FS Sustainability | ESG Feature | Mining the decarbonised future

MINING THE DECARBONISED FUTURE It’s the ultimate catch-22: investing in mining can be seen as exacerbating global warming, but it is also necessary to extract the commodities to build out renewable energy systems and a clean future. Rachel Alembakis explores how institutional investors strike the right balance.

2

Feature | Investment

T

www.fssustainability.com.au September | 2022

01: Daniela Jaramillo

02: Debbie Smith

03: Richard Glass

director of sustainable investing Fidelity International

national mining leader PwC

head of investor relations IGO

he mining and extraction sector have a spotlight position in the push to decarbonise the global economy with the aim of containing global warming to 1.5 degrees. This focus presents the mining industry with both challenges and opportunities, because even as the world moves to wean itself off fossil fuel, the mining sector provide the commodities that form the base for renewable and clean energy production and transmission.

As companies seek to take advantage of these changing trends, they are exposed to both environmental and social risk that can either jeopardise their social licence to operate or bolster their credentials to operate. Investors are actively engaging with the mining and extraction companies in their portfolios on a range of environmental and social issues, including decarbonisation and companies own operations and net zero targets, and also community engagement and engagement with First Nations peoples, occupational health and safety across physical and psychological factors, human capital management including diversity and inclusion, and social licence to operate.

Fidelity International recently published a paper, The decarbonisation and mining paradox, which identifies environmental and social risks challenging the mining sector in delivering the commodities that will support the transition to a net zero future and the role that investors play as stewards on behalf of their clients and beneficiaries.

To meet the challenge of transitioning to a low carbon global future, there will be strong demand for the commodities that will build the infrastructure of electrification.

In PwC’s recent Mine 2022 report, the management consultant said demand for copper, lithium, nickel, graphite, and cobalt is expected to increase by up to six times by 2040.

According to Mine 2022, revenue rose by 32% from 2020 to 2021, among the top 40 miners globally, and net profit soared by 127% “on the back of high commodity prices and prudent cost management.”

From Fidelity’s perspective, the environmental opportunities are tied to managing social license to operate, which director of sustainable investing Daniela Jaramillo 01 identifies as one of the industry’s biggest risks.

“One of the biggest obstacles that faces the mining industry is losing or being at risk of losing their social licence to operate,” Jaramillo says.

“We need the industry to keep on extracting responsibly for us to decarbonise but decarbonising responsibly and in a sustainable way is a complex task for the sector.”

Australia has strong deposits of many of those critical minerals and leveraging strong performance on ESG factors will be strategi-

Delivering net zero within mining operations

cally important to investors and to customers, notes PwC national mining leader Debbie Smith02 .

“We obviously are very resource-rich in those commodities that relate to the electrification of everything, and we have a very good and very long track record in mining, and when it comes to ESG, which is going to be increasingly important, the prominence of these metals is going to be increasingly important as well as the human rights record and occupational health and safety,” Smith says.

Meeting demand for critical minerals However, meeting that increased demand while also meeting obligations on environmental grounds from government, regulators, investors, and other stakeholders means that miners could face extra risk.

“On the risk side, the supply and demand will be choppy, and they will not always come together at the right time, as you might imagine,” Smith says.

“Getting the supply into the market at the right time will be a risk and obviously because of our strong focus on environment, etc., making sure we have the right policy settings so that we can accelerate development and still be mindful of all the protections that you need to have to in place for community and broader stakeholders.”

For miner IGO, increasing its exposure to nickel and lithium while divesting from a gold mine was a strategic move on several fronts, says head of investor relations Richard Glass 03 .

“Our board and senior management identified the trend toward electrification and IGO’s ability to transition the business in that direction” Glass says.

“We then engaged with our people and what they said to us was that historically the mining industry has a bad rap – it was seen as destructive, environmentally degrading.

“But people want to wake up and go to work for an extractive business like IGO and do something that makes a difference to deliver a greener planet. The mining industry is a key part of the decarbonisation solution.”

This led to the board and senior management identifying the trend of electrification and IGO’s ability to more in that direction, he says.

“Without the raw materials to build batteries and storage systems to regulate power, you can’t achieve decarbonisation,” he said.

“From an external stakeholder perspective and talking to the community more broadly, undoubtedly, most of the population is concerned about climate change. For us, we believe that how we do things is as important as what we do, and by doing the right thing and demonstrating shared value, we keep communities and public on our side.”

We need the industry to keep on extracting responsibly for us to decarbonise but decarbonising responsibly and in a sustainable way is a complex task for the sector.

Daniela Jaramillo

Net zero targets are increasingly commonplace for ASX-listed companies, and when it comes to decarbonisation of operations in the mining sector as well the broader markets, investors are asking for near-term commitments, notes Australian Council of Superannuation Investors (ACSI) executive manager, governance, engagement and policy Ed John04 .

“The key issue is that investors need to see more detail on transition plans,” John says.

“The conversation and focus have shifted to actually, what are the short- and medium-term goals to achieve those and how do the targets work and how does scenario analysis work, are people stress testing to 1.5 degrees rather than higher warming scenarios.”

Increasingly, investors and other stakeholders are also talking to mining companies about how their customers are using their commodities, bringing Scope 3 emissions ot the conversation. This is often a talking point in collaborative engagement meetings, John notes.

“One of the changes of mindset is working across industries and also working with customers to ensure the sustainability over time, rather than seeing Scope 3 as something that is totally outside your control, companies should be thinking about how to work with customers and again support research and so on to actually address some of those downstream events,” he says.

IGO has announced the intention of being carbon neutral on Scope 1 and 2 emissions by 2035 and has adopted an internal carbon price of A$60/t to inform carbon reduction programs such as a 10 MWh battery energy storage system at Nova nickel mine’s solar farm.

