This amorphous term ESG encompasses a wide spectrum of information and considerations but is so often assumed to mean something it does not. To paint a better picture of what the term ESG actually means, each month we will be outlining examples of what ESG integration looks like in practice across a variety of sectors, through the lenses of risk, opportunity, and impact.
This month
- Sector: Materials
- Industry: Metals & Mining
- ESG Issue: License to Operate
Risk: Operating without FPIC
The global mining industry is one of the world’s largest and most visible industries, with over $2 trillion in annual revenue. But its sheer size and its enormous environmental, economic, and social impacts from its operational footprint also raise unique challenges.i
In some jurisdictions where mines operate, the right to self-determination for indigenous groups is protected under Free, Prior, and Informed Consent (FPIC), a concept formalized by the United Nations and the International Labor Organization, and codified by a number of sovereigns and entities, including the World Bank and across Bolivia. In locations where codified, FPIC requires developers to involve local indigenous groups prior to development, ultimately granting the local groups veto power. While this veto power creates a potential risk for developers who invest in pre-development, like exploration and feasibility studies, a lack of formalized or codified FPIC can create even riskier scenarios for companies down the line.
Mining companies today often have global, multinational operations, with extractive operations typically occurring in underdeveloped nations. The location of a mine can leave the company that operates it susceptible to operational delays, lower productivity, and, even in some cases, violence. Mining sites severely alter the natural landscape and access to resources, which can be highly disruptive to local communities. Not surprisingly, community opposition is common in the development and expansion of these sites, leading in some instances to protests and obstructions. In Peru, the world’s second largest copper producer, indigenous communities have increased their demand for greater benefits for the exploitation of resources, creating blockades on roads and mining areas.ii iii MMG Ltd.’s Las Bambas copper mine in Peru has lost hundreds of transport days since operations began in 2016 due to sporadic protests along the road used to send semi-processed copper to port.iv
American company Freeport McMoRan and English-Australian company Rio Tinto operate the Grasberg mine, the world’s largest gold and copper mines, located in the Papua province of Indonesia. The mine is a major source of revenue for the Indonesian government and is heavily guarded by police, military, and private security personnel. Separatist groups in the country campaigning for West Papua independence have waged attacks on the mine for decades, on top of operational delays due to labor unrest and disputes with the Indonesian government over rights to operate.v
Mining operations can also be accident-prone, and weak oversight further amplifies the likelihood of hazardous activity. In January 2019, Vale S.A.’s Brumadinho dam in Brazil collapsed, resulting in 270 fatalities, in addition to loss of property and diminished livelihoods for the surrounding indigenous communities, severely straining the relationship between the company and these populations. In 2021, Vale reached a $7 billion settlement with regulators to compensate the state for the socioeconomic and environmental damage. The incident led to a loss of more than $4 billion in Vale’s market capitalization.vi
What is FPIC?
FPIC is the consent to develop provided by a local, indigenous group or groups to that is deemed to be:
- Free of coercion, intimidation, or manipulation
- Provided prior to any development activities
- Involves complete and satisfactory information communicated throughout the duration of development
Opportunity: The race to decarbonize
Clean energy technologies—electric vehicles, batteries, solar panels, wind turbines—rely heavily on minerals and metals. One of the most common batteries for electric vehicles, NMC, used by companies like Volkswagen, Mercedes, and Nissan, contains significant amounts of aluminum, nickel, cobalt, manganese, and lithium. Renewable energy infrastructure like wind turbines, particularly those that have magnets to make them lighter and more efficient, require concrete, steel, iron, fiberglass, polymers, aluminum, copper, zinc, and rare earth elements. Electricity networks also require a significant amount of copper and aluminum.viii
As clean technologies scale, demand for these minerals will only continue to increase, particularly as their applications extend even beyond their current applications, such as copper for electrification and nickel for battery EVs. Steel will also play an enabling role with technologies that require additional infrastructure.ix
Investors are starting to pay closer attention to where these companies source their materials as supply chain accountability becomes more relevant and the market for these materials gets more competitive. The Responsible Sourcing Blockchain Network (RSBN) tracks cobalt across the supply chain, and Ford Motor Company, Volkswagen Group, and Volvo Cars have joined to demonstrate their responsiveness to responsible sourcing standards developed by the Organization for Economic Cooperation and Development (OECD).
With the rapidly accelerating shift to decarbonization, it’s one thing to produce an electric car and reduce future emissions, it’s another thing to consider the environmental and social impacts of every input that went into manufacturing that car. As these clean energy companies evaluate and further scrutinize their suppliers, metals and mining companies have an opportunity to differentiate themselves in leadership around stakeholder engagement practices and their management of community and labor-related risks to operations.
Impact: Or lack thereof
Particularly across North America where U.S. and Canadian companies have worked to redirect profit sharing to native and indigenous people, there are examples of mining companies that have provided job opportunities and stimulated economic growth for the local communities in which they operate. However, even mines touted as standard bearers for community relations continue to face opposition from indigenous groups who oppose any extraction and seek to preserve natural habitats.xi Little has been done by the industry to address what happens to these communities once the resources run out.xii As mineral reserves are depleted and mines close operations, without a plan in place to repurpose mines in ways that offer similar economic opportunities, communities are at risk of being left behind. Much like the impact to communities throughout coal country as coal mines have shuttered, the positive benefits of these metal mines may soon disappear.
Questions an analyst might ask
- What objectives has the company set related to minerals waste management and how frequently are those objectives reviewed for progress?
- Has the company implemented monitoring procedures to detect tailings dam seepage? What inspection procedures are in place for tailing facilities?
- What community development initiatives and investment is the company involved in? Is there systematic involvement of local stakeholders in that process?
- Does the company have a commitment to seek or respect the right to Free Prior and Informed Consent of indigenous peoples?
- Does the company have a strong policy in place related to bribery and corruption, with programs to support commitments, and a strong whistleblower program?
The bottom line
Companies operate in the real world. The real world includes people, the environment, and the economy. ESG information is just more data to better understand how these systems intersect and interact with one another.
Extractive businesses illustrate this dynamic very clearly. The ability for mining companies to remain competitive will in part hinge on the extent that they are able to manage their impact on people and the planet.
Learn more
To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable/.
