ESG at stake – Miller Thomson’s PDAC seminar

March 9, 2023 | Selina Lee-Andersen, P. Jason Kroft, Bruno Caron, Christie A. McLeod

Mining companies have an opportunity to play a leading role on developing approaches to respond to the complex challenges of climate change, the loss of nature capital and other sustainability variables. Read our top 10 considerations for mining companies and other corporate actors when developing and implementing an ESG framework. The authors would like to thank and acknowledge Hashim Ahmed, CFO of Jaguar Mining and Francisca Quinn, Quinn & Partners for the valuable insights that they provided which have been reflected throughout this article.

1. ESG is good for business

There is a compelling business case for mining companies to engage with and report on ESG matters. Frankly, all stakeholders have expectations for companies to address ESG (customers, investors, employees, communities, etc.). In addition to creating stakeholder value, a company that is reporting and monitoring ESG matters will reduce its project risks and also be prepared for future regulations and mandatory reporting standards. Long-term investors, such as pension plans, are aligning their portfolios with net-zero by 2050, recognizing net-zero as a systemic risk to their portfolios and economic system.

ESG leadership is about voluntary excellence and designing in the creation of positive environmental and social outcomes in the business model. For example, supporting Indigenous communities by creating project equity participation and procurement opportunities, increasing standard of living in the community and decarbonizing operations and supply chain. You also have to invest in human capital – engaging employees, creating inclusive workplaces – research shows how this increases attraction and retention, and reduces labour costs. Companies that don’t care for its employees, customers and communities will not be in business in 10-20 years.  ESG focus can also lead to new business models, for example around the energy transition and net-zero operations.

2. Mining companies should be aware of the new global biodiversity framework

In December 2022, the parties to the UN Convention on Biodiversity (“COP 15”) met to advance global action to address the ongoing loss of biodiversity. This meeting culminated in the adoption of the Kunming-Montreal Biodiversity Framework (the “Framework”), which consists of 23 targets for 2030 and 4 goals for 2050 aimed at halting biodiversity loss and restoring ecosystems. Canada’s key goals include protecting 30% of lands and waters by 2030, respecting the rights Indigenous peoples, and addressing the key drivers of biodiversity loss, such as pollution and overexploitation of nature. The parties at COP 15 also agreed to a series of related agreements to facilitate implementation of the Framework (including planning, monitoring, reporting and review), resource mobilization, and capacity building. With the implementation of new initiatives under the Framework, investors are expected to take a closer look at mining companies with operations in areas of significant biodiversity value. Given the more stringent targets under the Framework, investors will likely also incorporate biodiversity factors into their capital allocation decision-making processes and we can expect to see an increasing number of mining companies align their operations with the new biodiversity targets.

3. Sustainability standards are converging

As investors increasingly call for reporting on ESG matters, companies are looking to use and understand sustainability standards. While there are an overwhelming number of sustainability standards, a convergence of standards is starting to emerge. In March 2022 the International Sustainability Standard Board (“ISSB”) which was created by the IFRS Foundation in November 2021 published two Exposure Drafts which are now known as S1 and S2. S1 deals with General Requirements for Disclosure of Sustainability-related Financial Information. S2 deals with Climate-related Disclosures and its architecture is built on the recommendations of the Task Force on Climate-related Financial Disclosure (“TCFD”). S2 also incorporates industry-based disclosure requirements derived from the Sustainability Accounting Standards Board (“SASB”) standards.

In February 2023, at the IFRS inaugural sustainability symposium held in Montreal, ISSB announced that its S1 and S2 will not be republished for comments and that it will begin the balloting process leading to the finalization of S1 and S2. ISSB expects to issue S1 and S2 in a final form towards the end of the second quarter of 2023 with an effective date set for January 1st, 2024.  Meaning that S1 and S2 would be effective for annual reporting periods beginning on or after January 1st, 2024.

4. Companies should be aware of the evolving landscape of Indigenous consultation

In 2019, the Province of British Columbia passed the Declaration on the Rights of Indigenous Peoples Act to affirm and implement the United Nations Declaration on the Rights of Indigenous Peoples (“UNDRIP”) in British Columbia, and in 2021, the federal government passed similar legislation in which it committed to take all measures necessary to ensure that the laws of Canada are consistent with UNDRIP. One often cited article of UNDRIP requires states to consult and cooperate with Indigenous peoples “in order to obtain their free and informed consent prior to the approval of any project affecting their lands or territories and other resources.” As British Columbia and Canada work to align their laws with this and the other articles of UNDRIP, laws and policies surrounding Indigenous consultation and the assessment of proposed resource projects will necessarily continue to evolve.

5. Meaningful engagement may look different with each Indigenous nation

The Crown’s duty to consult, which is triggered when it has knowledge of the potential existence of Aboriginal rights or title and considers conduct that might adversely affect it, often arises during the consideration of mining projects. Frequently, the Crown will delegate procedural aspects of this consultation to the company seeking the approval of the project. Companies should consider whether to implement separate consultation protocols to engage with different Indigenous governance structures, particularly if there is a difference of opinion between the Band’s Elected Council and other groups that speak for all or part of the Indigenous Nation, such as hereditary Chiefs or a confederacy. Companies should also conduct background research before approaching an Indigenous governance body to understand the body’s basic history, current priorities, and its stance on other mining or natural resource projects.

