Episode 33: The Evolution of ESG in Mining

Tom Butler:

All of the commodities, whether it's commodities for batteries or electric cables, which is obviously copper and lithium and cobalt, or whether it's iron ore to go into steel, so you can build your wind turbines, or aluminum, they're all going to be needed for this transition. So the challenge for us is to deliver what's needed to support the transition.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On the show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Legal Disclaimer:

The views expressed here are those other participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Dan Barclay:

This is Dan Barclay, CEO of BMO Capital Markets. And I'm speaking with Tom Butler, CEO of the International Council of Mining and Metals. Tom, it's nice to be here with you for our second annual chat from the global metals and mining conference. Why don't we begin with you telling our listeners who may not know about ICMM and what it does.

Tom Butler:

Thank you, Dan. And thank you so much for having me back. And I'm really sorry that I'm not in Miami with you. This is being done virtually. Hopefully next year you'll be able to go back to a physical meeting. So for those who aren't aware of ICMM, we're a membership organization. The organization is dedicated to a safe, fair, and sustainable mining and metals industry. And it has 27 company members, soon to be 28, and then roughly 35 association members. And the two or three key distinction features about ICMM are firstly, the member commitments. So the members make a series of commitments in terms of how they will operate, which we call the Mining Principles. There are 10 overarching Principles, with, underlying them, 38 requirements or performance expectations, nearly all of which are at site level and they're very granular. And then in addition, another eight position statements on which we've developed as member commitments in response to critical challenges. So that's the first feature.

Tom Butler:

The second feature is that ICMM is CEO led. So the council is essentially acts like my board. There are 27 CEOs at the table when we meet. And I think that sends a very strong signal, both internally and externally that the CEOs are serious about the organization and the commitments they make and the objectives.

Tom Butler:

And then the third key feature about ICMM is the admission process, which is very rigorous. So admission to new companies is scrutinized by an independent panel of experts, three experts, one from each discipline; governance, environmental and social, and they kick the tyres quite hard and assess whether a company is close to being able to meet the ICMM commitments if they're not already meeting them. And we'll only recommend admission on the basis of an agreed action plan.

Dan Barclay:

I think it's great and unique what ICMM does. We're obviously on a big topic and issues conferences around ESG, and we had you open up at one of our plenaries talking about the E of ESG and mining. You highlighted climate change, water stewardship, and biodiversity as areas where mining companies are taking determined steps to make a difference in environmental sustainability. Can you speak a little bit more about these? Is one of the areas more important than the others or in your mind do they seem to have equal weighting?

Tom Butler:

I think they're all important for different reasons, Dan. Obviously climate change is the burning platform at the global level, so this is a concern for all sectors. In the case of mining and metals, we account for a significant portion of the overall emissions worldwide. So it's something that we very much need to take care of and there's a lot of attention being focused on us. And the point that I made on climate change when I was speaking yesterday, is that, if you looked at the issue, maybe even 10 years ago, there was still a debate going around the sector as to whether we even accepted that it was man-made and then today you see as a result of huge stakeholder pressure and also pricing pressure due to imposition of carbon pricing in a number of jurisdictions, a number of very significant commitments being made and companies becoming aligned on those commitments and showing that we're all committed to putting together and making progress.

Tom Butler:

Biodiversity is also a burning platform, but to some extent there's less pressure on the industry because our footprint is so much smaller than for example, agribusiness. The mining industry overall in aggregate accounts for less than 1% of the land footprint. And so we do need to take some very serious commitments and we have made some very significant commitments on this topic, but it's something that we can manage more easily and that hopefully will be something that we can get ourselves around more easily than the climate change.

Tom Butler:

And then finally water tends to be very much an operational issue, so very context specific, very mind specific. In some cases you've got way too much water to deal with and other cases, not enough. Again, we've evolved over time on this issue. It used to be a question of accessing water and having access to user rights. Whereas today we think about it much more holistically. We have a position statement, a water stewardship position statement, which essentially outlines a member commitment to take a, what we call a catchment-based approach to how water is used and managed. And that means considering the needs of all other users in the catchment basin and doing everything we can to integrate and mine and the use of water by the mine into that catchment basin and not just sort of consider that we should take priority, for example. And water's important because it's not just society's perceptions about how we use water, but also in many parts of the world, it's actually more difficult to get hold of than the minerals that we're mining.

Dan Barclay:

Toward the end of your comments, you also noted how much more needs to be done by the companies in this space on these topics. Do you think they're up to this space and do you think they're making the appropriate amount of progress today?

