Mining companies must overcome environmental and social issues to convince investors of their role in a sustainable future.
To build a sustainable and net zero world, we need the right materials. Many of them, like graphite for solar panels, are underground, which is why the mining sector will play a crucial part in the transition to net zero greenhouse gas (GHG) emissions.
“From steel for wind turbines to lithium and cobalt in electric vehicles (EVs), without mining we won’t be able to scale up renewable capacity,” says Harry Ashman, Vice President of Responsible Investment at BMO Global Asset Management (GAM).
A World Bank report estimated the production of minerals like graphite will increase by nearly 500% by 2050 – the equivalent of nearly three billion tonnes – to meet growing demand for clean energy technologies and energy storage solutions. With governments around the world committing to the phasing out of coal and exploring alternatives, mining companies that aren’t shifting from coal to sustainable materials are already behind the curve, experts warn.
But there are a whole host of environmental and social issues the industry has to contend with. Continued controversies surrounding health and safety, land rights and toxic waste plague the sector, even as a number of companies begin to make progress.
“How do we increase production of these vital transition metals without causing irreparable damage to ecosystems and communities?” Ashman asks.
Leaders and laggards alike face mounting pressure from NGOs, policymakers and investors to do better.
Prior to the COP26 summit, 141 signatories from human rights and environmental organisations sent a declaration to climate negotiators. They called for legally binding regulations to protect human rights, the environment and sacred sites, and the introduction of mandatory independent third-party verification of compliance, such as the Initiative for Responsible Mining Assurance’s standard.
Investor-led engagement with the sector is crucial.
“We want to engage with the reality of mining and the world’s existing demands for metals and minerals to help companies move towards sustainable improvements,” says Adam Matthews, Chief Responsible Investment Officer for the Church of England (CoE) Pensions Board.
It’s going to be an uphill battle for the sector to earn the trust of the public and domestic governments as it stamps out social and environmental malpractice, but investors believe seeds have been planted for positive and sustainable development.
A hole lot of trouble
“Enough of burning and drilling and mining our way deeper. We are digging our own graves,” was the stark warning delivered by UN Secretary General António Guterres during his opening address at COP26, as he called for more a more urgent transition away from fossil fuels.
The mining industry contributes to at least 10% of global anthropogenic (human-influenced) annual emissions, research by the United Nations Environment Programme has highlighted.
Yet over three-quarters of the world’s major metal and mining firms are falling short of the emissions cuts needed to limit global warming to 2°C by 2050, a Bloomberg Intelligence report previously found. Only 11 of 46 companies, including Anglo American and Newmont, had set the necessary targets. Australia-based Fortescue Metals was the only mining company assessed that had pledged to be carbon neutral by 2030.
“Over time, parts of mining – such as the vehicles and systems in place – can feasibly become net zero, so the overall carbon footprint of these companies will inevitably reduce,” says Neville White, Head of Responsible Investment and Policy at EdenTree Investment Management. “But the overall environmental risks posed by mining aren’t going to disappear. Mining is fundamentally invasive, clearing huge areas of land to dig big holes in the ground.”
EdenTree hasn’t identified a mining company that meets its environmental and social standards, White tells ESG Investor. Instead, the asset manager looks to invest capital in companies offering innovative solutions around recycling mining waste.
Members of the International Council on Mining and Metals (ICMM) have committed to net zero direct and indirect emissions by 2050 or sooner, and will report annually on their decarbonisation progress. Specific targets for Scope 3 emissions should be set by the end of 2023 at the latest.
As White notes, mining contributes to a plethora of other environmental risks, including deforestation, erosion, contamination and alteration of soil profiles and water pollution.
The 2015 collapse of Samarco’s Fundao tailings dam in Brazil led to a torrent of more than 40 million litres of waste filtering into the Doce river and ending up in the Atlantic Ocean over 400 miles away.
In 2018, mining and commodities giant Glencore was subject to censure following a toxic wastewater spill in southern Chad. Dozens of villagers – many of whom were children – suffered severe burns, lesions and sickness when they came into contact with the contaminated water. Livestock drinking from infected water sources were also killed.
As heavy emitters, a number of the world’s largest mining companies are on the radar of investor-led engagement initiatives like Climate Action 100+ (CA100+). Investor members ask some of the most environmentally damaging companies to make net zero commitments and install credible transition strategies.
China Shenhua is subject to CA100+ engagement co-led by BMO GAM. The company is on the lower end of the spectrum, having so far failed to meet any of the criteria. In comparison, BHP is making much more progress, including publishing its climate transition action plan last year, which meets CA100+’s medium- and long-term decarbonisation criteria.
Stewardship service provider EOS at Federated Hermes has been engaging with BHP on fresh water extraction on behalf of institutional investors since 2015, citing concerns around the increasing risk of water scarcity caused by climate change.
BHP published its first enhanced water report in 2018, outlining the company’s performance and risks at an individual asset level. The firm is currently approaching the end of its five-year target to reduce fresh water withdrawal by 15%, with plans to report on its progress at the end of 2022.
Under the surface
Alongside its poor environmental record, mining also needs to shake off its sullied reputation on social issues. Local communities and workers are subject to a number of risks.
