Do ESG and mining really go together?

At the COP27 climate summit in Egypt, there were renewed calls for ending reliance on fossil fuels in transport. But producing electric autos requires intensive mining for metals. Can the environmentally unfriendly practice of mining ever be reconciled with sustainability?

Capital News Africa: From the Trading Floor – Week 47-2022

Climate activists argue that electric cars and trucks are a much cleaner form of transport than those powered by the internal combustion engine. That certainly is true when referring to city transport in developed countries. But electric transport has become a dirty business in the emerging regions of South America, Africa and Asia, where intensive mining is taking place to get the metals needed to enable such transport.

While electric vehicle manufacture does not require gasoline or diesel, it needs an array of metals and other elements, including lithium, cobalt, nickel, manganese and graphite. The motors, ignition coils and sensors in electric vehicles also need rare metals like neodymium and dysprosium to work. Moreover, investors should be aware that as e-mobility goes hand-in-hand with the digitalisation of transport, rare metals like germanium and yttrium are used. Some of the elements required are so rare that investors which buy the companies that extract them have likely made very good bets.

Minerals for batteries, electric motors and digitalisation

Yet investing in mining companies poses a big dilemma for sustainability-minded investors concerned about the climate. And that is: Does helping to reduce the amount of the CO2 in the atmosphere justify supporting the destruction of the earth’s surface for the sake of extracting that which is needed for e-mobility?

First some context: Africa’s biggest mining companies have undertaken efforts in past years to improve their so-called “ESG scores.” ESG is an abbreviation of the environmental, social and governance criteria that investors judge companies on. The miners’ efforts followed the emergence of a long list of ESG criteria that had to be respected in order for fund managers from Europe and North America to consider buying them. Such criteria include environmental standards like preservation of groundwater as well as social ones that pertain to the working conditions in mines and a ban on child labour.

Complicated ESG rules

But as we will see, the ESG criteria are at times so complicated that it is difficult for outsiders to make sense of them. Fund managers in the EU certainly have to understand them, especially if they want to find investee companies for the ESG products that they distribute. To assist the fund managers in selecting the “right” companies, several rating agencies provide ESG intelligence and scores.

One of these agencies is Refinitiv, a New York-based company owned by the London Stock Exchange. Refinitiv uses no less than 630 ESG criteria and also provides an “ESG controversy score,” which measures the extent to which adherence to ESG (or lack thereof) could lead to controversy.

Refinitiv’s grading scale comprises 12 grades from “A+” to “D-”. An “A” indicates both an excellent performance on ESG and a high degree of transparency. “B” means good performance on ESG and an above-average degree of transparency, and so forth.

Judging by Refinitiv’s ESG ratings, African mining companies are doing just fine. Anglo American Platinum (ISIN: ISIN: ZAE000013181), the biggest of the bunch with a EUR 24.2 billion market cap, has an ESG score of “A-”. In the environmental categories of resource use and emissions, Anglo American gets a top grade. Its grade on social issues is also high. Only on innovation does Anglo American not do very well.

Impala better than Volkswagen

With a market cap of EUR 9.4 billion, Impala Platinum (ISIN: ZAE000083648) is Africa’s second biggest mining company. Yet while its business is mining the earth’s surface, its Refinitiv rating of “B-” is better than the “C+” rating of German automaker Volkswagen.

This is hard to understand, considering that investors in Europe and North America are applauding the German automaker’s full embrace of e-mobility. One sees the dilemma that ESG investors face. Impala’s score of “B-” is based mostly on a strong showing on social issues and a good showing on innovation. Regarding governance and ESG controversy, its performance was not nearly as good.

Sibanye Stillwater and human rights

This leads us to Sibanye Stillwater (ISIN: ZAE000259701), Africa’s third biggest mining company judging by a market cap of EUR 7 billion. Refinitiv gives Sibanye a “B”, thanks to excellent scores on environmental and governance issues. The company also scores highly on social issues and human resources. But it does not do well when it comes to human rights.

Unfortunately, Refinitiv did not explain Sibanye’s poor showing on human rights. We therefore sought out another source, namely the Responsible Mining Index (RMI). There, we discovered that the problem was not that the company was disrespecting human rights but one of disclosure. “While the company has made a commitment to respect human rights, it shows no evidence of having conducted any human rights due diligence processes, or tracking its performance on managing human rights issues,” RMI said in a 2020 report on Sibanye. This and the Impala vs. VW examples reflect that investors should carefully examine the ESG intelligence and ratings they are getting.

Regarding other major African mining companies, the ESG scores from Refinitiv are either very good or respectable. Gold Fields (ISIN: ZAE000018123) gets an “A-”; Northam Platinum (ISIN: ZAE000298253) a “B+”; Anglogold Ashanti (ISIN: ZAE000043485) a “B-”; and the coal mining firm Exxaro Resources (ISIN: ZAE000084992) a “B.”

These ratings suggest that African miners are a lot more “ESG” than the western media, which often reports on allegedly poor working conditions in their mines, would have you believe.