Trend 1: The social investor Embedding value beyond compliance into corporate DNA
8 minute read
04 February 2020
The drive toward socially conscious profit is no longer limited to environmental activists. Much of society and investors alike are demanding greater transparency around the true social, economic and environmental impact of sectors such as mining. To help regain investor trust, miners should embrace a commitment to value beyond compliance.
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Value beyond compliance is about the fundamental synergy between economic performance and social progress. It leverages shared value principles, innovation, analytics, digitization, and strategic and evidence-based solutions to deliver socioeconomic impact while simultaneously fostering operational efficiency and business competitiveness. And while initially conceived as a way for mining companies to build greater social capital, its principles can ultimately be leveraged to meet mounting investor expectations as well.
As organizations heavily dependent on investment funding, mining companies have long understood the imperative of delivering shareholder value. That could be why in the past some miners struggled to justify investing in non-revenue-generating activities—from community infrastructure projects to sustainability initiatives.
Now, however, the pace is accelerating as investors get serious about mining company commitments to environmental remediation, energy efficiency, diversity, health and safety, and the fair treatment of community stakeholders and employees. The trend toward responsible investing has seen individual investors and institutional asset managers alike integrating environmental, social, and governance (ESG) principles into their decision-making. Particular attention is being paid to how companies are addressing issues such as climate change, water management, health and safety, and the fair treatment of workers and communities—all important aspects of mining operations. Today, ESG investing is estimated at over US$20 trillion in assets under management,1 and those numbers are only expected to grow.
The rise of socially conscious investors is not merely an altruistic trend. That’s because companies that fail to deliver value beyond compliance could face financial and reputational consequences.
A case in point: Following the collapse of Vale’s tailings dam in January 2019, the company suffered a single-day loss of US$19 billion.2 As of October 2019, its stock price was still reflecting a 26 percent year-over-year decline.
Demands for disclosure
In light of these concerns, many large investors around the world are now demanding greater disclosure from mining companies:
- In early 2019, institutional investors active in extractive industries set up the Investor Mining & Tailings Safety Initiative, which has already engaged in two interventions. The first was a call, supported by funds with over US$6 trillion in assets under management, for a new independent and publicly accessible international standard for tailings dams. The second saw a group of 96 institutional investors, representing over US$10.3 trillion in assets under management, writing to 683 extractive companies seeking greater disclosure on the management of their tailings storage facilities.3
- As of 2020, roughly 800 financial services organizations with US$118 trillion of assets under management have committed to making climate-risk disclosures about their portfolio investments. Already, some global banks are measuring the ESG performance of their corporate clients in a bid to meet clean lending targets; 26 global banks have stopped providing direct financing for new coal plant projects;4 insurers like Chubb5 and Suncorp6 no longer provide coverage for new coal projects; and some fund managers are seeking greater disclosures from companies regarding their gender pay policies and supplier relationships.
- After revealing that 87 percent of the world’s largest cobalt, copper, lithium, manganese, nickel, and zinc mining companies have faced various allegations regarding human rights and the infringement of land rights—the Business & Human Rights Resource Centre launched a tracker tool that lets investors and other stakeholders trace allegations made against these mining companies.7
Earning investor trust
“This isn’t just about compliance,” says Dr. Leeora Black, Global Mining & Metals Value Beyond Compliance Co-Leader, Deloitte Australia. “Many investors are making it clear that they will not advance funds unless companies can demonstrate a meaningful and measurable commitment to the principles so much of society holds dear. This causes mining companies to consider not only threats to public trust, but also potential threats to investor trust.”
How can miners earn greater trust from investors? Possibly by making important social issues part of their strategic decision-making process. In recent years, these issues have been guided not only largely by core ESG principles but also by the 17 Sustainable Development Goals (SDGs) introduced by the United Nations in 2015, whose aim is to address endemic global challenges such as poverty, inequality, climate change, environmental degradation, peace, and justice.8
Since the SDGs were first introduced, they have become a beacon not just for various governments and corporations, but for many asset managers and investors around the world, who often expect these principles to be embedded into the mainstream of business rather than being segregated to “good works” managed by their corporate social responsibility (CSR) departments.
Andrew Lane, Mining & Metals Leader, Deloitte Africa, explains: “When companies make portfolio choices, they traditionally look at a range of factors—such as the assets, geographies, intrinsic value, shareholder value, and risks associated with these investments. But beyond those factors, they should think about the societal impact of their decisions by asking if their investments can also make the impact that society expects of them.”
Companies that don’t prioritize these values may find themselves shunned by an investment community intensely focused on delivering both financial and social returns. In a survey of 347 institutional investors, BNP Paribas Securities Services found a growing number of asset owners and asset managers aligning their investments to the UN’s SDGs. By early 2019, 75 percent of asset owners (vs. 48 percent in 2017) and 62 percent of asset managers (vs. 53 percent in 2017) had allocated at least 25 percent of their holdings to funds that incorporate ESG criteria.9
Even more recently, Allianz Global Investors—an active asset manager with over US$608 billion in assets under management—announced that it now considers the UN SDGs a credible international framework for guiding an impact-investing strategy.10 The International Council on Mining & Metals (ICMM) agrees, even mapping its 10 principles for sustainable development in the mining and metals industry against the SDGs to discern where the industry can help to support global sustainability goals.11
Resource companies have started to respond. In late 2018, for instance, Royal Dutch Shell PLC announced plans to link executive pay to short-term carbon emissions targets.12 BHP recently followed suit, linking a higher percentage of its chief executive’s bonus to specified climate-related goals.13 Yet much work remains to be done before most mining companies will have developed the internal cultures required to truly embrace a commitment to value beyond compliance.