Most notably, health and safety has been a priority area of engagement for investors. Last month, BHP was fined A$125,000 when a worker was struck in the neck by a metal shard during routine maintenance work. In Siberia last year, an explosion 250 metres underground in the Listvyazhnaya coal mine led to 75 miners becoming trapped, with many left seriously injured. Further, prolonged exposure to toxic pollution has been found to cause birth defects in the children of cobalt and copper miners in the Democratic Republic of Congo (DRC).
There are potential solutions companies are considering as technology evolves, such as installing robots in mines.
While such solutions solve one problem, they may contribute to another, Matthews points out. “At one level, automation will greatly reduce health and safety risks for workers, but it also means these companies would be replacing their human workplace, which isn’t ensuring a just transition,” he says.
The 2019 Brumadinho tailings dam disaster in Brazil prompted the CoE Pensions Board and Council on Ethics of the Swedish National Pension Funds to take unusually proactive steps to prevent a recurrence. Backed by investors with over US$20 trillion in assets under management, members of their Investor Mining and Tailings Safety Initiative have committed to measures to improve safety in the mining sector.
“When one company screws up it can impact the reputation of the whole mining sector – therefore, investors need to help level the whole sector by introducing best practice standards,” says Matthews.
To date, 79 companies have pledged to implement the initiative’s Global Industry Standard on Tailings Management, including BHP, Anglo American, Rio Tinto and Glencore. The CoE Pensions Board will be voting against the chairs of boards at mining companies that have not implemented the standard, Matthews says.
“We are in the process of developing a 2030 investor agenda for the mining sector that will address a number of issues, which will be published in due course,” he adds.
Investors should also look beyond health and safety, says Nabylah Abo Dehman, Head of Stewardship, Social Issues and Human Rights at the UN-convened Principles for Responsible Investment (PRI).
Rio Tinto recently commissioned an external review by Australian Sex Discrimination Commissioner Elizabeth Broderick of its workplace culture. Published this week, the report highlighted a number of incidents involving bullying, sexual harassment and racism disclosed by employees. The company has since announced it will be implementing all 26 recommendations made by Broderick to improve workplace culture and safety.
“Human trafficking and exploitation – including the possibility of sex trafficking, can also be a risk around mining camps because of the transitory nature of the workforce and isolation of the worksites,” says Abo Dehman.
Mining companies can also have a negative social impact on local communities surrounding their operations by infringing on land rights.
Rio Tinto destroyed a 46,000-year-old Aboriginal cave system in Australia as part of an iron ore exploration project. The Juukan Gorge caves in Pilbara contained evidence of human habitation as far back as the last Ice Age; a parliamentary inquiry concluded that the company had been aware of the historical significance beforehand.
The ICMM has published guidance outlining how members should manage mining-related activities that occur on or near traditional indigenous lands and territories, including examples of how to build engagement capacity and “negotiate in good faith”.
South Africa-based Coronation Fund Managers tracks investee companies’ community investments on an annual basis to analyse the degree to which they are financially contributing to and supporting villages and towns around which they operate, says Neville Chester, Portfolio Manager at the firm.
“We have found that most miners have stepped up their levels of community involvement in recent years to make meaningful and sustainable investments in the surrounding communities. This is particularly important, given the finite life of a mine and the need to sustain communities beyond a mine’s end of life,” he notes.
Unearthing new possibilities
While the social and environmental challenges of the mining industry can sometimes seem insurmountable, there is evidence that companies are beginning to pave a path to sustainability.
“Given the intense focus on this area by the public in general, we find that major mining companies are some of the most ESG-aware companies we deal with,” says Chester.
For example, Anglo American is investing in technologies that will improve the efficiency of its existing mining practices, delivering at least 30% reductions in water, energy and capital intensity while producing less waste.
Currently, the company loses between 10-15% of coarse particles during the mining process. To improve its coarse particle recovery and overall mining efficiency, Anglo American has found that crushing ore particles so they are 2.5 times larger leads to a 20% increase in throughput and an 85% increase in water recovery.
As well as improving its emissions – for example, by purchasing EVs – Fortescue Metals is also investing in sustainable technologies, having established subsidiary Fortescue Future Industries (FFI) to develop hydrogen-based energy solutions. FFI today announced A$1.8 million investment (a 20% stake) in Sparc Hydrogen, a company with an exclusive licence to develop and commercialise green hydrogen technology created by the University of Adelaide and Flinders University.
Companies are also looking to improve the visibility of their sustainability-aligned reporting. Some, like Glencore, are producing annual Task Force on Climate-related Financial Disclosure-aligned reports. Others, like Capella Minerals, are partnering with ESG disclosure platforms to better align with international best practice across social and environmental factors.
Miners are also capitalising on increased demand for sustainable materials. Last year, Glencore announced a long-term partnership with Britishvolt, a UK-based investor in lithium-ion battery cell technologies. Glencore will be supplying responsibly sourced cobalt.
Mining companies are also building their in-house ESG capabilities and resources, both independently and collaboratively. Scandinavian Akobo Minerals recently appointed a Head of ESG to advise the company’s ESG integration efforts. In 2020, US miners trade group, the National Mining Association, launched a task force headed by CEOs to help companies collaborate with one another as they work to improve their ESG-related performance.
“I am seeing deep commitment amongst many mining professionals to drive innovations and best practice,” Matthews says. “But good practice can’t just be demonstrated by a handful of companies – the whole industry needs to be moving towards the same future.”