The ESG investing trend is akin to the ‘Wild West’ for the finance industry
Miners have been keeping their own ESG scorecards for years, but with increasing public, investor and end-user pressure on mining companies to be more transparent about environmental, social and governance performance, and to 'be better', greater consistency in ESG measurement is now in the spotlight.
Gus MacFarlane, VP of Verisk Maplecroft in Calgary, Canada, said at PDAC mining clients were concerned about the type of data investors were relying on to inform investment decisions.
Different measurement methodologies, and ESG standards, produced divergent results, he said.
"It's essentially a Wild West out there at the moment.
"The rapid onset of market tension has created a demand for greater data standardisation, considering ESG scorecards still draw on fragmented data supplies.
"For instance, two identical mines in contrasting locales with the same water use should have entirely different ESG scores. A mine in the Atacama Desert of Chile, where there is acute water shortage, compared with the same operation in Ghana, where there's an oversupply, don't have divergent outcomes according to most current models. ESG does not yet account for contextualised situations like these adequately and that is a major problem," MacFarlane said.
"ESG investing tends to over-rely on historical group-level data, with an over-focus on harm."
MacFarlane said incentives for miners to compile ESG report cards that kept the investment community happy "might compromise the logic of the exercise".
"These result in ESG outcomes that entail inefficient market data, assessment divergence, an obscuring of ESG impact risks, limited insight into net outcomes and an inability to anticipate major failures," he said.
There was no sign of a tailings dam burst, or the risks to people and property, in Vale's Brumadinho ESG reporting, for example.
"What other risks are there the data is not picking up?" MacFarlane said.
Verisk Maplecroft has been collaborating with Wood Mackenzie to develop a better ESG modelling method with greater focus on a company's management approach, outcomes and, critically, context.
"This is how we arrived at a holistic ESG assessment. It can offer investors greater richness of information in assessing companies along contextualised measures," MacFarlane said.
He said investors were increasingly asking for site-level, sub-national data, beyond a group-level view. "Group-level reporting is the norm, but it is slowly changing, since disclosure assessment frameworks focus on improved granularity.
"What's the middle ground between raw data and ESG ratings methodologies? The story still needs to be told," he said. "It's about going beyond the bilateral data exchange."
Major US investment group Blackrock, with US$7 trillion of assets under management, has accelerated ESG investing in mining, with significant implications for resource companies. To date, about 2,372 entities have signed on to the UN Principles for Responsible Investment, founded in 2006, representing $86 trillion of assets under management.
The PRI was the first real effort to create a strategy and principles to incorporate ESG factors into investment decisions and active ownership. At its core, it was meant to create an economically efficient, sustainable global financial system that could sustain long-term value creation, said Ani Markova, a director for both SilverCrest Metals and Golden Star Resources.
"Such a system could ultimately be rewarding in the long-term, fostering responsible investment trends for the benefit of greater society."
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