o3 BLOG | Investing
ESG Investing — The Role of Sustainability and Investing in 2022
ESG Investing in 2022 — The world faces several crises and concerns, such as climate change, humanitarian risks due to political tensions, and inequality. While these issues are not new, the rise of the COVID-19 pandemic has amplified the need for solutions from leaders at both corporate and government levels. Such responses will result in massive yet difficult-to-predict impacts on the global economy. Over the past two years, more investors have been using Environmental, Social, and Governance (ESG) data to assess growth opportunities and higher profitability in long-term investment strategies. By facing ESG challenges, investors have bold visions of the future and acknowledge that their strategic capital allocation decisions can make a tangible impact on the world.
When people think of ESG initiatives, the environmental pillar is often at the forefront. Companies across all sectors understand the need to implement greener practices and assess current sustainability initiatives to decrease carbon footprints in response to climate change. However, from a corporate standpoint, societal issues also highlight the need to ensure a support system for employees that prioritize diversity and inclusion policies surrounding race, colour, gender identity, and differing abilities.
Investors Consider Corporate Accountability a Part of ESG and a Contributing Factor to Long-Term Growth and Return
From a company’s board structure and management team to its carbon footprint and waste reduction strategies, individual and institutional investors are looking for public and social accountability at all levels. They also expect board members and senior management to demonstrate their long-term sustainability goals — beyond short-term profits and immediate returns. What are leaders and decision-makers doing for society as a whole? Companies that go beyond check-boxing common targets by focusing on impactful corporate governance and risk management, are likely to catch the eye of investors in search of opportunities for long-term equity returns and sustainable finance.
ESG Creates Value For Investors
Many experts expect investors to continue to hold companies accountable for their ESG goals, especially as the pandemic persists and the possibility of an economic downturn still looms. Companies that develop responsive and actionable policies to tackle ESG challenges and obstacles, as well as ones that institute operational changes — reducing waste or improving risk management — are standing out to investors.
In an annual letter to CEOs, BlackRock’s CEO Larry Fink wrote: “… A company’s ability to manage environmental, social, and governance matters demonstrate the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”
While this statement speaks to companies across all sectors, the complex nature of the mining industry and magnitude of mining projects requires the involvement of governments and the backing of communities. As regulatory policies differ between jurisdictions, mining companies often turn to help from NGOs that focus on sustainability issues ranging from human rights to environmental stewardship.
The mining sector has achieved significant advances in addressing ESG at the corporate and operational levels over the past 20 years. On the environmental front, miners aim to improve tailings safety, minimize water and energy usage, and reduce GHG emissions through various initiatives such as switching to electric and hydrogen-powered trucks and machinery and expanding renewable energy.
Beyond the life of a project, the increased emphasis on social impact introduces a positive and sustainable change in communities and societies — with more progressive miners implementing plans to help communities survive beyond mine closure.
On the governance front, we see an increase in the number of standalone Sustainability Committees providing adequate and independent Board supervision and engagement with senior management. Furthermore, we have seen a push to increase the diversity of directors and leadership throughout the last decade.
In Canada, mining companies have set a global precedent for responsible mining. The Mining Association of Canada’s Towards Sustainable Mining (TSM) standard is an internationally recognized sustainability program that supports mining companies in managing critical environmental and social risks. Given Canada’s position as a world leader in the production of minerals and metals, addressing health and environmental issues is a national priority. In addition to industry-leading ESG practices, Canada, as a whole, offers a support system that allows mining companies to deliver on their sustainability plans.
How ESG Initiatives Lead to Higher Returns for Investors
While ESG initiatives benefit the environment while keeping in mind the interests of stakeholders at multiple levels, ESG can make global capital more accessible, helping companies grow in their existing markets and branch off into new ones. Keeping sight of the bigger picture, many individual and institutional investors understand that sound ESG policies signal financial health. An increasing number of investors use ESG ratings and evaluations to determine if a company is worth investment.
- Increased Accessibility to Capital
Tackling ESG issues can make global capital more accessible. According to a 2021 report conducted by Mckinsey, the mining sector accounts for 4–7% of global carbon emissions. Capital markets place a greater emphasis on sustainable mining practices, with the cost of capital highly dependent on ESG. The report also states that the cost of capital can be 20–25% higher for mining companies with poor ESG scores. Companies that publicly share compliance and regulatory policies to minimize environmental impact demonstrate a long-term commitment to sustainability.
- Higher Valuations
We hear that ESG and financial performance have a direct correlation, but how do companies with ESG initiatives translate into higher valuations than those that haven’t addressed ESG? According to MSCI, a global consultancy highly recognized for its ESG rating system, companies’ ESG information transfers to their value and performance, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (lower costs of capital and lower valuations) (higher profitability and lower exposures to tail risk).
Further, ESG takes a holistic approach that encompasses social engagement practices benefiting local communities and residents through extensive planning and resource sharing. Locally sourcing goods and services, creating employment opportunities for locals supporting community initiatives and creating diversity networks also play critical roles in sustainable ESG policies.
- ESG Regulatory Compliance in Risk Assessment
The Impact Assessment Agency of Canada is a government agency that reports to the Minister of the Environment and Climate Change and provides high-quality impact evaluations that consider the environmental, economic, social, and health impact of planned initiatives. The agency facilitates decisions on projects that support Canada’s sustainable development and helps companies shift to greener operations. Increased support from governing bodies shows accountability, which some analysts correlate to lower risk. A 2020 CFA Institute report stated that ESG analysis should be a fundamental part of investment analysis and requires a disciplined and tangible approach to integrate fully into the investment process. The report also showed the impact of ESG on company share prices across all sectors in 2022 saw tremendous growth over five years (2017–2022).
- Boosts Employee Motivation and Positive Sentiment
Employee productivity can increase if they believe in a company’s ESG goals. By installing a vision and greater responsibility, higher employee satisfaction can directly correlate with shareholder returns. A Marsh & McLennan study also found that attractive job destinations for post-secondary graduates typically have lower carbon footprints, more diversity and a conscious effort to respect employees. “By 2029, the Millennial and Gen Z generations will make up 72 percent of the world’s workforce, compared to 52 percent in 2019. These generations place greater importance on environmental and social concerns than their predecessors do — and will expect more from employers on these issues.” the study reads.
- Reduced risk + Create Shareholder Value.
Allocating capital towards sustainable opportunities can help companies streamline their profits, creating long-term value for investors. According to a study from McKinsey, “A strong ESG proposition correlates with higher equity returns”, from both a tilt and momentum perspective. Better performance in ESG also corresponds with a reduction in downside risk, as evidenced, among other ways, by lower loan and credit default swap spreads and higher credit ratings
Metals and mining investors are showing a greater interest in identifying well-positioned mining companies with sustainably-run operations with the goal of achieving a low-carbon profile, and adequately compensating for ESG externalities. The industry’s ability to credibly and independently demonstrate its commitment to ESG principles, recognize its shortcomings, and effectively use sustainable finance tools will communicate long-term value creation and socioeconomic benefits beyond value preservation.
ESG is not merely a trend and we can expect its role in investing to grow significantly in the near future. Mining companies with transparent ESG practices certified by industry-recognized regulatory and compliance agencies, have a strong media presence, and an accomplished senior management team with a solid track record at fostering relationships within the industry and community demonstrate the opportunity for growth and long-term value for shareholders.
To learn more about O3 Mining’s sustainable initiatives and ESG investing, contact our Investor Relations Team today
The Journal of Portfolio Management July 2019, 45 (5) 69-83; DOI: https://doi.org/10.3905/jpm.2019.45.5.069
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