Tom Butler:

Well, I think we still have some progress to make on climate change, especially we've set some very ambitious targets. A number of members have set intermediate targets and then net zero targets in 2040/2050. As I said, I think it's about committing and aligning their teams around those targets. And it's difficult to say how are we going to get to that today. This is very much like the moonshot when Kennedy announced that he was going to put a man on the moon by the end of the decade, he didn't really know how he was going to do that. You always start this kind of process by setting the goal and putting down some aspirations.

Tom Butler:

And it's interesting, two years ago, we kicked off our own initiative on which is related to climate change, which is what we call the Innovation for Cleaner, Safer Vehicles, which is a initiative related to trucks and mobile equipment. And it's got three streams and one of the streams is greenhouse gas and having available technology by 2040. That was two years ago and we were worried about putting a date on it two years ago and how could we be certain that we'd get there, but just given the technical progress that I've seen around the world, I'm beginning to feel more and more confident that we'll be able to get there well before 2040.

Tom Butler:

And then the other thing to say is of course, scope three, which is the biggest challenge. This is the elephant in the room. This requires working with the value chain, working with the buyers. Some of the commodities produced by ICMM's members go into processes that produce a lot of CO2, most notably, for example, steel, we're already seeing technologies, which, although they're not commercially viable today are not that far off. So for example, hydrogen reduction and steel, people are saying, well, it's 30 to 40% off being commercial. And with scale and with innovation, it's becoming, well for me, I'm becoming more and more confident that we'll be able to whittle away that 30%. And you're seeing announcements all the time, which indicates that other people have got that kind of confidence. For example, earlier this week, Volvo announced that they will only manufacture electric cars by 2030 and that maybe even two years ago would have been inconceivable.

Dan Barclay:

Yeah. I think we've seen an enormous amount of development over the last 12, 18 months in terms of thought process experimentation and now success. One of the other topics that I think we're trying to layer in through the conference this week is around ES and G. And obviously the progress we've got and the focus has been mainly on environmental. How do you think about the social and the governance and how integrated they are when we think about sustainability?

Tom Butler:

Yeah, I think that there's a lot of interconnection between E, S and G and to give you a specific example, social issues often depend on how environmental issues are dealt with. So perceptions about water use, perceptions about dust management, perceptions about rehabilitation of a tailings facility or for that matter, managing a tailings facility safely. And so there's automatically an interconnection between the social issues that you have to deal with and how well you're managing the environmental issues.

Tom Butler:

They both feed into to governance because governance is there to make sure that you've got the right structures in place to oversee how you manage the environmental and social issues and that you're accountable for them, and that you're transparent and that you're not dealing with them in isolation. And the tailings standard, which we launched in October, which I was talking about earlier on today, on one of your panels, is another good example of that because it's very integrated. So it integrates environmental, social, technical considerations, and also has a strong governance component. And it's not a coincidence by the way that that standard was developed by a multidisciplinary group, seven experts with all sorts of different disciplines who put it together. And I think that's the direction of travel. We have to be more and more integrated. And one of the things that we're thinking quite hard about is social performance and how to integrate that better into the management structures in companies and in operations.

Dan Barclay:

I'm with you on this Tom, that it's a holistic discussion on ESG. And I'm sure you've seen some of the work that I've put out around connecting the dots on these. I've often remarked around the pandemic is an accelerative change in business and in life. And how do you think the pandemics impacted the mining and the ESG narrative? You mentioned technology and automation in your remarks. Do you think we'll see more radical change in the way mine and production processes are fundamentally designed?

Tom Butler:

Yeah, it was interesting when the pandemic started, there was a lot of commentary about which way is everyone going to jump. Now that they're under real pressure, are they just going to forget ESG or is it going to make everyone take it more seriously? It was pretty clear very soon that the pandemic highlighted inequality and vulnerability and it was pretty clear, which way you had to go. There was a very strong moral imperative. And I think the industry's response was very robust on that score. We focused on safety, we focused on supporting surrounding communities. We deployed our crisis management experience and skills and logistics capability and put a pretty strong response out there. So I think in terms of their response, it actually strengthened our ESG narrative and the companies that had the best practices going into the pandemic were also the ones who were able to manage surrounding social issues the best because they had the best networks with their surrounding communities.

Tom Butler:

In terms of what's it going to accelerate, it's obviously accelerated remote work that goes all the way down from CEO's. I mean, this conferences remote. I think a number of the CEOs in ICMM's council have realized that they can work in a completely different way. I think everyone's realized they can do things differently. And I don't think we'll be going back to the way it was before. People are going to be looking for hybrid approaches. In terms of technology, it's accelerated the use of things like drones. People are using iPads to do due diligence, which previously they would have insisted on traveling halfway around the world to do. Now they've got someone on the ground pointing an iPad at different things and sort of giving them virtual tools. There are some very exciting developments in other sectors, which I think will find their way into our sector. To give you one example, people these days are operating on people using special surgery glasses from different continents, well you could do the same thing to maintain a vehicle if you need some specialist engineer, it doesn't even have to be on the same continent.

