Today’s mining companies are under the spotlight and public scrutiny like never before. In particular, the spotlight is on their performance along environmental, social, and governance (ESG) criteria. These are the central and most widely accepted criteria measuring a company’s approach to sustainability and societal impact. Many companies in the mining industry have generally been proactive and made progress in securing their social license to operate. In addition, most have come to view excellence in ESG as a business principle that creates shareholder value and a positive impact on local and regional economies, leading to better working conditions for employees and access to better education, health services, and jobs.
Investors confirm that companies seen as strong ESG performers are better investment targets than those that are not—even if the latter are historically and presently strong financial performers. Looking ahead, companies at the forefront of ESG performance will become increasingly attractive to investors, potential and existing employees, and host governments.
Despite the compelling business case for ESG and its acceptance as a critical issue by essentially all mining companies, there is no company that stands out as the undisputed leader in ESG performance. Even the world’s top mining companies still experience fatalities, spillages, community strife, conflict with NGOs, and public relations disasters. We believe that companies could substantially improve ESG performance if they viewed it as a system of interrelated principles and ways of working that shape the culture of the entire organization, rather than as a number of often disconnected activities aimed at minimizing risk and exposure. ESG needs to be at the core of the company’s purpose, culture, and strategy.
What does it mean to place ESG at the center of your organization? Egon Zehnder’s Mining & Metals practice analyzed the industry’s 20 largest Institutional Investors, studied the shareholder base of the Top 50 mining companies, tracked the public commitments made by these companies, and interviewed industry and ESG leaders to explore how companies can embed sustainability into their core purpose, people, culture, and processes.
In our view, a clear sense of purpose is paramount for strong ESG performance. While shareholder value creation is a company’s raison d’etre, being a responsible steward who does this in a sustainable way must be at the core of how the company conducts business. The purpose must be genuine, credible, and clearly communicated. More importantly, there must be alignment between what is publicly said and visible on the ground. Without this sense of purpose, companies cannot attract or retain the best people in the industry. If the Board, Executive Committee (ExCo), middle management, and those at the “coal face” do not live this purpose in their daily lives, it becomes lip service at best.
With regards to people, we believe that the following are critical requirements to bring ESG to the core of an organization:
An ESG specialist on the Board to constructively challenge the Directors, CEO, and ExCo in ESG matters. They must help set the tone and culture of how the company views and addresses ESG issues. The full Board needs to have bought into the criticality of ESG and not view it as yet another agenda item to be addressed. As such, ESG “literacy” must be a critical evaluation criteria for new and existing Board members. We have also witnessed enhanced oversight of ESG through Board committees among a number of companies.
The CEO needs to drive ESG across the company and consistently reinforce it. She or he must create an atmosphere of trust among ExCo members to openly discuss challenges and mistakes in order to create a culture of learning and thinking about how world-leading ESG performance can be achieved. The CEO must also be willing to sanction “bad” behavior rigorously and forfeit short-term profit for long-term sustainability. She or he must be a visible champion—not just someone who says all the right things—who is truly seen as a clear ESG leader by all stakeholders.
The CEO must also build and foster an ExCo as a cohesive team with trust at the core, allowing for open discussion and constructive conflict—from which ultimately flows a commitment to openly address issues in their businesses without fear of sanction by the CEO and Board.
The CFO needs to be a key champion in measuring not only risk avoidance but also how the company is living up to its ESG promises in a very practical way. The CFO also plays a key role in driving the ESG agenda. Naturally, the CFO should be responsible for developing company-relevant tracking and reporting standards for ESG performance. Already there are numerous measuring and reporting initiatives focused on sustainability, and we have found a real desire among CFOs for standardized principles.
The Chief Sustainability Officer (CSO) must be a master strategist, influencer, and doer who has the license to constantly challenge the organization to generate strategies on how ESG can contribute to world-class business performance. We still find a lot of companies struggling with the concept of a CSO, though there is ample evidence that a strong executive in such a role can have a material impact on ESG performance.
Additionally, Investor Relations (IR) and Corporate Relations have a significant part to play, as they provide a key conduit to external parties, including governments, communities, NGOs, and investors. We have seen instances, where the Head of IR in particular, was brought on board with the clear remit to shift the company’s investor base toward those with a stronger focus on sustainability. The head of Corporate Relations, on the other hand, is often an indispensable advisor to the CEO and Board on matters of complex government relations and external positioning.
In terms of processes, we believe that financial rewards need to shift away from primarily focusing on individual performance to even greater group accountability and responsibility for ESG performance. Many companies have made significant strides in this area, yet all too often this has led to a sense of “distributed” accountability, where ultimately everyone is held accountable but no one is clearly responsible. Also, changes in the rewards structure overall have been relatively piecemeal and have not led to a substantial change in ESG performance—not least as processes have not been supported and reinforced by the necessary culture change. Similarly, in their recruitment processes, companies will need to continue to go beyond measuring skills and experience, and more rigorously test for values, potential, and a candidate’s identification with the company’s purpose and ESG culture.
The culture of an organization is the written and unwritten values, assumptions, and norms that drive people’s behaviors. As such, a company’s culture is perhaps the most important—and elusive—ingredient in creating a high-performance ESG company. This is because leaders will need to: 1) understand the culture that is needed in order to achieve their ESG goals; 2) identify change leaders as “multipliers”; and 3) sustain momentum for the long term. More importantly, long-held habits and behaviors need to change among all employees, and anyone who has been involved in cultural change programs can attest to just how difficult—and often ineffectual—they can be. At the same time, culture change in relation to ESG is becoming more important, with increased scrutiny, speed of change, as well as competition for world-class talent who will be looking to find a home in a company with the culture that best resonates with theirs.