6. ESG reporting – how to turn challenges into opportunities

ESG reporting and data digitization are two key challenges for many CFOs, but combine these together, and this is where companies can achieve transparency and consistency in reporting to the stakeholders, while maintaining lower costs of compliance. These steps may involve the use of environmental telemetering systems to capture data at source of the activity, interfacing that data to current Enterprise Resource Planning systems through the use of applications and running artificial intelligence systems 24/7 on the captured data to report anomalies. These days this can be done at cheaper costs and is customized to the size of the organization.

7. The responsibility for ESG is shifting from the “Sustainable Group” to the “Treasury Group”

According to a 2022 survey conducted Diligent Institute, only 3% of companies globally use their audit committee to oversee ESG issues.

Historically audit committee have been responsible for oversight on financial reporting, the selection of the independent auditor and receipt of audit results both internal and external.

With the forthcoming adoption of S1 and S2 by ISSB and as sustainability reporting and sustainability auditing becomes “mainstream,” the role of the audit committee is called to change and evolve into a role of guardian of both the financial and sustainable information of a corporation.

For example, the European Union’s Corporate Sustainability Reporting Directive or (“CSRD”) will mandate that audit committee “be assigned with certain tasks with regard to the assurance of sustainability reporting.” Those tasks will include an obligation to guarantee the integrity of the sustainable reporting and to report on how it fulfills this task.

Limiting the role of the audit committee to financial reporting may create a potential “blind spot” for companies.  The audit committee has transferable skills from their business oversight which can easily be brought into sustainability reporting.

However, for this to happen most audit committees need to be brought up to speed with sustainability issues (for example biodiversity and loss of natural capital) through education sessions from outside experts and, in some case, with the addition of audit committee members who have ESG specific knowledge and expertise.

Finally, with these new sustainability disclosure standard rules coming to fruition there will be a need for public companies Sustainability Officer to rely more heavily on the in-house legal department and Chief Legal Officer to understand these new rules.

8. Mining companies can achieve net-zero emissions – without unduly relying on offsets

While there are many roads to take on a net-zero journey, there is a basic decarbonisation roadmap. A company should quantify its emissions from the start of the project, and when working towards net-zero, a company’s first step should be to reduce its emissions as much as possible. Net-zero (“NZ”) is different from carbon neutrality, which has been a leading carbon leadership strategy for the last 20 years. NZ means reducing emissions as much as possible and eliminating the remaining emissions through removals. Carbon neutral is neutralizes emissions by preventing release somewhere else through carbon offsets. There are still emissions released and there is no onus of reduction. All organizations and countries have to get to NZ by 2050 to limit global warming to 1.5oC and avoid the worst impacts of climate change.

Companies should consider to integrate the following 4-step process:

  1. Inventory all emissions – measure emissions associated with combustion of fuels and use of electricity;
  2. Reduce emissions as much as possible – use efficient and electric equipment for heating, ventilation, excavation, crushing, hauling, trucking, and so on;
  3. Replace fossil-based energy with clean energy – renewable energy; and
  4. Use carbon removals – reforestation, soil carbon enhancement, direct air capture and sequester carbon.

Today, there are 18 mining companies in the world that have set NZ targets. Nine out of the 18 have targets that align with science. These are validated by the Science Based Targets initiative (“SBTi”), a third party validation program backed by the Carbon Disclosure Project (“CDP”), the United Nations Environment Programme (“UNEP”), the World Resources Institute (“WRI”) and the World Wildlife Fund (“WWF”).

9. Biodiversity considerations should be “mainstreamed” in the mining sector

Sustainable mining requires companies to better understand the value of biodiversity both to their long-term operations and to local communities. The incorporation of biodiversity considerations into everyday business and policy decisions is known as the “mainstreaming” of biodiversity. For biodiversity to become mainstream in their businesses, companies need to have good metrics. To date, this has been a challenge for many organizations because biodiversity metrics have tended to be process-driven rather than performance-driven. Industry best practice is for companies to follow a mitigation hierarchy to avoid, minimize, restore, and only then offset impacts on biodiversity and ecosystem services. This is considered the basis of all robust risk-based approaches to managing and mitigating impacts from mining operations. Mining companies should adopt biodiversity commitments and policies that  address biodiversity impacts from company operations using the mitigation hierarchy. Once biodiversity commitments have been established, companies should incorporate the necessary processes into their operations to achieve these commitments, including monitoring and reporting systems.

10. ESG reporting – what should audit committees and CFOs be aware of? What keeps them up at night?

Similar to the increasing use of Non-GAAP measures, we will see ESG reporting increase. With multiple standard setters, and lack of consistency in definition of key performance indicators (“KPI”), we may see green washing or biased reporting. This becomes a greater risk to many companies when the social and environmental license to operate is linked to the ESG KPIs. Incorrect reporting could lead to “going concern” problems to companies, not to mention, an obvious increase in the risk of directors and officers liabilities to their shareholders, especially in jurisdictions which are highly litigious. How can we solve this? Well the good news is we have done this before in the form of ICFR (Internal Controls over Financial Reporting). Audit Committee and CFO organizations need to (i) define ICSR (Internal Controls over Sustainability Reporting); and (ii) apply rules, procedures and controls in a formal manner to ensure fair disclosure principles are applied here as well.

Miller Thomson recently hosted an in-depth discussion on this topic during the Prospectors & Developers Association of Canada’s 2023 Convention in Toronto. Moderator Jason Kroft fostered a fruitful and engaging dialogue among panelists Bruno Caron, Selina-Lee Andersen, and Christie McLeod from Miller Thomson, Hashim Ahmed, CFO of Jaguar Mining Inc. and Francisca Quinn, Founder and President of Quinn+Partners and a Director of the Canada Nickel Company.

To view the recording, please click here.

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