Guide to Mining Finance - environmental, social and governance considerations

TECHNICAL GUIDE TO FINANCING: ENVIRONMENTAL AND SOCIAL INPUTS REQUIRED

The changes correspond with evolving ESG risks to financiers. The textbox below lists matters most commonly presenting risks through their potential to halt projects, suspend operations, increase management costs and/or result in significant closure liabilities.  These are listed in historical order rather than importance.  All are important, with the associated risks varying according to the ESG setting of the operation. Closure liabilities have always been a material issue for financiers, while compliance has only recently become associated with significant risk.

International initiatives, public reporting codes and standards applied by financiers

The changes can also be clearly related to international initiatives that have had a direct influence on law and views of good practice.  The most important of these being the Rio Declaration (1992), the Declaration on Fundamental Principles and Rights at Work (1998), the Millennium Declaration (2000) and the Sustainable Development Goals (2016).  The latter consolidates and updates the paradigms introduced by the earlier initiatives.  The principles in these initiatives are introduced into national law, international standards, industry good practice initiatives and corporate standards.  United Nations agencies play a major facilitating this.

Codes for public reporting of mineral resource and ore reserve reporting codes require "environmental, social and governmental modifying factors are taken into account when converting mineral resources into ore reserves".  This requirement was included in the first code - the 1989 JORC Code.  Historically the modifying factors to be considered were undefined and two decades ago there was a tendency to focus predominantly only on closure liabilities.  With time the scope has expanded to include permitting, water and waste management and other environmental issues, stakeholder agreements and social licence to operate.

The most elaborate guideline on environmental, social and governance (ESG) factors to be included covered in public reports on mineral resources and reserves is the South African SAMESG guideline (2016).  This formally recognises a number of international standards, including the United Nations Global Compact, the Global Reporting Initiative, the Equator Principles and the International Finance Corporation (IFC) Sustainability Framework.  It requires disclosure of the following: ESG legal matters; environmental and social context and risks; legal compliance audit findings; ESG management system conformance findings; and ESG risk assessment and management.  The increased emphasis on legal compliance is particularly notable.

For over a decade, mining projects and operations looking for finance from financial institutions have been encouraged to observe the Equator Principles (EPs), the IFC Performance Standards (PS) on Social and Environmental Sustainability and relevant World Bank Group Environmental Health and Safety (EHS) Guidelines.  The standards and guidelines do not apply to "designated countries", which are countries deemed to have adequate legislation and institutional capacity to protect their people and the natural environment.  Designated countries include Australia, Canada, Israel, New Zealand, Switzerland and the United States.  They also include all current members of the EU other than Bulgaria, Croatia, Cyprus, Latvia, Lithuania, Malta and Romania.

Projects and operations receiving debt and equity finance from financial institutions signed up to the EPs have to comply with Environmental and Social Action Plans (ESAPs) addressing gaps in compliance with the EPs, the IFC PS and/ or the WBG EHS guidelines.  The ESAPs are prepared following due diligence reviews and are made binding through conditions in agreements with financiers.  Some developers mistakenly think that the IFC PS requirements override legal requirements. It is important to appreciate that the EPs require conformance with host country legislation, as well as the IFC PS.

New In: Compliance with Approvals

Compliance is of interest to financiers because operations can be stopped temporarily or their permits to operate can be revoked if there is persistent non-compliance with approval conditions.

The number and complexity of approvals required to proceed with mining projects has grown in the last two decades.  The bulk of the approvals are ESG approvals. A great deal of attention has been focused on obtaining approvals, but less has been focused on compliance with conditions of approvals.

Remarkably, compliance has not been critical to renewal of approvals in many jurisdictions and has not been rigorously tracked by mining companies and regulatory authorities, until recently. 

Increased focus on compliance with approval conditions can be related to a sharp rise in the number and magnitude of fines for non-compliance.  This trend applies to all industry, not just the mining industry. A record fine of £80 million for non-compliance was issued to a water service provider in the UK in 2017.  Recent record fines in the mining industry are in the order of 8 million and 16 million USD, recorded in the Americas.

In addition, there has been an increased frequency of suspension of mining operations for materially significant periods due to non-compliance with permit conditions.  A decade ago, suspensions of operations were almost unheard of.

Now that mines are tracking compliance they find that many of their commitments are poorly worded and/or difficult to comply with.