ESG and Your Portfolio – Building a More Sustainable Future
“You wouldn’t invest in companies that didn’t report their core financial data. So, if you are a ‘values’-based investor you cannot very well invest in companies which don’t detail material information.”
Leon Saunders Calvert, Head of Sustainable Investing & Fund Ratings, Refinitiv
Key Takeaways
- Mining companies have embraced the ESG movement and are incorporating its values into their business models.
- There are over ten different ESG frameworks, principles, standards, and other guidelines to choose from.
- Water management and the protection of biodiversity have become top ESG priorities.
- Responsible Gold Mining Principles give investors confidence that companies are making consistent efforts on ESG.
- With 7.8% of total patents related to sustainability, the mining industry is not only an early ESG adopter but also an ESG R&D leader.
- Gold as a physical asset is one of the most carbon-neutral investments over its lifespan.
Introduction
“Please take me dancing tonight, I’ve been all on my own.”
Sting
Mining companies have embraced the ESG movement and are incorporating these values at their core. Just like Sting, they want investors to take them dancing and give them the recognition they deserve. However, for investors the story is not that easy. When it comes to choosing your ESG investment strategy, you might feel lost early on. Mining investors looking to clear the ESG fog swiftly realize that just as out on the highway, shining more light on the road ahead can prove counterproductive. How can one find their way through such a fog? There are over ten different ESG frameworks, principles, standards, and other guidelines to choose from.
Environmental, Social, and Governance Frameworks in Gold Mining
Source: Incomet Capital
The table portrays the ESG norms currently in place that apply to the gold and general mining industry. They range from the UN Guiding Principles on Business and Human Rights, to the Conflict-Free Gold Standard and the Framework of the TCFD, which covers a few ISO norms, and also include the ICMM Mining Principles, the GRI Standards, and the UN Sustainable Development goals, amongst others.
With this excessive number of guidelines, principles, and frameworks, it is difficult for investors to assess the true ESG compliance of a mining company. Investors cannot precisely evaluate the details of all these frameworks and local legislation, as such evaluation could take months for just one company.
This leads to a major problem: Investors, banks, advisors – in short, the entire financial system – must now comply with ESG investment regulations in Europe, and soon in America, as the ESG regulation wave keeps moving on.
Understanding this new reality, rating agencies have risen to the challenge, as they have in the past,[1] and now provide investors with ESG ratings for thousands of publicly traded companies.
Thus, thanks to the rating agencies, building an ESG-compliant portfolio has never been easier. However, a lot of discrepancies exist among the rating agencies’ assessments leading to their ESG ratings. This uncertainty can prove detrimental to any ESG portfolio investment strategy.
Portfolio Strategy: From Best in Class to Avoidance Screening
“When I think about ESG for any given portfolio investment, it starts with what will be most financially material for any prospective investment.”
Lila M. Murphy, Intrinsic Value Partners
Technically, building an ESG-compliant gold mining portfolio requires only a few steps: Define the ESG characteristics of the portfolio, choose an ESG data provider, implement an investment strategy, and then engage with your investment.
The choices involved in every step can have a major impact on the complexity and efficiency of the ESG portfolio’s performance. Without providing a how-to guide, we aim to point out the main ESG portfolio strategy used in the markets today and offer some additional relevant information that could help you to see more clearly.
Define which issues regarding ESG are important for your portfolio
From water discharge to gender equality on the executive board, ESG ratings are based on more than 1,300 data points, leaving infinite possibilities for building a portfolio that goes hand in hand with the clients’ chosen values.[2] Defining ESG parameters becomes the center point of the strategy. It is also important to keep in mind that ESG issues are not static. As shown in the next chart, the main concerns in 2008 were environmental policy and environmental management, as well as emissions. Even if emissions are still a top criterion, water management and the protection of biodiversity have now become the new top priorities.
Evolution of ESG main issues between 2008 and 2018
Source: Elena Escrig-Olmedo, Incrementum AG
Choose Your ESG Data Providers
Without reliable data, the task of analyzing the ESG performance of a gold mining company is almost impossible to achieve by yourself. The company might publish a nonfinancial report (which is a good starting point), but such reports are often produced in order to make the company stand out positively. Financial reports can be compared from one company to the other, but this is not (yet) the case for ESG reporting.
Using the services of an ESG rating agency is, therefore, highly recommended. It could even be wise to use and compare the scores of more than one rating agency, since the various organizations tend to have enormous discrepancies among their scoring processes. A weighted average of ratings from Sustainalitics, Refinitiv, ISS ESG, VigeoEiris, and MSCI could potentially provide the best insight.
