ESG compliance in the mining sector

The mining industry continually reshapes itself in the face of market demands, technological innovations and societal expectations. The industry continues to thrive due to its ability to adapt to changing demands in environment, social and governance (ESG) issues. ESG is therefore not new to the mining sector.

However, in recent years, there is emphasis on sustainable and responsible mining practices due to the heightened expectations and greater involvement of investors. Investors now require key positive indicators on ESG factors. This has pushed mining companies to have bolder commitments with measurable targets in reporting progress on ESG compliance factors.

In this context, mining companies are prioritizing ESG considerations such as reducing carbon emissions, conserving water and implementing community engagement initiatives. Additionally, mining companies are demonstrating commitment to ethical practices and sustainability in order to maintain their social license to operate.

This article discusses the significant role ESG plays in the development of sustainable mining which ultimately benefit the performance of mining companies and the development of local communities.

Scope of ESG

ESG, as relates to business, refers to environmental, social and governance factors that companies aim to comply with, and investors consider in their investment decisions. The scope of each of the elements are:

• Environmental- focuses on lowering carbon footprints, safeguarding biodiversity and optimizing the use of resources with a strong interest from investors in reducing carbon outputs and environmental conservation.
• The social dimension involves engaging stakeholders and contributing to the well-being of local communities, highlighting the importance of human rights and interactions with residents as well as promotion of employee wellbeing and good labour practices.
• Governance pertains to the sustainable management of resources, transparent disclosure practices and adherence to legal frameworks and good governance practices.

Consequently, mining companies must adopt operational methods that are environmentally friendly and promote sustainability. Additionally, they must cater for social needs, promote human rights and adhere to good corporate governance practices. Mining companies that effectively incorporate ESG factors into their operations are in a stronger position to attract investors.

Causes for Heightened Focus on ESG

Investors and lenders are increasingly focused on ESG factors when making investment decisions. Thus, to access capital, mining companies must demonstrate commitment to ESG concerns. The following are some of the general factors that have given rise to ESG compliance in the industry:

1. Investor attraction– Mining is a capital-intensive venture. To access funding, mining companies must demonstrate a robust commitment to addressing ESG concerns and a strong track record of ESG compliance. This is because, institutional investors consider ESG factors when making investment decisions. For example, the International Financial Corporation’s (IFC) Environmental and Social Performance Standards define standards that apply to investment decisions and are considered during credit review processes. Similarly, in certain markets, the influence of ESG rating agencies has resulted in ESG becoming a major focus in relation to IPOs for large mining companies.
2. Regulatory requirement– ESG requirements are finding expressions in domestic regulatory frameworks. Mining companies have no option than to comply with such regulations. Non-compliance results in heavy sanctions imposed on defaulters. For example, mining companies who unlawfully pollute a water resource beyond the level prescribed by EPA commit an offence. Social factors are covered in employment legislations while governance frameworks are dictated by corporate law and governance codes.
3. Marketing tool– ESG compliance is now a marketing tool to attract clients and investors. Investors are increasingly focused on ESG factors when making investment decisions, thus companies with strong ESG performance are more attractive to investors seeking sustainable and responsible investment opportunities.
4. Self-interest– ESG leads to long term sustainability of businesses. It is, therefore, in the interest of mining companies to adopt ESG measures to ensure sustainability of their business over a long term.

Ghana’s Regulatory Framework on ESG Factors & its Implementation in the Mining Industry

There is currently no composite law or regulation that governs ESG in Ghana. Nevertheless, ESG requirements in mining are supported by the existing legal framework for the mining industry including the Minerals and Mining Act and its regulations. Under the current regime, the grant of any mineral right is dependent on obtaining an environmental permit from the Environmental Protection Agency (EPA).

The grant of the EPA permit requires the submission of an environmental impact assessment and periodic reports in respect of economic activities that have an adverse effect on the environment. The EPA may also require a mining company to post a reclamation bond to secure implementation of reclamation.

To ensure standards are met and there is no threat to human life and/or the environment, there are strict requirements regarding mining activities. Additionally, relevant permits are required in respect of mining activities in a forest reserve. Regarding the social aspect, fundamental human rights are enshrined in the 1992 Constitution and enforced through various legislations. Employees have protections from unfair labour practices, and unhealthy and unsafe environments under the Labour Act.

