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Investing in the mining sector through an environmental, social and governance (ESG) lens is more complex than just allocating to miners producing metals key to the energy transition to low-carbon technologies such as lithium, nickel and other components. Rather, it involves a broader approach of analyzing the mining process itself, according to experts.
And there are a growing number of tools and standards emerging to help keep the due diligence process as simple and straightforward as possible.
“It is more about how we mine it, not what we are mining,” says Kevin D’Souza, chief sustainability officer at private equity firm Resource Capital Funds in Toronto. “Being a lithium miner doesn’t necessarily make you better than a gold miner that has been doing wonderful stuff on the ESG front for decades.”
For example, according to a study published by non-profit organization American Geophysical Union earlier this month, one of the most common methods of lithium extraction could be causing more damage to local water supplies than previously thought.
“We cannot go about trying to solve one societal problem and create another,” Mr. D’Souza says.
Roopa Davé, partner, sustainability services, at KPMG LLP in Vancouver, says understanding a miner’s approach to how it produces responsibly should be the top issue for advisors.
“These resources come with a lot of other challenges beyond environmental ones, ranging from geological to socioeconomic and geopolitical,” she says.
Such wide-ranging analysis can seem overwhelming to advisors looking to satisfy growing client demand for ESG considerations in their investment decisions. However, some data providers are putting together rating systems designed for investors looking for a more straightforward seal of approval.
The pros and cons of standardized analysis
MSCI Inc. is one such provider of ESG ratings that offers “an easy metric to digest,” says Sam Block, vice president of MSCI ESG Research in Burlington, Vt.
“We can provide a standardized, consistently applied model to evaluate these companies from an ESG perspective,” Mr. Block says.
“We are able to weigh the different issues based on the impact that each issue is expected to have on an industry and also the timeline for when we expect a certain issue to be realized in a way that could impact a given company’s bottom line.”
Yet, no matter how detailed any standardized ESG analysis attempts to be, RCF’s Mr. D’Souza warns that such ratings systems risk creating the “illusion” of tangible ESG progress.
“There is this weird beauty pageant to get the best metrics and reporting out,” Mr. D’Souza says. “That is a worry, that everyone gets caught up in what the [ratings providers] are putting out rather than what is actually going on at the [particular] mine site, and so many have already fallen down that trap.”
More bespoke analysis tuned to each potential investment is always ideal, though Mr. Block says the option is usually not practical for retail investors.
“Financial advisors might not know every single detail” using MSCI’s analysis, he says, “but they can rely on a consistent approach so they can understand and digest the information they are looking for.”
When junior players don’t disclose everything
Where ESG analysis can become more complicated is when considering investments in the junior mining sector. That’s in part because exploring for transition metals, in particular, is a major area of focus for micro-cap players, according to Lauren Bermack, national deals mining leader and partner at PricewaterhouseCoopers Canada in Toronto.
“For junior mining, you really have to do the research and understand the individual companies well enough because there are a lot of them,” Ms. Bermack says. “It is not something you’d want to go into without a lot of knowledge.”
There were a total of 612 junior miners registered in Canada as of 2021, according to federal government data.
Complicating matters further, KPMG’s Ms. Davé says junior miners represent “highly speculative” investments, and many of them don’t necessarily have the budget and capability to report and disclose ESG metrics on the same level as some of the bigger players.
For advisors looking for an “easy answer” that will spare them from countless hours of due diligence, Ms. Davé says they can look to see which juniors are joining larger ESG collaborations such as commitments to The Mining Association of Canada’s set of standards, Towards Sustainable Mining, or participation in the Initiative for Responsible Mining Assurance as evidence of best practices.
The key, Mr. D’Souza says, is for advisors and investors to keep both production and process in mind when considering whether any miner fits within an ESG-focused portfolio.
“The extraction of critical minerals for the energy transition while also holding a strong ESG performance generally are not mutually exclusive,” he adds.
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