Digging into ESG risks reveals a different story for every mine

19-12-2013 | Engage | Michiel van Esch Corporate risk oversight is crucial to the mining industry. As local situations differ greatly, so do the risks that need to be mapped. There is therefore no standard solution to address ESG risks in this industry. As a result, engagement should focus on the risk oversight processes and policies rather than on the specific risks themselves.

Risk oversight of vital importance in the mining industry
Risk oversight is an important part of a company’s corporate governance. This is especially true for the mining sector, as mining activities can have a severe negative impact on employees, the environment and society at large. Compared to other sectors, work-related fatalities are high, and operations are predominantly located in relatively unstable emerging markets. As a result, a variety of stakeholders closely monitor the activities of mining companies.
Studying the risk landscape
Opening, exploiting and closing a mine each come with their own specific risks. Add to this the various types of mines and it is clear that the issue is complex. We therefore commissioned a study into therisk oversight practices of ten prominent mining companies. Although the results vary greatly, we found that the greatest room for improvement lies in linking how the company mitigates ESG risks to remuneration and the independence of their board members.

Engagement activities

In line with our findings, we selected the following areas for engagement:

• Improve risk oversight policy and governance
Criteria include the presence of experienced board members, a majority of independent board members and remuneration policies that are linked to mitigating key ESG risks.

• Improve risk oversight and management
Important parameters include a regular review of risks by the board, appropriate communication channels between management and the board, and a clear whistle blowing system.

• Improve risk management performance and monitoring
If companies have had serious ESG breaches over the last years, they should implement changes to their risk management systemto minimize the risk of reoccurrence.

In the second quarter of 2013, we started an engagement with ten companies, including companies like Grupo México, the third largest copper producer in the world, Glencore Xstrata, an Anglo-Swiss multinational commodities trading and mining company, and Anglo American, a British multinational mining company. To date, we have held conference calls with almost all of these companies on our three key engagement objectives. We expect this active dialogue last two to three years.

"Risks are not merely operational in nature;the local circumstances at mining sites are much more complex."

First observations
So far, we have found that some degree of responsibility for ESG risk management typically lies with the board, although prioritizationof risks differs from company to company. Workplace safety is usually high on the companies’ risk agenda, and ‘Safety first’ appears tobe most mining companies’ motto. Anglo American, for example, has an official safety and sustainability board committee. In addition, most companies are faced with environmental risks, such as the leakage of pollutants, and health risks. Other risks that most companies appear to have in common relate to labor relations, dealings with local communities and water management.

At first sight, there appears to be a standard list of ESG risks that are mostly related to daily mining operations. However, the situation turns out to be more complex. This became clear when we recently visited the Lonmin mine in Marikana, South Africa.

A visit to Lonmin mine : more than operational risks
In October, we joined other investors at the UN PRI conference in South Africa. Upon the invitation of South African asset manager Stanlib, we also visited a mine operated by Lonmin, a producer of platinum group metals operating in the Bushveld Complex in South Africa, where over 40 mine workers were killed during a strike last year. Although we are currently not in dialogue with the company, we seized the opportunity to learn from its experiences. Our trip revealed that risks are not merely operational in nature and that local circumstances at mining sites are much more complex.

"Identifying the relevant stakeholders and understanding the social ramifications are crucial to mapping the mining company’s ESG risks."

What struck us most is that the company had to run an entire community. At the mining site we visited, an entire village was at work, and this community was entirely geared toward the mining operation. Because the local authorities provide few essential public services, the company has had to step in to provide education, housing, medical care and safety. However, the company must also carefully manage the community’s expectations – particularly when its resources are limited – because it is faced with social risks that are much broader and more complex than operational risks.

Continuous learning
An important lesson we have learned is that risks must be assessed within the local context of a specific company or mine. There is no such thing as a standard list of ESG risks with standard solutions. Identifying the relevant stakeholders and understanding the social ramifications of a specific mining operation is crucial to mapping the mining company’s ESG risks. Given the variety of risks, rather than imposing a one-size-fits-all solution to ESG risks, our engagement with mining companies seeks to add value by focusing on how the company’s risk oversight has been organized. Companies should have a meaningful process in place for improving their ability to identify and mitigate risks, involve stakeholders on a regular basis, and continuously learn from incidents. 

michiel-van-eschMichiel van Esch
Engagement Specialist RobecoSAM Governance & Active Ownership