Over 10 major rating agencies provide ESG scores. For your convenience we have selected a few that we consider to be the most appropriate for the gold mining industry and have dived into their pros and cons for investors.
Pros and cons of the most-used ESG rating agencies
Source: Rate the Raters 2020: Investor Survey and Interview Results, Incrementum AG
Choose Your ESG Implementation Strategy
In the highly competitive ESG portfolio management race to gain more assets under management, investments strategies evolve rapidly. Choosing the top ESG mining performers is no more the trend when building a client’s portfolio. Upon specific request, fund managers can build personalized portfolios that exclude mining companies with the lowest ESG performance or build the entire strategy to focusing on only one or a few precise issues that are at the core of their client’s values.
Incidentally, the most-used model by asset managers was to build a portfolio of gold mining companies to act as a benchmark. We applied an ESG overlay, as discussed in the In Gold We Trust report 2020,[3] (excluding the companies with the worst ESG performance and determining the portfolio objective by controlling the weighting composition. By readjusting the weighting monthly and fixing clear parameters, the ESG value of the portfolio can be increased significantly without sacrificing financial performance. Additionally, these portfolios tend to produce slightly better returns than their benchmark. As expected, this model has now greatly evolved and complexified, so that ESG is treated more and more as just another common financial parameter.
When deciding how to integrate ESG factors into investment decisions and processes, it is important to remember that these factors can be used in the same way as financial factors. The principles of responsible investment provide us with clear insight on the four different strategies currently used by fund managers:[4]
- Fundamental strategies require the investors to adjust the company financials according to their ESG consequences. For example, if a company must treat more contaminated rejects, their operating costs increase.
- Quantitative strategies are used by fund managers to build investment models that incorporate ESG factors into all the financial data, such as revenues, net profit, etc.
- Smart beta strategies focus on the portfolio risk profile, with a focus on ESG. The ESG factors can be used to weigh the portfolio construction, resulting in a lower ESG risk exposure.
- Passive strategies allow the fund manager to adjust a benchmark index composition by weighting the companies making up the index by their ESG scores.
Building Your Portfolio – Selecting Individual Companies
Many strategies can be deployed to choose individual companies. One investor could favor only gold companies that are implementing the Responsible Gold Mining Principles. This would ensure that the selected companies have a real commitment to sustainability and are specifically addressing gold mining ESG challenges.
Other investors could focus on general ESG scores as a selection criterion. No matter which strategy one selects, the same steps will be applied: initial screening, due diligence, investment decision, investment monitoring, execution of exit.
Engage with Your Investment!
This step might be the most important in managing your portfolio: Engage with the companies you invested in. It has been proven that the agent of change is not divestment but engagement. By being vocal in asking companies to do more towards ESG, you become an agent of change. The more that shareholders prioritize ESG-favored decisions, the more the company will have to embrace them.
If the executive remuneration of a public company does not include an ESG performance vector, there is no incentive to lean in this direction. However, if active ESG investors pressure the execs to incorporate the mitigation of environmental and social damages into their remuneration, changes in the company’s ESG policies will happen quickly.
ESG Ratings: What to Improve Next?
“It is not good enough to do what the law says. We need to be in the forefront of these social responsibility issues.”
Anders Dahlvig, CEO of IKEA
The European Union Commission (EUC), the first adopters of ESG into their financial regulations, published a report on ESG rating issues in November 2020.[5] They identified that the main problem with ESG ratings has to do with the inner workings of the rating agencies. They concluded that addressing this fundamental problem is crucial for the future of ESG-compliant investment.
The main recommendations focus on nine pressing issues that currently reduce the reliability, quality, and relevance of using ESG ratings, which remain the only point of reference for fund managers and investors in regards of their regulatory ESG obligations.
The European Commission is focusing its attention on the data used to make the ratings. They are demanding greater transparency, accuracy, and reliability as well as more time-sensitive data. Additionally, the agencies be careful of data bias and only use data that is highly correlated with its material impacts. They should clearly divulge their possible conflicts of interest.[6] Moreover, they must provide better materiality and contextual understanding of their ratings. They will have to clarify which information comes directly from mining company sustainability disclosures and which from their engagement with companies, and use clear and consistent terminology that allows verification and the reproduction of results.
Is There a Way Around?
“There will be no one price for copper. There will be no more one price for gold. Everything will be priced in relation to its ESG components…”
Robert Friedland
For gold mining investors interested in following ESG principles, one way to get around these problems is to look for companies that have adopted the Responsible Gold Mining Principles. They give investors the confidence they need that companies are making consistent efforts and are deploying money into their ESG management. Furthermore, you should look at companies that not only report on all the aspects covered by the RGMP, but that are also assessed by an independent firm.