In respect of the governance pillar, the Companies Act prescribes the structure for corporate governance, which is centred mainly on the shareholders, the board and management of the company. It allocates the role, powers and duties of each stakeholder, thereby imposing checks and balances on the exercise of power. The Act also covers the fundamental role governance plays in corporate business strategy and decision-making processes leading to profitability and growth.

The various legislations cover different aspects of ESG factors and have minimal reporting requirements. Secondly, the legislations do not provide the details required and leave out many ESG requirements to the discretion of mining companies. This has led to some mining companies resorting to box-checking of the general legislative framework rather than adopting innovative measures to achieve compliance.

Voluntary Codes/Frameworks

The major gap in ESG compliance is lack of a binding and enforceable legal framework. To fill this gap and to achieve ESG compliance, various voluntary codes are being adopted by mining companies to ensure adherence to standards in their reporting and compliance levels. The voluntary codes also help investors to measure the ESG credentials of mining companies.  The following ESG-related guidelines seek to encourage voluntary ESG-related compliance and disclosures:

• Sustainable Development Goals and the Global Reporting Initiative (GRI) are the most used standards in the mining sector. The GRI is a sustainability reporting standard which mining companies in Ghana have subscribed to and covers sector-specific sustainability reporting requirements by companies across all the ESG factors.
• Mining companies also observe International Council on Mining and Metals standards which provides standardized frameworks dedicated to ensuring a safe, fair and sustainable mining and metals industry.
• Additionally, the standards of the Extractive Industry Transparency Initiative (EITI) 2023 has been endorsed by Ghana. It requires compliance with ESG requirements for managing mineral resources at the national level. The reporting obligations on companies is mainly on their environmental and social impacts.
• The International Council on Mining & Metals (ICCM) 10 Sustainable Development Principles act as a best-practice framework for sustainable development within the mining and metals industry.
• The Minerals and Mining Policy of Ghana also emphasises environmental regulation of mining activities, employment creation, and local economic development (social) which are aspects of ESG.

Though, these are voluntary codes, mining companies are taking active steps to comply with these requirements and reporting on compliance to attract investment.

Challenges of Implementation of ESG Factors

Adoption of ESG and complying with ESG factors are sustainability issues. However, there are challenges particularly in the Ghanaian context, in adopting and seeking to comply with ESG requirements especially in our competitive business environment. These challenges include:

1. Lack of codified enforceable rules– the regulatory environment for ESG compliance is complex and ever-changing. More importantly, there is no composite enforceable legal framework that comprehensively deal with ESG. It is therefore difficult for companies to stay current with changing requirements and fully understand what is required. This can be challenging to navigate.
2. Cost– implementing effective ESG practices can be expensive, and many companies may need more resources to invest in ESG initiatives.
3. Varied Voluntary Codes– there are overlapping voluntary codes/standards existing which can make it difficult for mining companies to determine which code to adopt for their ESG strategy.

Despite the challenges, the truth remains that, investors care about ESG and would only conclude transactions upon an assessment of ESG factors and ascertainment that a company has a track record of good ESG performance. For mining companies to be well positioned for investments, it is prudent for mining companies to develop a clear and robust ESG policy that assuages investor concerns regarding their business and promotes continued investment. Such policies must consider both the mandatory legal requirements, voluntary codes and the company’s specific corporate values and overall strategic priorities. Once an ESG policy is adopted, the next stage is the implementation with measurable goals for reporting.

Conclusion

To conclude, ESG compliance is becoming increasingly important for businesses as investors and other stakeholders demand greater accountability around ESG issues. In like manner, it provides a significant opportunity for mining companies to differentiate themselves by improving their sustainability by reducing the risks associated with ESG issues. By prioritizing ESG practices, mining companies can identify and mitigate risks and build a more resilient business.

*Vera is a Partner with the Green Transition, Sustainability and Carbon Market and the Natural Resources & Extractive Industries Practice Groups of AB & David Africa. She is based in the Accra office and has over 19 years of experience in advising clients across sub-Saharan Africa. Vera is also a Tutorial Master at the Ghana School of Law.