Tailings Dams and Due Diligence Series – Part II
Questions for the Board, shareholders and potential investors
Part 1 of this brief series presented the concepts of failure, loss of control and significant loss as a lead in to a discussion on ESG (environment, sustainability, governance) metrics. It posed questions for the Board, its shareholders or for potential investors looking for acceptable ESG performance, particularly around those significant risks that must be effectively managed.
First a question: Would you prefer to achieve 95% of your target performance or to achieve 75% of your target performance? Pretty obvious choice, right?Sorry, trick question. I didn’t mention that the two targets are different. I ask it this way because in Australia at the moment, and I expect a similar situation is occurring around the world, there is a Board focus on compliance. The Australian Institute of Company Directors (AICD) is effecting a major push around the Board’s responsibility to create a culture of compliance in their companies. This is in response to a number of failures in the performance of some companies. I, personally, believe this is an approach that hasn’t been properly thought through. It is an approach that is thwart with unexpected consequences. For mine, legal compliance in ESG is a 50% pass mark; a “D” grading if you recall back to high school. An “A” grading, however, represents excellence; a 100% achievement. So would you prefer a 75% achievement against a target of 100% for excellence (a score of 75%), or would you prefer a 95% achievement against a target of 50% for compliance (a score of 47.5%)? Since the latter achievement doesn’t even reach legal compliance, even though you achieved 95% of your target, it is purely an unacceptable score. Note here very carefully, management achieved 95% of their target. A very creditable result from their point of view. The concern is the target that the Board is setting. The concern is that the Board does not understand or is confused in the confluence between targets and achievements and the impact to the business. This cannot be more so obvious in the area of ESG.
I have been a professional in the mining and resources field for over 40 years. I have been amongst technical people, operators, management and the Board and never once have I heard of people being proud of their “tonnes per employee key performance indicator”. Never once have I seen peer reviews discussed around a BBQ by mates over a couple of beers comparing our “cost per tonne of gold produced” versus yours. But I have heard on very many occasions that “we are proud of our safety performance”, “we are proud of our environmental credentials”, “we are very happy to work with our company because it clearly puts ESG first AND it achieves the results to back that statement up”.
Where is this discussion going? It’s going towards the financial benefits of excellence in ESG and thence back to the metrics that can be used to achieve those benefits, both in terms of ESG outcomes and financial performance. These benefits being both positive performance and lack of negative performance.
Let’s look at the employee who is proud of his company safety performance. Actually he is also very proud of his own performance as excellence in safety is a team thing and cannot be achieved without the involvement of all. The employee is empowered around safety. He is a significant part of the achievement. He sees himself in that way. He is proud of himself and he and his employer share the benefits. Now, couple this with excellence in environmental performance. Again, such excellence can only be achieved with the total involvement and ownership by the employee. If an automotive fuel company never spills a drop of gasoline even though it has been through many hands, all of the team should be rightly proud of management, the team, and themselves. Now imagine being in a company that puts ESG first, that enables its employees in safety and environment to the degree where excellence is achieved. How would you think having the hearts and minds of all of the team so clearly focussed would impact the bottom line? Obviously, significant ESG loss is minimal to zero. But having a team that is so clearly focussed also shows in the non-ESG performance as well. A team developed to reduce, to minimise, and to eliminate loss of any kind. And very proud of it! That’s the driver behind ESG, but, and a big but, you cannot get there by focussing on compliance. A “D” grade is not going to make people proud. Only grades of “B” or “A” are going to do that.
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So I hope you can see that the outcome by management is more so governed by the targets set (and supported) by the Board. Management can and will achieve high performance levels, maybe not to 100% at first, but the outcomes will approach excellence over time.
So, that’s the rationale. That’s the driver behind excellence in ESG, but what are the metrics? What does a Board have to do to achieve ESG excellence? What do shareholders have to see to be satisfied that their ESG values are being adequately managed and that significant ESG losses (and the resultant big $ losses) are not just around the corner? What do potential shareholders need to see when comparing potential investment options from an ESG stand point?
My next article will progress this discussion.
Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>