Dan Barclay:

Yeah. And I think you highlighted earlier around the idea of more greenhouse gas friendly trucking, and I think one of the hallmarks of the mining industry is this process of continuous innovation. And it's usually a science based discipline, and the amount of change that the industry can actually create itself. And once it starts to get confident and then innovate, innovate, innovate is a great hallmark to the industry.

Tom Butler:

Yeah. Let me just make one more point on that. I think you're right. And I think we don't talk enough about it. I've seen some incredible innovation with the members. One of the things that I would never have dreamt up, but which really impressed me, it was a very simple thing that I saw them in the Pilbara on the Rio Tinto railway, where they have a microphone listening to the train every time it goes past. And it actually knows which wheel it's listening to. This sort of two mile train goes past every day or two, and it identifies each wheel and listens to it. And it can detect before it fails that it's about to fail. So you can actually swap the axle out before you have a derailment or a train failing on the track and those kinds of small innovations that are so important and so impressive, and we're doing them all the time.

Tom Butler:

And it does point to the sort of a common theme in the industry, which is that we are upskilling. There will be more automation, there'll be less need for more straightforward skills that are required in drilling, blasting and truck driving. And there'll be more need for computing and data analytics. And about two thirds of the engineers needed today, already are the sort of the ‘soft’ engineers, the software type, IT type engineers. And that's an issue for the industry, which we have to think about because it means that the proposition for a host countries, especially in developing countries is harder to make because often the host countries don't have these kinds of skills. And so we need to think very carefully about how to help surrounding communities and host countries, especially in developing countries, upskill so that they're able to still capture the benefits, even with a highly automated mine. And we've got an initiative which we're kicking off on that, which we're calling the Skills Initiative, which is essentially working with all sorts of partners, both at national, but global level to try to anticipate those impacts.

Dan Barclay:

Well, let's use this theme and go crystal ball time. What's your vision on the future of mines and what kind of timeframe do you think that could be achieved in?

Tom Butler:

Well, there's all sorts of different things I can think about. So we've already got all electric underground mines today. So can we imagine an unmanned, surface only underground mine? with nobody having to go down at all? I think probably, yes. I've seen mines, for example, I was in Grasberg two years ago where the operators were all driving the trucks and the diggers virtually from the surface. So can you get everyone else out of the mine and thereby improve safety? I think that's perhaps around the corner in some parts of the world. People are working on waterless minds. We've talked already about water in very scarce areas that that can save you a lot of costs, but also helps with safety on tailings. People are talking about completely different techniques for mining, so solution mining. I think a key thing is better management of waste. So recycling waste or finding other value chains for waste. Perhaps turning tailings into bricks could be something and perhaps eliminating tailings altogether, which is probably a little bit further off, but certainly within my lifetime, and I'm already getting quite old Dan.

Tom Butler:

And then I think in gold, one of the interesting things is whether we can do away with cyanide. The universities are already researching alternative solvents. And if we can find an effective solvent that is cyanide free and which doesn't harm the environment, and that's what they're working on, then I think that would make a huge difference also to artisanal mining. As I'm sure you know, artisanal miners use either cyanide or mercury, it's very damaging for the environment. And so, if we can find some kind of solvent which is neutral in terms of impact to the environment, then the informal sector will be impacted very positively. And we can't forget that sector because there are so many millions who are employed by it.

Dan Barclay:

A hundred percent agreed. Let's switch gears a little bit. A question for you, are mining and sustainability and profitability compatible or mutually exclusive?

Tom Butler:

Well, I think profitability is a required condition. So if it's not profitable, then it's not sustainable. So assuming that you've got something that's profitable, then I think the challenges, can you meet society's expectations, and of course, regulations and society's expectations are continually being ramped up and, increasingly, sustainability means going beyond the pure regulatory requirements. So being able to demonstrate that you're producing responsibly, going beyond the regulations and showing that you've got a positive impact. And I think if you don't do this and you can't show that you're doing it, then you start to lose access to capital. You start to lose access to projects and you start to lose access to markets. And we've seen so much interest from governments. We've seen so much interest from end consumers, whether it's people buying gold or whether it's the car manufacturers buying their commodities to make their cars. This is increasingly a consideration. If you lose access to those things, then obviously you're not profitable.

Tom Butler:

And then finally, I think the important point that I'd make is that if you can't show that you're producing responsibly and having positive impact, you lose your people. You and I, we discussed this last year, actually, I remember, you know, it's increasingly important if you want to attract talent, that you can show that you're operating with purpose and that you're having positive impact. And this industry is in competition with Silicon Valley. For example, I mentioned IT and software engineers, and if you want to attract those kinds of people, a lot of them are motivated by purpose as well. So we need to develop the narrative and also show that we were actually doing it.