As joining the RGMP is done on a voluntary basis but engages a lot of capital, both financial and human, it sends a strong message to investors that ESG is a priority. Additionally, as the reporting follows strict guidelines, it allows comparisons among companies. Therefore, there is a higher chance that the scores obtained through RGMP will contain fewer discrepancies than those obtained by companies working with different rating agencies.
Another way to understand the mining industry’s commitment to ESG values is by the impressive proportion of green-patent holders per sector in proportion to their respective total patents, as per the following graphic, where gold represents non-sustainability-related patents, blue denotes “green” patents related to environmental themes, and turquoise represents “blue” patents related to improving conditions and addressing unmet sustainable development needs.
Percentage of Sustainable Patents per Industry
Source: Journal of Cleaner Production, Incrementum AG
With 7.8% of their total patents related to sustainability,[7] the mining industry, a big part of the Materials sector, is not only an early adopter but also a leader in regard to their commitment to R&D and mitigating ESG-related risks. Many of the patents help either to lower the costs of operating or to reduce the externalities of the mining process. An example is the patent for a mining method for stopping inclined extremely thin ore veins.[8] Not only does the method help to reduce costs, but it also reduces the mining of sterile rock, leading to smaller tailings and reduces the energy used for the entire process. Other patents in development, such as this one for “Methods, Materials and Techniques for Precious Metal Recovery,[9] can lead to less use of contaminants while increasing gold recovery in the leaching process. This consequently means less contaminants to treat, reduced costs, and improved project economics.
Gold Miners’ Success Stories
It is easy to forget all the efforts that the gold mining sector has poured into sustainability issues in the past few years. Many funds and organizations are now updating the markets by chronicling the hard work the sector has done to improve its ESG performance across the board.
In that regard, our partner Baker Steel Capital Managers[10] has collected information on over 120 mining companies located around the world. They found that the mining sector has made noteworthy progress towards achieving ESG goals, especially in the fields of energy efficiency, water efficiency, and emissions reduction across the sector, as well as improved safety for staff. For example:
- Over the past 15 years, US mines have seen a 63% reduction in the fatal injury rate.
- 75% have a dedicated sustainability committee.
- 80% have energy efficiency, water efficiency, and emissions reduction policies.
- 90% of companies have ethics and human rights policies.[11]
In measuring the efforts of the gold mining sector towards sustainability, the most relevant actor is the World Gold Council. In September 2020 they published a new report highlighting gold mining’s contribution to the UN Sustainable Development Goals.[12] Their research focuses on case studies and examples of miners all over the globe helping to advance and promote sustainability and the 17 UN Sustainable Development Goals.
Gold miners’ 17 SDG initiatives: selected projects
Source: World Gold Council
Mining companies that commit to the Responsible Gold Mining Principles have enhanced the lives of all their stakeholders. The RGMP and the SDGs share the same objectives through four main pillars: global partnership, social inclusion, economic development, and responsible operations, energy and environment.
Mining companies have helped to improve local communities all over the globe, and we present just a few examples contained in the WGC report in the following table:
Source: World Gold Council, Incrementum AG
What Are Our Premium Partners Doing on ESG?
In this chapter, we have covered some of the big trends in the mining sector. We now turn our attention to the way ESG principles are being implemented by some of our Premium Partners in gold and silver mining. We provide a brief summary of each partner’s ESG activities below.
Agnico Eagle
Agnico Eagle is a Canadian gold producer with operations in Canada, Finland and Mexico. They have one of the lowest greenhouse gas emissions (GHG) intensities within their peer group. The company is achieving this by sourcing 52% of their electricity from renewable sources and implementing a range of GHG reduction initiatives. Within its operations in the Canadian region of Nunavut, Agnico Eagle is considering utilizing wind power generation, and has already obtained permits to make this possible at their Hope Bay Mine.
You can read more about Agnico Eagle’s ESG activities via the section of their excellent website dedicated to sustainability.[13] Also, in 2020 Agnico Eagle published a comprehensive sustainability report that contains a thorough overview of their activities.[14]
Gatos Silver
Gatos Silver is a US-based silver company focused on high-grade silver deposits in geopolitically stable jurisdictions. They place employee safety and environmental protection at the heart of their operations. The company provides comprehensive benefits to local employees that include education assistance, medical care support, and the provision of clean, sustainable water.
Gatos Silver strives to hire locally. Currently, 60% of their employees reside in Chihuahua State, where their mine is situated. They are also very attentive to gender diversity: 20% of their workforce are women, well above average for the sector.
