ESG, does the bell toll for thee?

Given the recent hullabaloo around the decision of three major US financial institutions – JPMorgan, State Street and Pimco – to withdraw from Climate Action 100+ (CA+), one might think so. In addition, Blackrock announced it would remain engaged, but through its European-based offices. It appears the three financiers who have withdrawn are bowing to pressure from some Republican politicians claiming that CA+ activities are in violation of US antitrust and securities laws. But before we accept the perception that this is a death-knell for global ESG efforts, let’s take a look at a few important factors about this group, its activities and relative effectiveness, as well as broader ESG “infrastructure.”

CA+, the world’s largest climate investor group with over 700 members (important factor number one) works with high-emitting companies across the global supply chain to help them transition to a low-carbon economy. Its efforts are coordinated by five investor networks including the UN-backed Principles for Responsible Investment (PRI) whose “green” standards underpin several industry initiatives such as Copper Mark and Responsible Steel (important factor number two). CA+ “clients” include Grupo Mexico (mining), PEMEX (Mexico’s largest state-owned oil company), Aramco (Saudi Arabia’s oil company), and UltraTech Cement (Indian construction materials), illustrating its expansive reach (important factor number three). So, while of course disappointing and dismaying, the withdrawal of the three US financial institutions should not crush CA+ efforts.

Turning to the broader ESG situation, the above-mentioned industry initiatives (Copper Mark and Responsible Steel) are examples of how particularly the extractive industries have acknowledged the importance of fully integrating sustainable and ethical practices into their operations. The International Council on Mining and Metals (ICMM), a voluntary membership mining group founded by several of the industry’s largest companies including Rio Tinto Group (NYSE: RIO | LSE: RIO), Freeport-McMoRan Inc. (NYSE: FCX) and BHP Group (ASX: BHP | NYSE: BHP) among others, also has developed a series of Principles to help guide companies in sustainable extraction activities from mine inception to closure. While the initial impetus for many of these actions came from NGO scrutiny of end-user products and subsequent pressure from those companies on their suppliers to ensure “clean” and ethical extraction, the extractive companies have gone beyond that starting point to collectively develop measures whose costs and benefits make sense to the industry. (One example of early pressures would be smelters who began to insist to their mine suppliers that they needed to be able to certify their product as child-labor free, or the famous “blood diamonds” campaign.) While some companies are choosing to place their ESG procedures under safety and security in their internal organizations, they nonetheless are adhering to sustainable practices and most companies now have sustainability reports on their websites and for their Boards and investors.

These are pragmatic decisions by companies facing intensified scrutiny by governments and societies. Regulatory measures related to ESG standards continue to multiply, sometimes in a confusing fashion, a point which needs to be addressed. For instance, the European Union recently enacted a law imposing financial penalties on companies found to be “greenwashing,” usually defined as a company making bold statements without any substantiating operational or financial evidence that the claimed activities are real.

Perhaps most importantly, so-called real people are seized with the core of ESG, i.e. that environments should be protected and benefits shared. Over the past few years, several notable examples include protests in Greenland which forced a government transition and a rewrite of a proposed mining project; Serbia, where again a government fell amid accusations that the proposed mining contract did not adequately compensate the country, and most recently Panama, where a company was forced to cease operations with potentially disastrous financial results. This heightened activism is unlikely to disappear, providing a cautionary tale that the social license to operate will continue to become more costly for companies who are perceived to not be doing enough in the ESG realm.

Bottom line? ESG is not on the ropes, despite the hype, and companies who want to thrive are adapting to survive.

Today’s mining industry is not the mining industry of your grandfather – but you wouldn’t know it judging by popular (mis)conceptions and perceptions. The vast majority of companies have invested extensively in technologies allowing cleaner and more profitable operations, and in programs promoting durable economic development in communities near mine sites.

So, if this is the case, why are there so often accusations of “greenwashing” and what the heck is greenwashing anyway?

Simply stated, greenwashing is when a company which isn’t doing very much to transform its operations to a more sustainable and equitable footing wants to pretend otherwise. Greenwashing often is characterized by vague and sweeping statements of intent rather than concrete and specific examples of programs and practices. It is an attempt to convince investors and the public that a company is doing more than it is in the domain of “green.”

Now, there are a couple of important caveats. First, the degree of specificity for a company depends on its stage of development. A junior exploration company, for instance, clearly has far fewer specifics to cite and therefore statements of intent, coupled with the specific examples possible (often involving reduced drill waste and improved post-drilling restoration, for example) are perfectly acceptable. Not so, however, for mature production companies. Second (and applicable throughout the industry) there is an understandable confusion about what is regarded as acceptable investments and program performance to merit the designation of “sustainable green production.”

Some international and regional organizations such as the United Nations and the European Union are diligently working on sustainable mining standards, as do some individual countries. In the US, for instance, the Securities and Exchange Commission is actively working on developing standards which reportedly may resemble those of the EU while incorporating some of the principles of the UN Sustainable Development Goals. Within the UN SDGS, item #12, Responsible Consumption and Production, is of particular relevance to the extractive industries.

