More than a buzzword, ESG has become the overarching theme impacting all facets of mining.
Image courtesy of MMG-Las Bambas
Is mining sustainable? The depletion of a finite resource that cannot be renewed is, in essence, the antithesis of what many consider sustainability. However, mining is fundamental to a sustainable future in the transition to an electrified green economy that is growing incrementally. For this transition to happen at the pace necessary to combat the impacts of climate change, a greater acceptance of the mining sector is a necessity. In this context, sustainability in mining is about doing things better and proving that an industry with a checkered history can operate in a responsible manner.
Has modern mining cleaned up its act? For those within the industry, this goes without saying. However, ask the families of the 270 people killed during the Brumadinho tragedy in 2019, or the Puutu Kunti Kurrama and Pinikura communities whose 46,000-year-old Aboriginal site at the Juukan Gorge was destroyed in 2020, what they think of the sector.
Incidents such as Brumadinho and Juukan Gorge are the ones that make the news and capture media attention. Furthermore, the organizations responsible are not small backwater operators, but two of the three biggest mining companies by market cap in the world.
A commodities note written by Daniel Litvin for the Financial Times on June 7th titled “Prepare for a ‘supercycle’ in anti-mining activism” suggested that new waves of social opposition set to hit the industry may change it for the better. Litvin argued that the common thread linking the challenges surrounding mining is ESG as a route to building stronger relationships with customers and investors, rather than just a way to reduce criticism.
Indeed, rather than being an afterthought at the back of company PowerPoint presentations, ESG is now at the forefront of corporate strategy. A report from Morningstar released in April revealed that sustainability-focused funds attracted record inflows during the first quarter of 2021, pushing global assets under management in ESG funds to nearly US$2 trillion.
“Financial institutions are finally putting their money where their mouth is,” affirmed Michael Cullen, managing director Latin America for FTI Consulting, giving the example of a mining project in Peru he worked on where a European and an American banking institution were about to stop financing due to environmental and human rights issues. “If you are a junior mining company hoping to fake it till you make it before being bought out, that is not going to happen, as a deep ESG audit will be performed to ensure that you comply with their very high international standards.”
Michael Scherb, founder and CEO of Appian Capital Advisory LLP, weighed in on the subject: “Today, ESG comes up in nearly every interaction with investors. It used to be a buzzword, then it became a checklist, and now it has become a real thematic in underwriting,” he said, explaining that it is an educational process, walking institutional investors (like pension plans and sovereign wealth funds) through the good that mining does in the world. “This is not just about decarbonization and commodities, which is everyone’s focus, but involves communities, jobs, health and infrastructure investment in remote parts of countries which may not usually receive benefits,” added Scherb, remarking that a lot of sectors can learn from mining’s ability to bring different stakeholders together as part of a final product.
The International Council on Mining and Metals (ICMM) has set out a list of Mining Principles, created on the understanding that the decarbonizing of the global economy and meeting the UN Sustainable Development Goals (SDGs) requires a sustained demand for metals and minerals over the coming decades.
“The mining sector is the backbone of the transition to a net zero emissions economy,” stated Rohitesh Dhawan, new ICMM CEO, who brings a wealth of sustainability-focused experience to the role. Dhawan cited the World Bank estimate that there will be a 500% growth in the demand for critical minerals required for this transition. To underline the importance of the mining sector, he gave the example that if the UK alone was to convert all its petrol and diesel cars to electric cars today, it would take up twice the annual global production of cobalt. “Therefore, mining will be a fundamental pillar of vehicle electrification, and for the production of other important elements to reach carbon neutrality such as solar panels or wind turbines.”
Dhawan went on to emphasize that the way minerals are produced is also important. In the past, mineral production contributed 4-7% of global greenhouse emissions.
Achieving tangible change will require the buy in of the full mining supply chain, including the engineering firms and consultancies that design projects and advise on environmental and social strategy. In a white paper titled ESG Performance Expectations in Mining, Kevin Brady, director of sustainability services at multinational EPCM firm Ausenco, suggests that proactively addressing ESG can turn a risk into an opportunity – to attract investment, secure community and regulatory support for projects, and attract and retain high-quality employees and partners.
To improve the ESG performance of a project, Ausenco considers sustainability from a holistic standpoint when designing process plants that treat ore and the infrastructure needed to enable this. Brady gave an example of one of the areas that impacts a project the most: “The mining industry consumes approximately 6% of global energy consumption. Approximately 40% of this 6% comes from the crushing process, so any improvement in this process is a benefit from a cost, energy consumption, and environmental perspective.”
Gonzalo Covarrubias, general manager of WSP Peru, explained how the company’s consulting services aim to create long-term relationships between project, community and operation, suggesting that the mining industry has not been great at communicating its role in supplying global demand for sustainable technologies. “We need to clearly communicate why we mine metals – as they are vital for development; and how we mine metals – by having a responsible mining and strong relationships within the communities that we operate.”
Covarrubias emphasized the need to communicate with local communities, governments, clients and employees in unison rather than in silos, accentuating the importance of long-term planning that considers climate change, wealth-creation for communities and how technologies will evolve.
“Today, ESG comes up in nearly every interaction with investors. It used to be a buzzword, then it became a checklist, and now it has become a real thematic in underwriting.”
