[Column] Cameron Tandy: Mining industry is becoming a steward of sustainability and decarbonization
Miners are stepping up to take a more prominent role in the energy transition. According to the United Nations Global Compact-Accenture Strategy CEO study, about 72% of mining and metals CEOs agree that sustainability issues, including decarbonisation, are “very important” or “important” to the future success of their businesses (compared to just 54% across all industries).
For a long time, the mining industry was considered a contributor to the problem of environmental sustainability, but now it is increasingly seen as a critical part of the solution. As a result, many mining companies are now embracing their role as environmental stewards by increasingly focusing on reducing greenhouse gas (GHG) emissions.
Perceived financial incentives are a significant driver
This change in perspective is predominantly financially driven. Miners see decarbonisation as a revenue opportunity – mining and selling the necessary raw materials that drive the energy transition (copper, lithium etc.) or charging premium prices for lower-carbon products. And now, with a growing pool of sustainability-linked funding by investors focused on environmental, social and governance (ESG) factors, miners view decarbonisation as a means to reduce their cost of capital via enhanced access to this funding.
While mining companies must balance the interests of multiple stakeholders – including local communities, governments, regulators, end customers, employees and investors – equity investors want to see action and favourable financial results before rewarding companies with increased valuation and investment. We studied the share price movements of mining companies three days before and after their decarbonisation announcements. The results showed no apparent change between companies’ cumulative average abnormal returns and the broader sector, nor did they show a disappointing average market reaction.
Accenture conducted the Global Institutional Investor Study of ESG in Mining to determine the reasons behind this market behaviour. The study found that more than 83% of investors view improving financial performance and strengthening the balance sheet as “important” or “very important,” whereas aggressive decarbonisation was viewed as “important” or “very important” by less than 70% of respondents. Ultimately, investors are asking mining companies to pursue decarbonisation aggressively while simultaneously asking that decarbonisation initiatives bring financial gains, whether they come from improved earnings or lower cost of capital.
Decarbonisation-driven investment may be temporary
There is no denying the public pressure on mining companies to pursue sustainability and decarbonisation. Still, when stacked against a list of other mining-related priorities, investors ranked sustainability initiatives second to last as a value driver. Ranking highest were emerging technologies and digital transformation initiatives.
Overall, the findings suggest a risk that investors may be less inclined to invest in mining companies with strong sustainability credentials if the availability of green capital should decline. The impact of climate change appears to be less crucial than the financial motivations in investors’ minds, with the lowest number (only 57%) of respondents highlighting it as an “important” or “very important” consideration.
Investors view emerging technologies and digital transformation as the best opportunities to achieve value. Technologies such as advanced automation, data analytics, artificial intelligence (AI) and blockchain can likely drive operational efficiencies that enhance revenues and earnings. These technologies can also be instrumental in achieving decarbonisation and reporting on decarbonisation performance. Therefore, it is reasonable to expect that digital transformation projects can be well-received by investors and other stakeholders.
Making decarbonisation environmentally and financially rewarding
Sustainability and profitability are not mutually exclusive ideals, however. Optimal management practices in decarbonisation can enhance value in the mining sector. Also, quantifying and monetising the solutions that address this can generate financial returns – whether it be improved earnings or market valuation multiples - that drive higher shareholder value.
For example, the Global Institutional Investor study noted that investors are far more concerned – by a factor of four - with the Scope 3 emissions of miners rather than Scope 1 and 2 emissions, even though miners have little influence over the emissions of downstream sectors like steelmaking or aluminium smelting. Accordingly, initiatives to address Scope 3 emissions can result in a magnified positive response from shareholders.
Avenues to address Scope 3 emissions include joint ventures and R&D partnerships with downstream companies devising new low-carbon processes and products. In the case of bulk materials like iron ore, focusing on beneficiation and grade control initiatives can have a magnified impact on Scope 3 emissions at today’s downstream processing plants. Scope 3 emissions should be accounted for in capital allocation decisions when assessing such initiatives.
Ultimately, investors see the most significant opportunities when miners focus on digital transformation and efficiency initiatives that can reduce emissions (Scope 1, 2 and 3). The first step is to establish the framework for reliable carbon emissions measurement, tracking and auditing so that the monetary value of decarbonisation down the entire value chain can be reliably quantified and integrated, not just within the mining company but with suppliers and customers alike.
Moreover, these initiatives lay the groundwork to enable miners to leverage their in-house human ingenuity to de-risk the more significant decarbonisation challenges. The result is more than a boost in environmental sustainability – it is a source of long-term financial sustainability.