Achieve lasting results and build trust
The mining industry is naturally competitive. But building trust in “brand extraction” cannot be done alone. Each miner is responsible for improving the trust they build with stakeholders and strengthening the social license to mine. As leaders, the Top 40 play a crucial role.
Across all sectors, the ESG revolution is upon us. Miners will see tangible business benefits by reorienting operations around a value proposition that puts people and planet alongside profit. As miners strive to deliver the minerals to achieve a net zero future, the societal impact on communities and the wider stakeholder ecosystem must be front and center. Looking to the year ahead, we see key areas where miners should focus their attention.
Strengthening ESG Accountability
ESG presents both risks and opportunities for the Top 40. Governments and regulators are sending clear signals that they will hold companies accountable to operate more sustainably and ethically. The EU is leading the charge with its supply chain oversight, but it’s not the only jurisdiction taking a tougher stance on ESG.
In 2021, the United States Securities and Exchange Commission issued a risk alert focused on greenwashing. In the same year, a major Chinese regulatory agency declared its intention to implement enhanced sustainability reporting. Japan, Malaysia, India, Singapore and the UK have also taken steps to demand more ESG transparency and action from companies.
This growing pressure presents the Top 40 with the opportunity to position themselves as the world’s leading suppliers of ethically and sustainably sourced materials, particularly those intended to power batteries, solar panels, wind turbines and other technologies. Many mining leaders are responding positively to the challenge.
Rio Tinto produces carbon-free aluminum and sells it to Apple for use in making its products. BHP supplies nickel sulphate to Toyota and Panasonic to make low-carbon batteries as part of a green electric vehicle ecosystem. These initiatives demonstrate that miners and buyers often need to work together to meet the growing ESG expectations of governments and other stakeholders such as employees, local communities and customers.
Trust is an essential material
In the age of critical minerals, maintaining a strong social license to operate is more critical than ever to success. Demand for critical minerals exceeds short-term supply. To make up for this shortfall, miners will need to develop more mines, often in previously unmined areas. As they seek to grow, miners will need to work even harder to meet community expectations and build trust.
In January 2022, the Serbian government revoked Rio Tinto’s operating permits for the group’s $2.4 billion Jadar lithium project in response to environmental protests. The decision eliminated almost a third of future European lithium production.
In the United States, Lithium Americas Corp.’s Thacker Pass project. has been the subject of legal challenges by environmental groups, and Ioneer Ltd.’s Rhyolite Ridge mine. has been weighed down by extensive environmental reviews and regulatory disputes.
In Central Africa, cobalt miners face pressure to meet community expectations regarding worker rights and child labor. These serious matters are a priority that require the attention of minors.
Building social license begins with forming genuine partnerships that genuinely respect and benefit local communities and the rights of Indigenous peoples. Miners of the Future is community-centric and focuses on providing skills, decent jobs, worker protection, social and economic development, inclusion and equity.
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Environmental stewardship, i.e. responsible management of biodiversity conservation, tailings management, water quality and mine closure, is of paramount importance. essential for the inheritance of a minor. Rightly or wrongly, entire industries are often judged by a few bad projects or companies. Every miner has a role to play in improving the social license of mining.
Achieve net zero
The pursuit of net zero goals poses a series of choices for miners. They can divest, decommission, reduce emissions in existing operations, or offset assets that produce high greenhouse gas (GHG) emissions. Many of the top 40 have publicly committed to achieving net zero goals by offsetting current emissions, either by purchasing carbon offsets or investing in solutions that mitigate climate change.
Asset disposal will reduce a miner’s GHG emissions on a stand-alone basis. But in many ways, this decision just makes the shows someone else’s challenge. Transferring assets to third parties increases the risk that those assets will not be decommissioned in a timely or appropriate manner and will continue to contribute to GHG emissions well into the future. Industry surveys conducted by the International Council on Mining and Metals (ICMM) indicate that nearly 20% of operating mines are likely to close within the next decade.
This poses challenges not only to mining companies, but also to the communities and governments on whose lands they operate. To manage closures and decommissioning sustainably, miners will need to collaborate with stakeholders on funding, post-mining land use goals, and transitional support to employees and communities. This is an important opportunity for miners to build trust and advance net zero ambitions.
Dynamics of tax governance
Tax collection continues to be a clear priority for governments, especially with the need to fund budget deficits that were needed to mitigate the impact of the pandemic. Inevitably, stakeholders will keep a close eye on how miners, especially the Top 40, react to this increasingly intense scrutiny. Miners should continue to prioritize tax transparency and governance as a key objective within the company.
We have previously highlighted the need for miners to seize the opportunity to ensure they tell their own story about paying their fair share of tax rather than letting others tell it for them. According 25th Annual PwC Global CEO Survey48% of mining and metals CEOs moderately to strongly agree that they effectively report all taxes paid to the public.
This percentage compares favorably to the overall global industry result of 33%. Barrick Gold Corp. released its first stand-alone report on tax contributions in April 2022 as a core part of its annual report. In December 2021, the ICMM reaffirmed its commitment to tax transparency and further strengthened existing tax transparency reporting requirements. (Over 50% of ICCM members are in the Top 40.)
Miners have the momentum to lead tax transparency efforts, but there is no time to rest. Over the past year, governments have stepped up their efforts to ensure businesses pay their fair share of taxes. The OECD continues to advance its Pillar 1 (reallocation of taxing rights) and Pillar 2 (comprehensive minimum tax) solutions as countries strive to implement international tax reforms at a steady pace.
The OECD estimates that Pillar 1 will reallocate US$125 billion in annual profits and Pillar 2 will increase annual tax revenue by US$150 billion globally. There are proposed exclusions for extractive companies with respect to Pillar 1. However, we expect Pillar 2 to affect most, if not all, of the Top 40.
The OECD has set a target date of 2023 for the implementation of Pillar 2. The OECD’s preliminary technical guidance on the rules points to a significant degree of complexity in data collection, administration and compliance. It’s a reminder that the Top 40 should make it a priority to review the impact these rules will have on their business and the tremendous effort required to meet the many compliance requirements.
At the national level, governments are developing more comprehensive and sophisticated tax regimes. Chile is seeking to introduce new mining royalties and Peru is pursuing tax reform to increase taxes on miners. In the United States, the state of Nevada recently passed a new excise tax to fund education that would double the taxes paid by gold and silver companies. Miners should take note of tax reform not just internationally but in every jurisdiction they operate in, and they should ensure that they remain compliant.
Putting ESG to work for mining
Being part of an ethical supply chain, protecting the environment and dealing fairly with communities can help miners win new business and create a premium for their products. In 2021, S&P Global began publishing a “green aluminum” price index, showing that customers are willing to pay an additional US$10-15 per ton for sustainably produced aluminum. These types of green premiums will only continue to grow as consumers become more discerning about supply chains and provenance.
ESG performance also affects the cost of capital. Increasingly, banks and investors are cutting ties with projects deemed unsustainable or unethical. On the other hand, ESG-friendly companies can often access cheaper capital through mechanisms such as green bonds or sustainability-linked loans.
ESG is about more than ticking boxes. It is about acknowledging the ongoing transformation of capital, business and society. ESG, like critical minerals, can be a strategic lever that helps miners align with this transformation. ESG must be considered at the heart of what a miner is; this will lead to sustainable results that generate value and growth while strengthening our environment and our societies.
Read the full report here