Gatos Silver have built San Jose del Sitio’s first full-time medical clinic and have been implementing comprehensive measures to prevent the spread of Covid-19. Their website contains more information about their sustainability activities.[15]
NOVAGOLD
NOVAGOLD is a Canadian mining company. They are committed to responsible mining, protection of human life, encouragement of good health, good stewardship of the environment, and adding value to the communities in which they work. The company has placed ESG principles at the heart of their business strategy for 25 years, but it is only recently that they have begun to quantify this activity with detailed metrics, which were developed in partnership with Barrick Gold.[16]
NOVAGOLD’s 2020 sustainability report goes into great detail on their activities.[17] Reflecting the importance NOVAGOLD attaches to sustainability, they have recently revamped the sustainability page of their website,[18] which contains a range of resources for those looking for a deeper dive into the company’s ESG activities.
Osisko Gold Royalties
Osisko Gold Royalties Ltd is a Canadian company that holds royalties in gold, silver and diamond mines. Osisko have been stepping up their ambitions to become a leader in the ESG space, focusing on decarbonization. In 2020 they released their inaugural ESG report, committed to global decarbonization through strategic partnerships and committed to the United Nations Global Compact, the world’s largest voluntary corporate sustainability initiative.
Osisko has announced a strategic partnership with Carbon Streaming – an investment vehicle that offers investors exposure to carbon credits – to help promote global decarbonization and biodiversity projects. Osisko’s investment totaled CAD 3.5mn for a 14.3% stake in the company.
Osisko’s reporting contains details of the ambitious actions they have undertaken to become an ESG leader. [19]
Victoria Gold Corp
Victoria Gold Corp. acquires, operates, explores, and develops mineral properties in Canada and the United States. Their ESG strategy has four pillars: health and safety, community investment, environmental stewardship, and local employment within Canada’s Yukon Territory.
In the course of over 3 million person-hours of employee working time, only three “lost time incidents” due to accidents have occurred at Victoria Gold Corp sites. The company works extensively with local businesses and has agreed an impressive CAD 200mn of contracts with local companies. Victoria Gold Corp is also the largest private employer in Yukon, employing 350–400 people, 50% of whom are Yukoners and 25% of whom are women. Their website has a community page that contains more information about the actions they are undertaking on ESG.[20]
Hecla Mining
Hecla Mining is a silver, gold and other precious metals mining company based in Coeur d’Alene, Idaho. They are the largest silver producer in the United States. Hecla are making efforts to address climate change by reducing the carbon emissions of their operations. By harnessing hydropower at their Greens Creek site they were able to reduce overall GHG emissions by 36% in 2020 based on 2019 levels.
Hecla’s 2020 sustainability report provides details of their impressive 2020 performance despite global challenges, as well as the varied measures the company is undertaking to support ESG objectives.[21]
Ximen Mining Corp
Ximen Mining is a mining exploration and development company based in Vancouver, Canada. They are committed to leadership in sustainable mining, environmental protection, responsible development, and safety in the workplace.
Water resources preservation is a key priority for Ximen. Their Kenville Mine in British Columbia discharges water that is clean enough to drink. Studies are also underway to harness power from the run-off water of their mine portals, so that turbines can be used to power long-life LED lighting. Another objective of Ximen’s Kenville Project has been to eliminate diesel and fossil fuel emissions from their operations wherever possible. Their primary power source is electricity supplied from the Kootenay hydroelectric generation system.
In an effort to reduce carbon emissions, 99% of Ximen’s underground and development equipment is pneumatic and powered by an air compressor drawing on hydropower. Remaining equipment is powered by new high-efficiency diesel. Plans are also underway to install solar power on Ximen’s Kenville site. Ximen’s website contains more information about their efforts to maximize the sustainability of their operations.[22]
Endeavour Silver
Endeavour Silver Corp. engages in the evaluation, acquisition, exploration and development of precious metal properties, primarily silver in Mexico. Their Sustainability Strategy covers five core areas: safety and health, people, community, environment, and economic value. Supporting the United Nations Sustainability Development Goals is at the core of the Endeavour Silver’s strategy.
In 2020 Endeavour Silver invested USD 1.5mn in environmental protection measures, achieved a 90% water recycling and reuse rate, reduced their GHG emissions by 34% based on 2019 levels, and supported the planting of 44,000 trees through a reforestation initiative.
Endeavour Silver’s brand-new sustainability report contains a great wealth of information about their ESG initiatives.[23]
Solgold
Solgold is a leading exploration company focused on the discovery and definition of world-class copper and gold deposits. The company is headquartered in Brisbane, Australia.
