Corporate Risk Oversight in the Mining Sector; challenges of broad ESG risks

Corporate Risk Oversight in the Mining Sector; challenges of broad ESG risks

11-11-2016 | インサイト

A sound corporate risk oversight is relevant for the investment process in various ways. As risk taking can lead to both profits and losses, it’s important for investors to gain insight in the specific risks that are relevant for companies and the type of policies they use to mitigate those risks. The board of directors is responsible for determining the company’s risk appetite and overseeing that management has taken adequate risk management policies and procedures.

Corporate risk oversight is crucial for the mining industry. Mining operations can have considerable social and environmental impacts and pose significant health and safety risk to employees and local communities. These risks can also have significant financial implications. Time and time again it has been observed how protests of affected communities can disrupt operations, or severe environmental damage can lead to hefty fines and delays in the mining operations.

We started our engagement in 2013 with research conducted by EIRIS. In this research, nine key risks were identified including health and safety for workers, the impact on local communities and potential environmental impact. Furthermore, the research focused on how corporate boards could work in order to identify and mitigate such risks. We selected 11 mining companies in our engagement peer group, reflecting a diversity in geographical scope of operations and commodities. We focused in three areas: risk oversight policy and governance, risk oversight and management, and risk management performance and monitoring.

This theme is in the end phase. We closed four companies successfully (Glencore, Newcrest Mining, Goldcorp and Eldorado), two companies unsuccessfully (Grupo Mexico and Yamana Gold) and one company closed effectively due to a filing for chapter 11 on bankruptcy (Peabody). Due to the Brazilian Samarco mine dam burst at the end of 2015, the engagement with Vale and BHP Billiton has continued under the enhanced engagement theme since then. Moreover, in mid-2015 we launched an engagement pilot with Vale with the desire to take a deeper dive into their key ESG risks. Later on we extended the pilot to three other companies.

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Three engagement objectives

Improving risk oversight policy and governance

We expect that companies adopt strong boards of directors, composed of competent board members, with a majority of independent board members. In our research we found that in general the companies had a board with insufficient independence and experience in relation to ESG risks in the mining sector. During our engagement, we found that Newcrest improved the most by launching a board renewal process that would update the ESG skill set of the board. One of the results includes the appointment of a mining specialist as an independent director who will become a member of the Safety and Sustainability Committee. At the end of the engagement all companies, with the exception of Grupo Mexico and Vale, adopted an independent and competent board, and had initiatives in place allocating responsibility to the board on ESG oversight.

Also key in improving risk oversight governance is the adoption of compensation packages for board members that include conditions that are related to ESG risks. These targets should be measurable and relevant to company risks. In the initial research we found that four companies did not include ESG metrics in their executive remuneration policies. At the end of the engagement all companies, except for Grupo Mexico, had linked executive remuneration to ESG metrics.

Improving risk oversight and management

We expect that companies conduct regular board review of risks, have appropriate communication channels between management and board of directors, and implement a clear whistle blowing system. In our initial research we found that two companies had poor risk management and board assessment procedures, and two companies appeared to have poor communication channels between management and the board. All companies had a whistle-blower system in place at the beginning of the engagement. During our engagement we found that risk management varies greatly across the peer group. Some companies had a centralized approach, where the board oversees and takes action on ESG risks, incidents and near-misses. Others opted for a de-centralized approach where local management in each one of the operations is on the lead in monitoring location-specific ESG risks. Regardless of the approach, Anglo-American is the leader of the group in this engagement objective. At the end of the engagement, all companies made significant progress in improving their risk management systems with the exception of Yamana Gold and Grupo Mexico. Yamana Gold had sufficient mechanisms in place to manage risks, however we found during our engagement that key ESG risks were not part of those measures. Grupo Mexico was in process of centralizing its risk management processes across all group entities. However, the company failed to provide sufficient evidence on progress made.

Improving risk management performance and monitoring

If companies have had serious ESG incidents over the last years, we expect that companies implement changes to their risk management system related to the management of such incidents. Companies should minimize chances for reoccurrence as much as possible. At the start of our engagement, research found that three companies, Grupo Mexico, Glencore and Peabody, failed to disclose past breaches and/or corrective and preventive actions. Of these companies, only Glencore improved significantly its disclosure on ESG incidents during our engagement with the company.

Pilot engagement program

A key lesson learned from this engagement process is that mining activities have a broad range of ESG risks that vary from one operation to the other. Even though the engagement objectives focused on risk oversight processes and policies, we learned that deep-diving into management systems of key risks can significantly enhance our understanding of how robust risk management systems are in reality.

For this reason, in mid-2015 we decided to start a pilot engagement with Vale. Under this pilot, we focused on the ultimate financial impact of the ESG risks. We did this by mapping the company’s operations per commodity, region, and profitability and production levels. This mapping exercise helped us identify the most financially material ESG risks in Vale, namely corporate governance and the relationship with the Brazilian government, social license to operate, joint venture control issues, and bribery and corruption.

This approach allows us to assess to what extent the company is successful in identifying the most material risks, and to focus and deepen our dialogue to key topics. Due to the useful insight that this pilot brought, we decided to expand it to other major global mining operations, including BHP Billiton (later on continued under the enhanced engagement theme due to the Samarco mine dam burst), Anglo-American and Rio Tinto. The pilot engagement is an extension of the Corporate Risk Oversight engagement and will continue with two companies until 2017 (Anglo American) and 2019 (Rio Tinto).

重要事項

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加入協会: 一般社団法人 日本投資顧問業協会

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