Michael Scherb, founder and CEO of Appian Capital Advisory LLP
Renewable Energy Sources
In April 2021, ENGIE Energía Perú, the Peruvian arm of French multinational electric utility company ENGIE, announced it will build a wind farm to supply power to Anglo American’s Quellaveco mine, making it the first Peruvian mine to use 100% renewable energy. Rik De Buyserie, country manager of ENGIE in Peru and CEO of ENGIE Energía Perú, detailed that the 260 megawatt (MW) Punta Lomitas wind farm will provide approximately 187 MW of green energy in a two-part project.
“Firstly, we will convert the current PPAs (power purchase agreements) that we have in place into green PPAs; and secondly, we have signed a green PPA for eight years from 2029,” explained De Buyserie, noting that ENGIE will also build a 60 km transmission line to connect the wind farm to the national grid.
The Ministry of Energy and Mines (MINEM) granted the concession on the Punta Lomitas wind project for both generation and transmission, and ENGIE expects to start plant construction in the second half of 2021. De Buyserie elaborated on the environmental benefits of the project, stating that the Punta Lomitas wind project will reduce CO2 emissions by 230,000 mt/y. He also underlined that ENGIE is building the wind farm without any subsidies from the government, adding: “It is great news for future development if you can be environmentally-friendly but also competitive from a cost perspective.”
Tom McCulley, CEO of Anglo American Peru, related that the deal with ENGIE was put together in the span of less than a year, with the two companies entering discussions just before the Covid outbreak in 2020. “This sends a message to the mining industry and to Peru that renewable energy is feasible,” he said.
Peru also has abundant solar energy sources, particularly in the south of the country, a source of power that has dramatically reduced in cost in the past decade. A report from the International Renewable Power Agency (IRENA) presented data showing the global weighted-average LCOE (levelized cost of electricity) of utility-scale solar PV is set to fall to US$ 0.039/kWh in 2021, lower than any fossil fuel-generated source.
In addition to their environmental benefits, renewables are now becoming an economically sound alternative. “We are currently evaluating the possibility of using solar power for San Gabriel, which has an ideal location to benefit from such an energy source,” revealed Roque Benavides, chairman of Buenaventura.
“Mining will continue to require significant amounts of energy, but if this can be supplied through greener sources, the industry will be able to change the perception some people connect with it.”
Rik De Buyserie, Country Manager – Peru, ENGIE, and CEO, ENGIE Energía Perú
Sustainable Wealth Creation and Community Expectation
“The social side of ESG – poverty – is often neglected,” stated Barrick's CEO Mark Bristow, citing a World Health Organization (WHO) report forecasting that 100 million people will move below the breadline (US$1.90 per day) because of Covid. “Companies that think simply ticking boxes is enough to raise money are in for a rude awakening, as the pandemic has highlighted that the world is not a platform for exploitation,” he added.
The majority of regions where mining is prevalent remain poor, despite companies and their shareholders making huge profits. It is one of the reasons why anti-mining sentiment exists, and one of the reasons politicians like Pedro Castillo rise to power.
After it has been mined, copper does a number of good things, but its extraction presents the moral issue of global benefit vs local cost. One of the most tangible ways to eradicate poverty is through the construction of wells and pipes to supply water to third world communities, giving single mothers the chance to care for their children or work rather than walk miles to collect water each day. However, the local cost of the mining process is its environmental impact in Andean communities that have not seen their fair share of the wealth created by generations of mining. Herein lies the challenge of obtaining and maintaining a license to operate.
Orlando Marchesi, country senior partner at PwC Peru, believes that many of the social challenges to mining in Peru are the result of a decentralization process that started in 2003.
While the country’s poverty incidence rate fell from 58 to 23 percent between 2004 and 2014, a large portion of the tax generated from mining has not been reinvested properly. He pointed to the lack of project management capabilities of regional governments, which have not been able to invest the Canon Minero (50% income tax generated from Peruvian mining companies) correctly.
“This has created conflicts between the mining companies and local communities,” he said, noting that unspent funds provided to regional governments (between 30% to 40% of the total paid) are returned to the Ministry of Economy and Finance. Stating that both the regional and local governments have done a poor job of bringing prosperity to their communities, Marchesi reflected: “If we had more efficient governments, we would have been able to build better infrastructure, health services and educational services over the last 20 years.”
Javier Del Río, VP business unit South America for Hudbay Minerals, gave an illustration of the situation faced by poor communities in Peru, using the example of the Chumbivilcas province, which has 83,000 inhabitants in a remote location over 4,000 m above sea level. “In the region 29 out of 1,000 children do not celebrate their first birthday due to the high rate of infant mortality. On the environmental side, 62% of the garbage and waste in the region is buried, burned or dumped into water sources. In other words, the area is in need of tremendous help.”
Hudbay intends to bring in a multi-stakeholder approach that delivers investment to Chumbivilcas from many sources, and signed a framework agreement in March 2021, committing to invest 11 million Peruvian Soles (around US$3 million) per year in social and technical development projects. However, Del Rio warned that the task requires support from more than just the private sector: “Regardless of who wins the election, sustained investment and development is needed in the Chumbivilcas province, and this cannot be achieved by one company alone.”
The hope for Peru, its mining industry and local communities is that the experience of mislaid promises and legacy issues is part of a learning curve that leads to clearer communication from the early stages of a project. Castillo’s Perú Libre government has been elected with a mandate to distribute wealth more evenly, but to achieve this, collaboration rather than demonization is a must for a country that relies on its mining industry.