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Can mining make the sustainability transition?

COP27 Mining .jpg

Among industries that have a big impact on the environment, mining is one of the most impactful. As mainstream banks and investors increasingly question their commitment to miners, one specialist investor is seeing an opportunity and believes the industry is beginning to change, adopting new approaches to reduce its impact and be more sustainable, writes Claire Landon.

There is no hiding from mining’s direct and visible impact on the environment. The extraction of ore from the ground involves stripping land bare to make away for mines and heavy infrastructure, which uses hefty amounts of energy and water, produces air pollution, and generates hazardous waste.

Such industrial activity is clearly at odds with much of the world’s sustainability drive. Yet mining of minerals and metals is critical to support the clean energy transition away from fossil fuels to renewable energy sources such as solar and wind.

Halting mining activity is, therefore, not the answer. Instead, adaptation – where miners embrace new emerging technologies and new sustainable practices – is a more realistic solution to the challenge the industry and the planet faces.

Either you refuse to do it because you perceive it to be dirty, or you commit to doing it better, by prioritising ethical, sustainable and transparent practices
Karim Nasr, managing partner and co-chief investment officer, La Mancha Resource Capital
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This is the view of Karim Nasr, managing partner and co-chief investment officer at La Mancha Resource Capital, and advisory firm backed by Egyptian telecoms billionaire Naguib Sawiris. La Mancha advises La Mancha Resource Fund, a long-term special opportunities fund investing in junior miners extracting precious and energy transition metals.

Putting the mining challenge for investors more bluntly, Nasr says: “Either you refuse to do it because you perceive it to be dirty, or you commit to doing it better, by prioritising ethical, sustainable and transparent practices”

Securing that commitment from miners is itself a challenge, but Nasr says the mining industry is beginning to shift its focus to becoming more sustainable, which includes reducing carbon emissions through electrification, deploying clean energy technologies where possible, and managing the environment the operate in a more sensitive way than they have before.

“One of our portfolio companies is building a mine in Pará State in Brazil, where they have to catalogue every species of flora and fauna beforehand, and then make sure it’s all there afterwards,” says Nasr. “That company hires specialists, like veterinarians, and monitors whether artisanal miners [small-scale subsistence miners who work independently] are contributing to deforestation.”

Together with this, Nasr says miners are also increasingly realizing their agency to have social impact.

“Miners have a responsibility, not only to supply essential minerals and metals, but to build resilience in host communities and countries,” he says, adding that some miners are now putting in place local development strategies to support the communities they operate in.

For example, in Ivory Coast, Endeavour Mining, a gold miner that the fund invests in, has developed local talent, some of whom have been moved to other mines, says Nasr. Workers, and management, are 95% local, with wages and benefits worth over $213m. It has created direct jobs, as well as indirect ones, such as among suppliers, contractors, and catering.

There is a clear economic benefit here, which, together with efforts to reduce the local environmental impact, is a force for good. But as much as the mining industry is making moves to be more socially impactful and environmentally careful, miners are doing so not just because it is the right thing to do – their banks and institutional investors are increasingly requiring it.

“Finance providers are demanding disclosure on ESG best practices, which is good PR – but they actually want it,” says Nasr.

Encouraging miners to develop more sustainable operations is one approach financiers are taking. For example, global mining titan Anglo American’s €745 million sustainability-linked bond in September is structured so that the company will be financially penalised should it not hit one or all three of its targets, which include reducing greenhouse gas emissions and the abstraction of fresh water in water scarce areas, as well as supporting jobs off site for every job on site.

It takes a long time to build trust. One false move, and you lose the trust of a community, and it takes a long time to build it back.
Emma Leith, head of ESG, La Mancha Resource Capital
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Another, more extreme, approach is to cut financing ties all together. Standard Chartered did just that earlier this year when it ended its financing relationship with Adaro Indonesia, a subsidiary of Indonesia’s largest coal mining group. The bank has pledged to stop financing mining and power companies that derive 100% of their revenues from thermal coal.

Such examples of this type of action remain rare, but the risk for miners, especially those unwilling to move with the times, is that this becomes more common.

Emma Leith, La Mancha’s head of ESG, says together with pressure for change among financial stakeholders, local communities hold powerful sway, too. “If a community doesn’t like what you’re doing, they can block the road, meaning your operations are instantly interrupted.”

She adds: “It takes a long time to build trust. One false move, and you lose the trust of a community, and it takes a long time to build it back.”

This risk is a key reason why miners need to adopt more sustainable practices and operations.

“If people don’t like you, you can’t just take the mine and move it somewhere else,” says Nasr. “Every capital provider will insist that you meet targets, and If you don’t have a solid ‘social licence to operate’, good governance and zero tolerance for corruption, it just won’t work.”