Mining companies need to start thinking seriously about ESG — opinion

The introduction of new, tougher standards together with recent case law, point to a harsher, less forgiving approach to enforcement and larger fines for regulatory non-compliance and failings in relation to environmental and social governance.

European law firm Fieldfisher has observed a notable uptick in enquiries from mining clients on how to comply with increasingly strict standards on environmental and social governance (ESG).

However, many companies still fail to obtain legal advice on their obligations.

Regulatory non-compliance and perceived failures to implement and uphold ethical practices have led to a spate of litigation on ESG-related matters against mining companies, particularly on health and safety and environmental issues.

Activist shareholders staging protests at AGMs and other company meetings has also become a real concern for mining businesses.

Extractives companies are facing sharper scrutiny of the way they handle various environmental issues and social concerns, such as the rights of indigenous people, health and safety, security and workforce rights.

Since February 2017, when the London Stock Exchange launched its first “guidance for issuers on the integration of ESG into investor reporting and communication”, anecdotal evidence suggests the number of London-listed mining clients seeking legal advice has increased, but not commensurately with the volume of new regulations and guidelines that have been introduced in the UK and internationally.

Extractives companies are facing sharper scrutiny of the way they handle various environmental issues, including pollution, tailings management, habitat protection and site remediation; and social concerns, such as the rights of indigenous people, health and safety, security and workforce rights.

The growing emphasis on ethics and sustainability is being driven by customers, investors, regulators and industry initiatives – as well as a genuine desire among some companies to conduct their operations in a sustainable way.

Legal and social expectations

In addition to the LSE's ESG guidance, which was last updated in January 2018, various influential international bodies have set, or are in the process of setting, standards that mining companies are now being held to.

Despite some lingering uncertainty around the application of the US Conflict Minerals Rule, which was brought in as a consequence of the 2010 Dodd-Frank Wall Street reform law, many large companies have anticipated its implementation and started consistently reporting and conducting due diligence on the use and provenance of 3TG (tantalum, tin, tungsten and gold) and derivatives in their products.

Some 3TG miners will soon face similar compliance obligations under the EU Conflict Minerals Regulation, which takes effect from 1 January 2021.

In June 2018 the World Gold Council began consulting on its Responsible Gold Mining Principles, which aim to set clear expectations for investors, downstream gold supply chain participants and other stakeholders as to what constitutes responsible gold mining.

The London Metals Exchange has joined other exchanges in becoming an advocate for ESG reporting and is poised to roll out responsible sourcing protocols developed in conjunction with market participants – the first of which are due to become mandatory by the end of 2022.

Other bodies, including the Global Battery Alliance, launched in 2017 by the World Economic Forum, aim to galvanize and coordinate the international community’s efforts to accelerate movement towards socially responsible, environmentally sustainable activities in high-risk value chains.

The International Council on Mining and Metals (ICMM) is also developing ESG performance requirements

Commenting on this trend towards more robust ESG in the mining sector, Fieldfisher’s head of mining, Jonathan Brooks, said:

While in the past, ESG was seen as a concern reserved for mid-to-large cap mining companies, there has been a noticeable trickle-down effect in the last two years to the small-cap and junior end of the market.

"These companies need to sit up and take notice, not just to be compliant, but to unlock the benefits that come from implementing ethical and sustainable business practices.

Risk-averse lenders have started to warm to the more responsible image of the mining industry and moves to share the profits of resource exploitation more equitably between key stakeholders have been met with approval by most lenders.

Demonstrating good ESG is increasingly seen as vital to securing investment in mining projects – particularly traditional equity financing from public markets and alternative financing from offtakers, private equity and multilateral and bilateral financial institutions and contractors."

Fieldfisher mining lawyers and guest speakers from the World Gold Council and Thor Explorations will be discussing the trend towards more rigorous ESG practices at its Africa Week Mining Lunch, which is being held at its London office, Riverbank House, 2 Swan Lane, EC4R 3TT on Wednesday 5 June 2019. If you are interested in attending, please contact [email protected] for more information.