Solgold is committed to sustainable exploration and mining. They see transparent and responsible practices as critical to long-term success. Their priorities are their people, their communities and protection of the environment.
Solgold aims to achieve an injury-free workplace, equal opportunities for all employees, a proactive contribution to local communities, the implementation of responsible mining practices, rehabilitation and reforestation of land, and responsible use of energy.
Solgold’s website contains more information about their sustainability initiatives.[24]
The Road to the Paris Accord
“Mining companies nowadays have to satisfy investors, local communities, and governments by demonstrating that they are serious about dealing with energy transition and aiming for net-zero sustainability.”
Tim Biggs, Deloitte EMEA and UK
The World Gold Council also recently published their view on the potential pathways to net-zero emissions for the gold mining industry.[25] As stated in the In Gold We Trust report 2020, the energy transition is the most notable change driving the gold mining sector into the new decarbonization economy.[26] Gold as a physical asset is one of if not the most carbon-neutral investments over its lifespan, due to its physical properties, as we note in the In Gold We Trust report 2019.[27]
However, more can be done to reduce emissions produced by mining operations. In their report, the WGC estimates that up to 95% of these emissions come from energy consumption.
By investing in energy transformation projects as soon as possible, the gold mining companies could reduce their emissions by 27% by year 2030 and therefore be roughly on target to meet the Paris Accord emissions objectives for 2050. As seen in the chart below, there is plenty of room for amelioration. Moving towards renewable energy is the sector’s most valuable challenge of the next decade.
Mining companies energy source per country
Source: Wood Mackenzie
Conclusion
“The reality is that ‘ESG is a real indicator of financial performance.”
Terence Lyons
In recognition of ESG’s growing importance, we have chosen to make it a key topic of our In Gold We Trust report for a third consecutive year. Clearly, the gold mining sector is committed to helping solve ESG issues and improve on their legacy of the past, and a new generation of activist and solution-oriented stakeholders is ready to take the industry by storm.
From striving to reach the goals of the Paris Accord on time, to decarbonizing the industry and implementing the UN’s 17 SDGs, every day that passes is one step further on the road to a sustainable gold mining future. We can only hope that investors will keep being vocal about their own ESG priorities and that, in return, executives will lean towards implementing the changes demanded by their shareholders.
Companies and stakeholders will dance to the beat, while the rating agencies will be listening to the lyrics: “Every breath you take / Every move you make / I’ll be watching you”.
[1] See: “Rating agencies part of banking crisis: investors”, Reuters, September 25, 2008
[2] See: Sustainalytics: ESG Risk Ratings
[3] See “ESG Compliance and Financial Stability”, In Gold We Trust report 2020
[4] See Principles for Responsible Investment: A Practical Guide To ESG Integration For Equity Investing, 2016
[5] See European Commission: Study on Sustainability Related Ratings, Data and Research, November 2020
[6] See Krall, Markus: “Governance and Conflicts of Interest in Financial Credit Rating Agencies”, Revue internationale de droit économique, Vol. 2, 2016, pp. 185-195
[7] See Van der Waal, Johannes, Thijssens, Thomas and Maas, Karen: “The innovative contribution of multinational enterprises to the Sustainable Development Goals”, Journal of Cleaner Production, Vol. 285, February 2021
[8] Patent: CN110005412B, 2019
[9] Patent: US20190233917A1, 2019
[10] See Incrementum Baker Steel Precious Metals Fund
[11] “ESG versus performance? For investors in mining it shouldn’t be a choice”, Research & Insights, Baker Steel Capital Managers LLP, April 11, 2021
[12] See World Gold Council: “Gold Mining’s Contribution to the UN Sustainable Development Goals”, September 2020
[13] Agnico Eagle: Our Sustainability Commitment
[14] Agnico Eagle: Sustainability Report 2020
[15] Gatos Silver: Corporate Sustainability
[16] Novagold: Sustainability Summary Donlin Gold Project Reporting Site Inputs – 2020
[17] Novagold: 2020 Sustainability Summary
[18] Novagold: Corporate Social Responsibility
[19] Osisko Gold Royalties: ESG Reporting
[20] Victoria Gold Corp: Community
[21] Hecla Mining: 2020 Sustainability Report
[22] Ximen: Sustainability
[23] Endeavour Silver: 2020 Sustainability Report
[24] SolGold: Our Sustainable Approach
[25] See “Gold and climate change: The energy transition”, World Gold Council, December 9, 2020
[26] See “ESG Compliance and Financial Stability”, In Gold We Trust report 2020
[27] See “ESG: Environment, Social, Governance–Three words worth more than USD 20 trillion?” In Gold We Trust report 2019
