This is akin to investing in a company solely based on historical production and financial results – a practice no savvy investor would endorse. Analysts typically extrapolate future return potential based on past performance.

But this is yet to become the norm with ESG data as it makes little sense to predict future contributions to a more sustainable world solely based on historical information. Third, and interconnected, much ESG data collated via questionnaires merely outlines relative performance compared to an often-nebulous benchmark. Essentially, this does not prove that a company is doing well but rather that it is doing less harm than some arbitrary and meaningless average.

Context-driven approach

If we aim to use ESG data to effectively safeguard actual performance rather than pursue scores, an innovative approach to data and associated decision intelligence and prescriptive analytics is required – to guide our industry towards where we need to be, not where we have been. If we want to gain a factual understanding of how miners are truly performing, we need to embrace a more context- and narrative-driven approach to ESG performance comparisons.

For some people, ESG data is kind of an end in itself – an effort to pass their “ESG exam.” They want miners to improve their ESG disclosure and scores as they equate this with becoming better companies. And if you are a financier, investor, ESG rating firm, listing agency or ESG data service provider this makes a degree of sense.

But for those in the trenches, ESG data and subsequent disclosure are just the byproducts of a wholesome ESG approach. ESG data is pointless without ESG leadership competence, industry knowledge and wisdom to provide the indispensable narrative and help bridge the gap between knowing what to do and making it happen.

The irrefutable fact is that company culture trumps everything, and there must be a fit-for-purpose ESG strategy and an appropriate internal governance structure to deliver effectively. This may seem rather obvious, but because fundamental concepts behind genuine ESG performance are still new to some, coupled with the increasing compliance nature of ESG disclosure requirements, companies tend to take a laggard approach and do the minimum.

Conversely, leading miners determine how ESG can create and protect value and thereby future-proof the business. In the mining ESG world – culture, strategy, structure, and data are an inseparable and symbiotic foursome. To be credible and resilient, miners need all four, particularly if they are aiming to raise finance, secure permits, improve investors’ returns, or maintain their sought-after social licence to operate.

There is a positive feedback loop here and “doing ESG-by-numbers” — shortsightedly focusing on ESG data and vanity scores — is simply letting the tail wag the dog.

Kevin PCJ D’Souza is a mining ESG executive and advisor with more than 30 years of experience in the industry. He has worked in more than 50 countries. He can be reached at kevinpcjdsouza@gmail.com.