Social issues come to the fore The social side increasingly matters as well, in terms of engaging with Indigenous Australians that own land with deposits of these minerals, in terms of maintaining strong relationships with broader communities and in terms of recruiting and retaining workers to guide this increased demand.

Rio Tinto’s destruction of heritage sites at Jukaan Gorge in 2020 looms large in these conversations, as does the February 2022 findings of an external review of Rio Tinto’s workplace culture which revealed “disturbing findings of bullying, sexual harassment, racism and other forms of discrimination.”

Investors deeply consider these risks because of their obligation to provide retirement savings for their members.

“Poor corporate governance and business practices like climate inaction, sexual harassment and cultural heritage mismanagement represent clear financial risks to investors and ultimately our members,” HESTA general man-

Investment | Feature

www.fssustainability.com.au September | 2022

04: Ed John

05: Kim Farrant

06: Liza McDonald

executive manager, governance, engagement and policy Australian Council of Superannuation Investors

general manager, responsible investment HESTA

head of responsible investments Aware Super

ager responsible investment Kim Farrant05 says.

“We saw the reputational damage that followed Rio Tinto’s destruction of priceless Aboriginal cultural heritage at Juukan Gorge, risking the company’s social licence to operate. Sexual harassment is another issue that can create legal and financial risks, impact employee wellbeing and productivity and cause reputational damage. “…The company, sector and system level risks that present when culture is not prioritised can have a negative impact on investment returns and the retirement savings for our members.”

HESTA has engaged with mining companies in their portfolio to understand how boards and senior management are considering workplace sexual harassment and cultural issues, including the steps they are taking to ensure high standards of workplace safety and employee wellbeing and Farrant says that those engagements will continue.

Aware Super also engages with the mining companies in its portfolio to minimise risk and enhance return.

“Over the past financial year, we’ve engaged directly with ASX-listed mining companies – along with companies in many other sectors – on issues including climate change, modern slavery, cultural heritage, culture and conduct, and equality, diversity and inclusion,” says Aware Super head of responsible investments Liza McDonald06 .

“Where we believe a company’s management of ESG issues does not meet industry standards or community expectations – or when the company’s conduct threatens its reputation and value – we work with the company to improve its ESG policies and practices. Engaging in this way enables us to increase the company’s ability to deliver sustainable longterm returns to our members.”

Role of active ownership Fidelity International also considers social license to operate as a key indicator in the mining sector, Jaramillo says.

“Our portfolio managers and our analysts are really thinking what are those metals that

have either a massive increase of demand due to decarbonisation, and where are those opportunities,” Jaramillo says.

“But at the same time, they need to ensure that those companies they are choosing are able to keep the local social licence to operate.

“There are companies that are doing this better, those that can get their permits, versus those that can’t fix community backlash and will not be able to move on with their project. Our question is, what are those minerals and metals required, where are they located, and which are the companies managing those risks better and particularly, that social licence with local communities.”

For Jaramillo, engaging with individual companies is one avenue to improve performance.

Engaging with issues at a systems level and advocating at the policy level are other levers.

“There is a lot of work at the policy making level,” she says.

“If we want to avoid a future Juukan Gorge, you need to not only engage with Rio Tinto, we need to make sure there are the right policies in place.”

Smith from PwC also sees a need for increased collaboration for the social licence to operate for the entire sector.

“I think you’re looking at a sector that has been highly competitive in the past … but I think there is definitely a need for stronger collaboration,” she says.

“You’re probably only as good as your weakest link – when you are an investor, or an off taker from Korea or Japan or the US, you’re not looking at the individual company at first pass you’re looking at the industry in Australia.

“It’s only then that you’ve got through the first screen that you’re looking at individual companies. There does need to be much stronger collaboration, and I think it’s starting to happen and what you saw probably one of the motivations for Rio doing what it did was to lead and get the conversation started.”

Investors are also engaging with IGO on issues including protection of cultural heritage of Indigenous Australians, community engagement, culture and occupational health and safety, Glass explains.

It’s about demonstrating to investors that we’ve thought about the material issues, we’ve addressed them, and we’ve built our response to them into the business.

Richard Glass

3

“More and more, investors want to see ESG embedded in remuneration benchmarks and incentive programs, so that obviously incentivises management to drive change,” he says.

“I think just generally, for companies to be considered investable by institutional funds, you have to have a credible ESG strategy in place, and at IGO, we’re proud of our position along the sustainability journey. It’s about demonstrating to investors that we’ve thought about the material issues, we’ve addressed them, and we’ve built our response to them into the business.”

There is also a role for investors to play at a policymaking level on broad environmental and social standards. Jaramillo points to initiatives like the Australian Sustainable Finance Institute, which is developing an industry-led taxonomy for green finance.

“That engagement at the policymaking level is really important,” she says.

“There is also work with [the Australian Sustainable Finance Institute], for example with the taxonomy, how do we define what’s green and what’s not green?

“It’s important that we recognise where green technologies like renewable energy come from, what are key inputs to it. How we define these things can help the industry position itself and define its very important role in decarbonisation. Recognising its role in decarbonisation can help the reputation of the industry, which in turn helps mining companies attract the best talent, enhancing its ability to operate sustainably and responsibly.”

As existing and emerging miners respond to increased demand for minerals and rare earths through the demand of decarbonisation, there will be increased environmental and social factors that they will have to respond to and manage positively to obtain the permits and community permission they need to operate, and it is not an either/or.

“You can’t tick a box on ESG,” Jaramillo adds.

“There’s not one ESG box, so you can’t tick the E box and untick the S box. That’s something that I think we need to recognise and acknowledge.” fs