Chris Holman
Partner
Azure Capital
Historically, mining may not be the first industry many investors think of when considering an investment based on environmental, social and governance (ESG) factors, but there appears to be a revolution underway that is creating a fundamental shift in the actions, and therefore ESG credentials, of mining companies. Over recent years, this shift has attracted the attention of both specialist ESG funds and alternate forms of capital who are keen to demonstrate their ethical standards for investing.
In a world that is rapidly migrating towards green living, and where the global population is increasingly focused on the social sustainability aspect of ESG rather than just environmental, the industry is being transformed in an effort to clean up its sometimes-troubled reputation.
Innovation and a conscious focus on ESG has allowed mining companies to become more efficient, cleaner, socially responsible and therefore sustainable. Although ESG has been a buzzword in mining for the last couple of years, it is the environmental aspect that had gained the largest focus. The emergence of coronavirus and the impact on the global population seems to have refocused the implementation of ESG on all three components, which results in a more holistic outcome.
"Innovation and a conscious focus on ESG has allowed mining companies to become more efficient, cleaner, socially responsible and therefore sustainable."
The heavy resource reliance of the sustainably focussed future presents a critical opportunity for mining companies to attract more and better-capitalised funding sources to develop projects. To access this capital, the need for mining companies to demonstrate a robust commitment to addressing and managing ESG concerns such as safety, governance, minimising environmental impact and mine rehabilitation.
Sustainability-linked investment facilities and ESG loans which incentivise the borrower to meet predetermined sustainability targets (PSTs), such as increased energy efficiency or improved working or social conditions, have grown substantially in the mining industry over recent years. In 2019, the World Bank, the German government, Rio Tinto, and Anglo American, launched the Climate Smart Mining Facility, the first fund dedicated to making mining for minerals climate-friendly and sustainable. Meanwhile Rusal has secured a US$1 billion-plus ESG-linked finance facility with PSTs relating to improvements in environmental impact and sustainability practices.
Mining Companies Aren’t Just Improving Their Own ESG Credentials, Their Products are Essential for our ESG Focussed Future
Miners are critical for the transition to a low-carbon economy, providing the raw materials needed to manufacture and power future green technology.
BHP is one of many mining companies pushing for awareness of this point in their recent advertising campaign where they remind us of how integral their copper is to the production of wind turbines, reinforcing this link to Australia’s largest source of clean energy.
Other examples of how our low-carbon transition is to some extent dependent on mining companies’ activities include the significant raw materials required to produce electric vehicles and the batteries to power them, which as we have seen from the rapid share price growth of lithium, rare earth and graphite companies in the past 6 months is a clear indication of the belief in our EV future.
It’s also become part of a government backed push in Australia to lead the world in supplying the minerals that are linked to a greener future. Green-linked financier the Clean Energy Finance Corporation (CEFC) has participated in financing for lithium mining and in recognition of the need to support the sector, the Australian government has established the Critical Minerals Facilitation Office.
Does Mining Have a Place in ESG Portfolios?
Although this will remain a contentious issue for some, it’s clear by the weight of ESG linked funds backing mining companies that the answer is clearly yes.
ESG investors can provide close scrutiny of mining companies to ensure sustainable mining practices, as they always have, but with the emergence of the large-scale funding being made available by these funds they now have real power to influence.
The increased investor focus on the social and governance aspects of ESG were outlined following the unfortunate destruction of Aboriginal sacred sites in Australia. Several major Australian superannuation funds became publicly involved in responding to Rio Tinto’s internal review, and investor pressure had a strong influence on the measures ultimately taken by Rio Tinto in responding to the crisis.
How Will This Impact the Mining Industry?
Structuring a funding package for the exploration and development of a mine is a difficult task for projects outside of the major miners. This is particularly the case for less traditional metals or non-LME traded commodities. As an example, the independent hard rock lithium miners in Australia such as Pilbara Minerals and Altura relied on high-cost debt funding given traditional bank finance wasn’t available for a commodity that was reliant on the future take-up of EV’s (among numerous other reasons).
The dearth of Australian funding options presented investment opportunities for specialised ESG funds. In 2017, Pilbara Mineral’s wholly-owned subsidiary Pilgangoora Operations successfully completed a US$100m senior secured bond issuance, including a US$15m investment from Australia’s CEFC, which was acting to support the development of a strong clean energy supply chain to further enable Australia's transition to a low carbon economy.
What we are now seeing is ESG funding covering all aspects of a funding package. We have rapidly moved from banks developing green loans, which still left a large equity gap to be filled, to now seeing substantial equity funding available from ESG funds – presenting new funding opportunities for many of these projects.
Mining companies now aspire for ESG funds to invest in their company to provide this additional funding source but also to provides certain levels of market validation. Those who are adopting sustainable and clean technologies are also well-placed to obtain assistance from federal government stimulus contracts.
"Mining companies now aspire for ESG funds to invest in their company to provide this additional funding source but also to provides certain levels of market validation. Those who are adopting sustainable and clean technologies are also well-placed to obtain assistance from federal government stimulus contracts."
One of the best recent examples of this is Vulcan Energy’s A$120 million equity raise, which included an energy transition fund. Vulcan is not only planning to produce lithium for EV batteries but to do so in a zero-carbon manner. It’s clearly a game-changer for mining investment and many companies have started to review their own project's emissions in a similar manner to attract funding.
In short, ESG considerations are now top of mind in the boardrooms of Australia’s mining industry. This has been welcomed by the investment community who are also becoming increasingly aware of the importance of a secure and sustainable supply of the minerals needed to feed the global push to electrification and a greener future.
What Does the Future Hold?
With investors and consumers becoming more educated about ESG, ethical investing, once considered a niche strategy, continues to expand exponentially. Derived higher performance of ESGs has resulted in increased capital flows into ESG equity funds, which have hit a record level in July last year as investor appetite grows. Globally, flows into sustainable investment funds doubled to $54.6 billion in the second quarter of 2020, over the first quarter. Whilst analysis shows that during market contractions, companies with solid ESG track records showed more resilience than non-ESG peers.
With attractive returns, the continued move to our green future requiring funding and strong ethical incentives for funds to invest in ESG conscious companies and commodities, ESG funds look set to become a major provider of funds across the debt to equity spectrum for mining companies going forward, which will be a welcome sight for those who have ever tried to structure a funding package.
