The industry landscape is being redefined by rising investor expectations around sustainable mining. Although recent ESG debates have been dominated by the "E" (environmental) like decarbonisation, climate targets, and emissions, the "S" (social) is increasingly in focus.
Community relations, human rights, and social considerations continue to shape the global mining industry's investment decision-making process. Investor expectations are rising and failure to address these complex factors will carry far more financial and reputational costs absent stricter codes of conduct.
Social considerations are transforming the mining industry and companies can no longer afford to overlook the social aspect of sustainable mining. The latter will increasingly determine companies' access to capital, permitting and regulatory approvals, and their very ability to conduct mining operations.
Morgan Stanley Research says that the transition from conventional resource exploitation to a symbiotic relationship between mining companies and the communities in which they operate is irreversible, and will demand enhanced codes of conduct to set commonly agreed frameworks and measurable success factors.
Actual and perceived non-compliance with stricter social standards and best practices have galvanised shareholders and raised litigation risk for mining companies. Repairing frayed community and government relations are vastly more costly than following stricter codes of conduct and decision-making processes.
Investor expectations continue to rise, challenging conventional ways in which mining companies have previously typically operated whereby exploitation licences or mining permits were sufficient to undertake day-to-day operations. A social licence is now essential in ensuring the continuity of operations, and its absence is likely to become a drag on returns and profitability as well as on a company's own reputation.
The issue of water in Chile illustrates this change. Mines like Los Pelambres (Antofagasta) have opted for building desalination plants to satisfy their water needs, in spite of having fresh water rights, in efforts to reduce competition for water with local communities. Water permits are no longer enough to conduct mining operations, given increasingly strained local aquifers, which can pose risks both directly to mining operations and indirectly via the potential strain on community relations.
The social aspect of mining is broad, encompassing subjects such as human rights, decent and safe work and impact on local communities, such as environmental, social, political, financial, and cultural. As such, risks are numerous and are continuously evolving.
Several miners have adopted standards laid out by international bodies such as the UN, OECD, and ILO, among others. However, more work is needed, especially around identifying local challenges and developing local solutions. For example, the protection of traditional sites is a feature of mining in Australia, while tackling illegal mining is more specific to mines across the African continent. Morgan Stanley Research believes identifying local challenges, setting processes to address them, and enhancing reporting around these issues will increase transparency and help companies mitigate these risks.
Exhibit 1: While not exhaustive, the table below provides a summary of key local challenges relating to the social aspect of mining across various mining jurisdictions
Just like best-practice codes and regulations that are developed by various official bodies and international organisations, it will be important to develop measurable objectives that are routinely audited and reported by mining companies to adequately reflect their progress in addressing social challenges. Given that many challenges are local in nature, success factors and relevant disclosures are likely to vary by region.
Taking transparency to the next level, companies could consider providing disclosure on scenario analysis for example by disclosing assets located in water stressed jurisdictions and a clear roadmap on managing any potential shortfalls in the future. This would offer greater accountability and transparency to local communities. Some companies are already increasing their disclosure, and Morgan Stanley Research thinks that this trend will accelerate.
For more on sustainable mining, or to read the full Morgan Stanley Research report, “The Rise of S” (15 Oct 2020), speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.