Fundamentally, the concept of responsible stewardship is at the heart of sustainable mining, and applies equally to all three elements of ESG – Environmental, Social and Governance.

One possible format for concretely reporting on activities related to being or becoming sustainable has five areas, including:

1. Reduce, Reuse and Rethink mining waste (tailings and beyond);
2. Water (same three R’s as above and incredibly key);
3. Lower CO2 emissions by transitioning to renewable energy supporting operations. Some companies also are exploring carbon credits by, among other options, maintaining more forested areas within concessions;
4. Ensure communities thrive both during and after the life of the mine. This involves extensive consultations and cooperation with expert implementing bodies; and,
5. Restore the land to its natural state at the conclusion of the mine cycle. One useful source working on global standards is the International Organization for Standardization (ISO) in Geneva.

In addition to working on developing standards for producers, governments such as the UK have produced guides for investors to try and determine whether a company is green or is simply greenwashing. The US Securities and Exchange Commission (SEC) proposed similar investor guidelines in June of this year, but so far these apply only to advisors and funds, not extractive companies.

However, the probable intention of the SEC, that such funds and investors in turn will pressure mining companies to be more specific and transparent in their ESG disclosures, apparently is paying off, potentially allowing their goal to be achieved without the need to produce prescriptive and controversial guidelines. Rumors continue to abound, however, that such specific guidance may yet be forthcoming.

The bottom line? To be green in practice likely also is to be green in profit, as investors increasingly will choose true green over greenwashed.

Those three initials seem to be everywhere these days, used in all sorts of contexts. As a performance measure for CEOs. As a standard for investors. As a banner for stakeholders. As a compliance test for companies. So what the heck actually IS ESG?

Let me take a stab at clarifying. I will address the initials slightly out of order, but you will see why as you read on.

ESG – Environmental, Social and Governance – began life as a set of principles to help guide companies to adhere to best practices in the three mentioned areas. In many ways, ESG evolved from another set of initials – CSR – Corporate Social Responsibility. The ESG principles, however, are more specific and in some ways prescriptive than CSR ever was, and that was by intent.

In an increasingly complicated and rapidly changing world in which people (the “S”) increasingly pay more attention to the actions and consequences of mining companies’ decisions and operations, companies themselves were seeking more clarity on what stakeholders expected of them.

Thus, in the environmental arena, the principles of “E” incorporate elements such as investments by companies in technologies to ensure cleaner, greener operations. This covers a range of activities such as conserving and recycling water to reduce demand on an increasingly scarce resource; moving to dry versus wet tailings (also for safety reasons); controlling dust with non-water spraying methods and seeking to ensure zero-discharge incidents, thereby keeping water pure and safe. Likewise, reducing air pollution from discharge at processing/smelting facilities is another good example.

“G” includes principles related to government relations (transparency, integrity) as well as internal corporate governance (transparency, accountability not only to shareholders but the broader stakeholder community).

“S.” The most complicated, the most amorphous, the most rapidly changing – and the most difficult and costly to manage. But the initial which, in my opinion, lies at the heart of sustainable, successful operations. Social relations. This has grown exponentially from a focus on the communities surrounding mine sites and corporate shareholders to a much broader constituency. Increasingly, companies are confronted with demands that they provide tangible benefits to entire national communities. In countries such as Chile and Indonesia, for instance, students in the capital cities have demonstrated in the streets because mining companies were not providing benefits to them. Many argue that these demonstrations might also be politically motivated by corrupt governments eager to extract from companies larger royalty/tax payments or carried shares in operations. While not discounting this possibility, I would say that even if there is or was a political element initially, these social movements have taken on a life of their own at this point, and must be reckoned with. Confronted by the twin constraints of the Foreign Corrupt Practices Act and the undeniable costs of trying to be all things to all people (literally replacing government services at a large scale, in the worst case), how is a company to respond?

Changing social demands also are impacting governance/government relations practices. As we see here in the US, public scrutiny of corporate political donations, including to PACs (political action committees) has become a flashpoint. Individuals want to know what “side” companies are on as regards important social questions – and, as we have seen for instance in Florida, “taking sides” is a losing proposition for companies who face either political or social backlash (or both) when they elect to take a stand. As to internal governance – well, that leads to another three initials, namely DEI – Diversity, Equity and Inclusivity. Companies are under increasing pressure to do more/better in incorporating diverse points of view in their management structures and Boards, among other specific demands.

In this swirling miasma, some are pushing to make the ESG principles more prescriptive. Providing a sort of “checklist” of minimally expected/required responses and activities would, some argue, make life easier both for companies and for investors trying to judge whether a given company is an ESG champion or a fraud.

Personally, I think a middle course is best. Some additional clarification around particularly government regulatory expectations is necessary to help companies accurately and transparently report their ESG activities and receive credit for the same while avoiding accusations of “greenwashing.” But in my view, there currently is an overreach which attempts to micromanage corporate operations. A one-size-fits-all ESG approach is patently impossible, due to cultural, physical and economic differences between countries and projects. Especially if CEOs are to be evaluated in part on their success in the ESG arena, they must retain the flexibility and decision-making latitude to, as much as possible, do the right things.

After all, doing the right things is really what ESG is supposed to be all about.