ESG and the evolving reporting and regulatory mining landscape

Theo Yameogo: Welcome, Dean. Thanks for joining me. I'm looking forward to our conversation.

Dean Braunsteiner: Thanks Theo! I really appreciate the opportunity to be speaking with you today.

Theo Yameogo: Dean, as the EY National Mining & Metals Assurance Leader, you see a lot of clients in different environments, different commodities, in different stages. What are the key challenges mining and metals companies face in this current environment?

Dean Braunsteiner: Yeah, Theo, it's a great question. And 2022 challenged mining companies in a number of different ways. Certainly, if you asked the question at the beginning of the year, I would say companies were a little bit more upbeat in terms of rising commodity prices.  And so real challenges were about continued production, ensuring that they had enough inventories on hand to have a stable production output. But certainly what we've seen over the last six to seven months in particular with things like the geopolitics that we're seeing, the war in Ukraine, that's now started to have an impact on how companies are viewing the industry very differently.

I would say the two biggest issues companies are facing right now, it's around inflation and supply chain shortages. The one thing I would note on supply chain, companies are pivoting. So, for instance, we've seen companies like Barrick Gold who've announced that they've tripled their inventories from pre-COVID in order to deal with supply chain shortages. And what that does, it allows them to continue a maintained predictable output from their mines and they're not having to search far and wide for products in order to continue their operations. I think more companies will start to follow suit. And the benefit of a rising price environment, it should enable companies to mitigate any future price increases as well.

We're also seeing issues around increasing interest rates by governments. That's having an impact on projects in terms of what was in the pipeline, in terms of development. And you might think, well, why is that important? Well, what we've seen, especially in sort of key commodities over the last number of years, it certainly looks like there's going to be a shortage of copper, nickel and lithium, which are key components to what's driving what I call the greener economy for most governments.

And so the challenge there is if those mines don't come into production or the expansions don't occur on time, then all of a sudden, countries won't be able to deliver on their decarbonization plans, which is causing quite a bit of concern at the moment.

Theo Yameogo: You mentioned ESG. Can you elaborate on how ESG is shaping or impacting strategies at mining companies?

Dean Braunsteiner: Yeah, I'd start off by saying that at least in my view, mining companies have done an exceptional job up to this point with respect to ESG. And I'll focus on the E for a moment. There aren’t too many industries that you could point to that really go into the most remote parts of the world, bring good paying jobs, clean water, electricity, education.

I mean, the list kind of goes on. And mining companies have been doing that for quite a number of years. And they've been reporting on that from a sustainability perspective. Certainly now on the social side as well, as I mentioned companies have been doing a great job with local communities, and that's become much more of an important factor in mine-building decisions and ongoing relationships, where I see mining companies starting to become more proactive and it's just around the governance side of things, and that's sort of the last part of ESG reporting. And I'd say from an ESG perspective, what's really changed there, from a company perspective, is really around the ability to attract capital, and that's where things have really changed. In the past mining companies would have to meet with the risk committee of a lender, go through internal rates of return, other key metrics about the project.

But that landscape has changed quite dramatically. Now, the first point of call with providers of capital is meeting with their ESG group and talking about what is the is ESG strategy, how does that fit with their global footprint? And being able to convince the lender, the capital provider, that you've got a solid strategy around ESG.

So that's sort of number-one importance before you can even get to the next step. And companies have done a great job at starting to have those conversations. The next iteration of ESG now, and I think the game changer here, is the SEC, you know, putting out a proposal around including ESG metrics and climate disclosure in regulatory documents.

And why that's important is that the next iteration of that will be the SEC requiring management to certify around policies, procedures in terms of how they've gathered ESG information, as well as what climate disclosure they're putting into their various financial reports. And then the next iteration of that would be requiring auditors to provide assurance.

And so I would link that to a very similar process the SEC went through on internal controls and SOX 404. It really started with management having to provide assurance that the policies and procedures in place to collect and report the data were quite robust. And now we're seeing that same landscape and lens being applied to climate disclosures as well as ESG reporting.

And I think boards and management need to really be aware of that because now there's going to be reporting to the board and a responsibility by the board to ensure that companies are accumulating that information in a responsible way. We're starting to see where management is including finance a lot more in that process because of their expertise on the SOX side.

And we're certainly encouraging companies to do test runs to ensure that the data that they're collecting could be subject to audit because that is coming. And so I think as early as 2024, it will require management certifications and then shortly thereafter, I would predict that your companies will need to have assurance provided on that as well.

And that will be a big challenge if you haven't prepped for that.

Theo Yameogo: That's very interesting, Dean.  What do you anticipate will be next on the horizon related to ESG?

Dean Braunsteiner: Theo, I think it's really interesting — and this is me thinking a little bit more about the future — but I can see where ESG ratings will become critical in a number of ways. So I talked a little bit about capital allocation and being able to attract capital, and I think ESG ratings will play into that. The other area that I can see will start to grab attention is around commodity prices.

And so ESG ratings playing into whether companies can earn a premium on the commodity price that they're achieving based on their sales. And I think that's important because ESG really talks and leads companies to do things in a very responsible way. And so I think that will drive behaviours. And the ultimate test will be when consumers demand to know where did the commodities come from in their smartphones or their tablets or in the electric car that they're driving. And I think being able to use ESG to show chain of custody and how the commodity went from ground to product, I think will become critically important. And there may be an assurance angle there as well where, you know, companies that are selling that electric vehicle will be able to use blockchain, for instance, to show you how all the different components came together and where they were sourced from.

That might be a bit out there, but I could see that also being something that's going to come up in the future. I also think that you may start to see new entrants into the mining space. I know we've talked at length before around companies like Tesla or maybe Apple, thinking about wanting to ensure that, again, they're able to demonstrate where their commodities have come from.

And rare earths are pretty important to some of the products that they're producing and will continue to be important. And so, again, driving that ESG component, do you think that those companies will think about ways where they can integrate supply into their business as opposed to just being a purchaser?  One of the things that I have read in the past that Australia did was a study where if you are a pure lithium producer, the concentrate was valued at $11 billion, which sounds like a big number.

But if you actually looked at what the end product was, it was generating over $7 trillion worth of value. And so I think there is an opportunity for mining companies to look at where would you like to be in that production line. Do you want to be just known as a producer of commodity or can you move up the chain and be able to deliver a little bit more value into the product and perhaps being able to diversify your portfolio a little bit.

And I think that's the questions that companies are going to start to ask themselves, where do you want to participate? And so I think it will allow for new entrants into the market, which will be disruptive and create perhaps different ways of doing things in the mining industry. And as we know, that's an industry that's been slow to innovate at times.

So it's pretty exciting. Looking forward to what's next.

Theo Yameogo: ESG is definitely of paramount importance for our clients now and into the near future. And I'm glad you came in to talk about that today. Thanks for joining me.

Dean Braunsteiner: No, thanks, Theo. It was a great opportunity to share some thoughts. Really appreciate it.