Incredible alignment of investors, governments and society on ESG issues
We are witnessing an incredible alignment of investors, governments and society on environmental, social and corporate governance (ESG) issues.
Asset owners with a combined $103 trillion in assets under management have already committed to the Principles of Responsible Investment, requiring them to integrate ESG into all their investment decisions. At the same time, more than 35 international ESG reporting standards and frameworks have come into existence. And all the while, communities and NGOs are placing increasing pressure on investors and regulators to up the ante on corporations on matters of ESG performance.
For companies in the mining sector, ESG reporting has gone from being an issue few ever had to worry about to something that is fundamental to their very existence. To get access to much-needed capital, mining companies – and particularly the juniors that are most in need of funds – must demonstrate their ESG credentials. But in order to achieve this, these juniors must spend up to $150,000 to navigate the morass of ESG standards.
This places even the most well-intentioned junior miner in a catch-22 situation.
Current ESG reporting regime is a mess
The increasingly complex state of ESG standards is beginning to resemble the complex reporting regime for publicly listed companies in my native Canada.
When a company lists in Canada, they must deal with the various rules of three federal securities regulators and agencies and 13 separate provincial and territorial securities regulators, in addition to the Anti-Money Laundering agency and the Canada Revenue Agency. These groups all have their own rules, many of which overlap, generating huge costs for the companies which must comply with these rules.
Even when the province- and territory-level regulators pass the same rule – a process known in Canada as a National Instrument - this does not necessarily mean all 13 jurisdictions end up on the same page. Often, all the National Instrument does is just list all the differences in one place.
When the different bodies are pressured into coming up with common rules, usually due to pressure from above, the one that inevitably gets selected is what I refer to as the ‘slowest common denominator’ – the proposal of the most intransigent agency in the group.
Junior companies being hit from both sides
What benefit do Canadian publicly listed companies or the Canadian investing public get from having to navigate all these overlapping rules? None. The same problem exists for companies in the mining sector that have to navigate dozens of overlapping ESG standards.
Most mining companies want to do the right thing and disclose their environmental, social and governance credentials. But with 35 international standards and counting, ESG reporting has become a somewhat punitive environment– particularly for the juniors that can ill afford to bear the costs.
It was hoped that the various bodies responsible for these standards – which include the Global Reporting Initiative, Sustainability Accounting Standards Board, CDP Disclosure Insight Action, and Climate Disclosure Standards Board, to name just a few – would begin to merge or consolidate standards out of a recognition that no company could possibly align with all of them. However, this hoped-for consolidation has yet to occur.
To further complicate matters, what was ethically correct yesterday is not necessarily the same today. For example, until a couple of months ago there was a trend toward divestment from defence companies. But thanks to Russia’s invasion of Ukraine, many investors have now come around to the position that investment in defence companies is warranted to that countries may defend themselves – and that measures should be put in place to ensure that defence companies with sound practices get access to capital.
Investors are the target audience for ESG disclosure
What the admittedly well-intentioned creators of the various ESG standards appears to have forgotten is that the primary reason for the existence of their standards is to give information to large institutional investors.
The trillions of dollars in institutional investment dollars to the mining and resources sector will ultimately drive what companies in the sector will need to report on. Therefore, it is the large institutions who will decide which criteria they use to assess how they invest, and it is their assessment of each company that will ultimate determine who gets the money.
That is why our ESG reporting software aggregates all the scoring and provides small-, mid-, and large-cap resource and other industry companies with 'reference ranges' so they can immediately manage their outcomes. Our customers know what's about to hit them well before they publish and are able to show real metrics, not just grand statements on a 150-page report with lots of verbiage and pictures but no material-based metrics to back it up.
At the end of the day, ESG is not only about good corporate citizenship. It is about getting access to alternative sources of capital. If you are able to clearly and properly disclose your ESG performance to investors, you will get access to funds.