Sustainability Series 5 – ESG and the Financial Markets

This is the fifth report from RFC Ambrian on sustainability in the mining industry. This report examines the pressures coming from investors and shareholders and capital markets in general from the recently accelerated focus on ESG and climate change.

Transformative Shift in Financial Markets: A transformative shift is taking place in financial markets with money flowing into investment strategies that emphasise the most sustainable companies. At the same time, investors are growing wary about allocating capital to companies that fail to demonstrate a commitment to sustainability. In the past decade, assets under management in dedicated ESG funds have risen sharply to over US$1,000bn.

Mining Does Not Score High on ESG Measurement: Company and sector ESG measurement is now an industry in itself, both internally and externally of traditional financial institutions. The investment community’s growing use of ESG information has raised the importance of ESG factors in their investment processes. This has not been positive for the mining sector. Despite some significant announcements from some companies, the mining and metals sector overall is underperforming against most key assessment indicators. Within most ESG frameworks mining companies are generally ranked as having a high or severe ESG risk. This will likely exclude most mining companies from dedicated ESG funds from the outset.

Financial Institutions are Key Influencers of ESG Action: Meanwhile, traditional capital markets lenders are also now looking at a companies’ ESG track records and goals when making investment decisions. Certain ESG standards and targets are now being stipulated as a pre-requisite to receive funding, either by choice, direction from governments and larger banking institutions, or activist pressure (or a combination of all three). Financial institutions are increasingly being recognised as key influencers of ESG action, with a responsibility to mitigate the climate impact of companies they invest in.

Growing ESG Related Debt Market: ESG focus in the capital markets has also resulted in a growing sustainable finance debt market. Importantly this is providing specific finance for ESG related projects. The sustainable debt markets are still small as a proportion of the global bond markets, but it is a fast-growing sector, and the total issuance of sustainable debt has now surpassed US$1,000bn.

ESG Commitment Required to Maintain Long-Term Value: The focus of the mining industry should now be to continue to raise ESG standards, tackle climate change appropriately, and convince society of its ability to operate in a sustainable manner to dispel the tarnished image. It is clear that companies that are not fully committed to ESG may discover that their finance options become more limited, and/or cost of capital increases, reducing company value in the longer term.

For the full 18page report please click here.