Mainstreaming shared value
To meet the mounting expectations of institutional investors, many mining companies will likely need to expand their approach to CSR. Beyond investing in local community infrastructure projects, they could embed ESG and SDG principles into their strategic and portfolio choices. This would mean considering the societal impact of their everyday operating decisions by, for instance, selecting new suppliers that are demonstrably creating local jobs and local value, or by helping community members gain the skills they need not only to contribute to immediate corporate goals but to thrive into the future.
Similarly, when building portfolios, miners should not only consider the strategic value of their asset investments, but also their capacity to add future value and their role in reducing portfolio risk. They should also consider the societal impact of their investments by possibly seeking assets that can deliver on clear social goals, with the aim of balancing their overall portfolio performance.
Additionally, mining companies may want to consider providing investors with specific details on how they’re addressing their stakeholder requirements. In some cases, this may mean building more effective processes for stakeholder engagement to thoroughly map and analyze stakeholders and their issues. This would likely include developing an annual engagement plan that aligns business strategy, business impacts on stakeholders, and stakeholder impacts on the business. At the tactical level, it could involve ensuring that stakeholder interaction and channels respond to the nuances of the stakeholder landscape. Operationally, cross-collaboration between business functions can also be important to appropriately address stakeholder requirements while realizing value and efficiencies. Last but not least, stakeholder engagement strategies should enable iterative revision and adjustment based on internal performance metrics in conjunction with collaborative stakeholder feedback.
Anticipating and influencing the regulatory environment
Another way miners can achieve value beyond compliance is by anticipating and influencing the regulatory environment. This issue has come into sharp focus in recent years in the wake of mounting protests, anti-mining advertising campaigns, abrupt tax increases, dramatic changes in regulatory regimes, and the nationalization of mines. Some reasons for this include:
- As the search for mineral deposits spreads, companies more frequently encounter indigenous populations who question the sovereign authority of the nation-state from which the company received its mining permit.
- Mining in the developing world tends to encroach on urban or semi-urban land, forcing miners to compete with agriculture and other industries for key resources (such as land and water). Resident action groups are responding by blocking or delaying access to these resources and using social media to mobilize and form coalitions.
- Fewer people see their personal welfare tied to the welfare of primary industries such as mining, especially as increased automation reduces employment opportunities in the industry.
- Between 1994 and 2004, not-for-profit revenues in the US rose by 61.5 percent14—a trend reflected internationally. This has given sociopolitical groups greater access to funding than ever before.
To counter any negative sentiment, mining companies should go beyond strict regulatory compliance. Instead, they should look for ways to derive tangible value from regulatory frameworks.
One way to consider is by viewing stakeholder relations, community development, safety and health, and environmental issues as multiple dimensions of a single challenge—namely sustainability. This can enable companies to create one holistic sustainability strategy that integrates their various compliance requirements across all relevant legislative frameworks and establish cross-functional teams to deliver on these plans.
In addition to better mitigating risk and strengthening stakeholder relations, this approach can enable companies to reduce costs and increase efficiencies. From an investor perspective, it can also let them develop evidence-based strategies to create a regulatory dividend that can be calculated and demonstrated to increase shareholder value.
Unlocking value beyond compliance
As mining companies begin to take steps to embed value beyond compliance into their corporate DNA, they should also consider how they plan to demonstrate this commitment to the investment community. This often involves measuring their social impact in terms that each stakeholder group understands, and then linking these metrics back to the ESG and SDG principles. Companies could need to supplement their financial metrics with proof points that show the real-world social impacts they are delivering at a grassroots level—which is ultimately what social investors most care about.
The key here is to define, or rather redefine, the concept of value and understand how it’s perceived by various stakeholders, including governments, host communities, and employees. It’s time to acknowledge that delivering value to these other stakeholders contributes to the value received by shareholders. This is the essence of shared value, and it can accrue in terms of quality and predictability of earnings.
How to respond to the demands of social investors
- Create value beyond compliance. To respond effectively to investor expectations, mining companies will likely need to move away from a mindset that relegates corporate social responsibility to a discrete function. Instead, they should consider revising their business models to tackle some of society’s biggest issues—from stakeholder engagement and creating a regulatory dividend to investing in renewable energy, getting proactive about the low-carbon economy, localizing procurement, strengthening diversity and inclusion, respecting human rights and fostering cross-industry collaboration.
- Change the image of mining. In an age of disruption, shareholder activism, and sometimes a breakdown in corporate trust, miners should try to retake control over the sector’s narrative. Oftentimes the industry is viewed critically in many aspects such as environmental and social responsibility. Stories should highlight the industry’s investment in innovation, collaboration, safety, sustainability, genuine rehabilitation, renewable technologies and diversity. In short, value beyond compliance should become a rallying call.
- Get better at brand and reputation management. The aim here is to link investor trust to the company’s strategic plan, instill a duty to protect both public and investor trust in all employees and leaders, and gain the capacity to sense risks to this trust so companies can rapidly respond to crises and emerging threats.
Energy, Resources & Industrials
Deloitte’s Global Energy, Resources & Industrials specialists provide comprehensive, integrated solutions to all segments of the Oil, Gas & Chemicals, Power & Utilities, Mining & Metals and Industrial Products & Construction sectors. Offering clients deep industry knowledge and a global network.
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Get in touch
- Andrew Swart
- Global Mining & Metals Leader
- Deloitte Canada
- aswart@deloitte.ca
- +1 416-813-2335
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