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Monica_55905 May 23

Walk the ESG walk or face significant risk

Walk the ESG walk or face significant risk image
Political and public pressure is building on business to fully embrace the fast evolving ESG and sustainability agenda. It’s important, argues Gillian Niven, that mining, energy and steel companies act now.
Environmental, Social, Governance (ESG) and sustainability-related matters are undoubtedly now front and centre not only for the extractive and steel industries but for business across all sectors. The last five years have seen significant momentum building in ESG and sustainability, most recently with tumultuous net-zero target setting in various industries.

While environmental and social issues have always been high on the agenda in the mining and energy sectors, as with any regulated industry forced to meet strict standards to win regulatory approval and license approvals, the challenges are mounting as efforts to tackle the climate crisis intensify. We are now seeing an increasing accent on the “G” as industry seems to become more au fait with “E” and “S” elements within this important agenda.

This focus has been most evident in the substantive discussions that have developed around the integration of ESG and sustainability into day-to-day business governance. The imperative to identify climate-related risks and opportunities has also come a mainstream preoccupation to ensure action on climate is real and long lasting. More generally companies need to focus on their governance structures and procedures, not least issues such as:
  • How ESG matters are scrutinised and policed at board and executive management level
  • How decisions around ESG are made and acted upon
  • What levels of disclosure are appropriate
  • How executives are held accountable for the commitments they make, not just around meeting statutory requirements, but also around wider climate change related issues.
Time is no longer a luxury (if it ever was). The first movers have already bolted from the starting line, convinced they can achieve a significant competitive advantage if they are among the first to get it right.

The need for transparent reporting

Notwithstanding the headway made in relation to some ESG matters, it is widely acknowledged that there needs to be far greater transparency in corporate reporting to provide clear evidence that ESG risk has been effectively assessed and to ensure that operators do not fall prey to accusations of ‘greenwashing’.

It’s impossible to understate the importance stakeholders attach to companies adopting a comparable and transparent disclosure framework. And it is equally obvious that companies can no longer produce sustainability reports just to ‘keep up with the Joneses’ or merely to be seen to be towing the sustainability line.

The information disclosed in these reports, and the commitments made by these companies (such as net-zero targets), should be vigorously interpreted, detailed and approved by companies’ Boards of Directors. It is precisely these targets that companies will be held to account for by increasingly knowledgeable and increasingly activist consumers, investors and shareholders and, indeed, by civil society at large.

The Africa context

This has real relevance in South Africa and across the region at large.

On a continent grappling with a poverty crisis and with majority of the population still unable to access electricity, let alone reliable electricity, our challenges are unique. But so is the wealth of resources on this continent, with potential for developing renewable energy solutions that far exceeds most regions of the world. It is this unique positioning that gives Africa the opportunity to make a real difference in responding to the climate change call.

Africa has seen a resurgence of interest in energy related projects, aligning with the push for companies to assess their impacts on the climate and to provide ambitious decarbonisation targets. With interest in renewable and innovative energy solutions rapidly on the rise, it means that Africa is posed for a boom in development and construction related to these projects. It is already apparent that mining groups will play a significant role here, as they look to develop renewable energy resources, both to meet their own decarbonisation targets, and, in some cases, as an opportunity to diversify and transform themselves into mining/energy supply combines.

South Africa is not new to this game, having actively procured renewable energy through government incentivised programmes since 2010. What will change the landscape, however, is the overlay of ever more exacting ESG-related requirements on these activities.

We expect the project developers, as key stakeholders in facilitating these decarbonisation projects, to face a similar kind of scrutiny that the financial sector attracted in relation to its impact and influence on climate related matters. It is foreseeable that there will be an increased focus on the management of, often complex, international supply chains to ensure that ESG requirements are being met at every level of operation. If they get this right, its clear that mining and energy project developers and their associated contractors have an important impact in the global effort to reduce emissions and mitigate climate change.

While developing renewable or innovative energy solutions to help business decarbonise and improve the green credentials of mining and energy companies considerably, it won’t in itself be enough in these challenging times. The energy intensive sectors should also expect growing scrutiny of how they are managing their supply chains. In other words, it won’t be enough just to be a renewable energy generator or off-taker -all the components associated with those project must also speak true to ESG.

Implications for suppliers

As the importance of credible, transparent disclosure grows, we expect project developers to require their appointed contractors and suppliers to address ESG compliance issues in tenders and performance of the contract. It is likely, for instance, that we will see a greater emphasis on contractors displaying their ESG credentials, through measures such as adopting a clear company policy on ESG and creating procedures to detail the company’s ESG management philosophy and its ambitions.
But contractors must be careful not to produce ESG credentials just for the sake of bid compliance. Instead they need to appreciate that greater levels of disclosure must come hand-in-hand with much more sophisticated monitoring and reporting.
Meeting this challenge will require a greater level of administration than in the past – potentially even requiring the appointment of in-house own ESG officers and the need to ensure appropriate training for such specialist teams.
At the moment, there remain inconsistencies in ESG compliance and reporting standards, which only add to the complexity and, potentially, to the cost in managing such challenges. There is no one-size-fits all in terms of the standards companies will be held accountable for. So companies need to decide how they allocate risk around these uncertainties and how the integrate this into their day-to-day governance procedures.
They will, for instance, need to consider where they source raw materials and components, whether their solutions actively address ESG and sustainability considerations and even if compliance may offer them a financial benefit in terms of securing premiums by increasing ESG scores and meeting sustainability targets.
The potential increased financial burden of ESG compliance raises the question of whether companies will start looking to invest in jurisdictions where government support and grants are available to speed them on their ESG transition if these additional costs cannot be covered within project budgets.
 
No time to wait
 
This is an evolving area and although much remains unclear from project development and risk appetite perspective, one thing is certain - companies cannot wait for lessons to be learnt before taking action.
 
Civil society is looking for boards and executive management teams to engage critically and authentically with these harder concepts and to be transparent leaders in this evolving area, which will undoubtedly be a central concern for business in future.
 
Disingenuous representation and shortcuts are only going to attract the attention of the climate change and environmental activists. They be of little benefit in the sustainability of companies in low carbon economies or within a society acutely aware of its historical and ongoing impact on the environmental and climate.
 
Gillian Niven is a counsel in Allen & Overy’s Projects, Energy, Natural Resources and Infrastructure practice. She is based in Johannesburg. Gillian.Niven@allenovery.com.