Dan Barclay:

Yeah. We at BMO are working through a framework around the stakeholder analysis on this, and you often start off when you think about sustainability as the negative and the risk management piece, you then think about where you get to on the employee side, which is an important stakeholder. And then I actually get to opportunity, which is what you're seeing with returns in the marketplace. The companies that are more ESG focused are getting better returns on cost capital, access to capital. We at BMO are actually very focused on the opportunity set from ESG. And so, as you innovate, as you create new, as you do new things, right? It's change that creates upside.

Tom Butler:

So you and I are completely aligned on that, and, by the way, this is something that I say at every opportunity, which is that a lot of ICMM's members feel that they're judged by the sustainalytics agencies at the world, judged on risk management criteria. But really what's is much harder to do and which is more important is that you are able to show that your social impact and the positive impact that you can have, so the opportunities that you're talking about. Because that's part of risk management, it's just sort of positive risk management, as opposed to mitigating for negative risks.

Dan Barclay:

You used the example you used earlier on trucking, trucking is actually better on an automated basis safety and other things, but it's actually coming at a lower cost, right? And so it's actually enhancing the profitability of the operation by doing it something more sustainably.

Tom Butler:

Yeah. Just to finish on the example I gave, I was giving about Grasberg, there's also had a diversity component because it's still illegal, incredibly in Indonesia, to send women underground. So, you know, the room full of people driving trucks, who I saw at the mine in Grasberg who were all on the surface where not breaking the law. And by introducing this, these virtual truck drivers, they were actually able to get women into the workforce, which was great.

Dan Barclay:

Wow. That's a great development. Let's turn back to ICMM for a second. You recently published a series of equivalency benchmarks that compare the ICMM Mining Principles to those published by other global organizations. Why did you think that necessary?

Tom Butler:

Well, there are a number of commodities specific initiatives in the market, and they are meeting the responsible purchase sort of requirements of their buyers. And, they're all slightly different because of the issues related to gold, for example, are different to the issues related to copper. And our Mining Principles supply to our members and our members produce all sorts of different commodities. And so, the main objective was to simplify for the purchasers, people who are concerned about purchasing responsibility, responsibly, to introduce some efficiency for them, and to introduce some transparency in terms of how these different initiatives map across to each other.

Tom Butler:

The subsidiary objective is we're trying to, by introducing this equivalency framework linked to our Mining Principles, which are obviously applied globally, is to make it simpler for investors and for capital, so that we can actually grow the pool of capital which is willing to invest in the sector. So, if people can start to understand just how we operate responsibly and what these principles look like, and how they map across to other ones that they may have seen, hopefully we'd be able to grow the number of people who are willing to consider putting money into the sector.

Dan Barclay:

Yeah. And I think this is a good frame to my concept on what I call the broken narrative, which is the actual ESG track record of the mining companies is actually, in lots of cases, spectacular. And yet they don't get the credit for it and it's misunderstood. It leads me to a good conversation actually on mining and the benefit to one of the key stakeholders, which is the host countries. I think you've been recently trying to publish and build the FactSet around this concept of what we add to the host country or the mining industry does. And you published a couple of reports on that.

Tom Butler:

Yeah, sure. There's one index, which we've e been producing now for a few years called the Mining Contribution Index, the MCI. We issued the fifth edition last December and the aim... Well, first of all, just to say that the countries are indexed on a range of parameters, but the most important parameter is the percentage of exports, which are related to mining. So how much of your country's GDP are related to mining activity. The aim is to profile the countries who are the most dependent on mining and thereby highlight the fact that there are a good number of countries who are very much dependent on mining.

Tom Butler:

So if you look at the top 15 countries in the index, first of all, they're all developing countries and they all have more than 40% of their exports dependent on mining. And they have actually very little else going for them. They're totally dependent and it's critical for them to get their mining sector right, and to use those assets that they have to develop themselves. And so, this is really our way of saying, "Look, there are some countries for whom there's no alternative, and they need as much support as they can get from the international community in terms of institutional building support from multilateral banks, support in terms of strengthening how they manage their title and also support in terms of what they do with the cashflow that they receive from the operations so that they can help themselves develop and diversify."

Tom Butler:

And then the other report is tax where we aggregate across all the membership and we've started to regularly produce a summary of taxes paid, so the most recent report came out in December covering the period 2013 to 2019. The total tax paid by the membership across the board was $97 billion in that period with another $57 billion in royalties, so big numbers.

Tom Butler:

The most interesting thing for me, apart from the fact that it's a very big number, was that, when the industry goes through a downturn because of the balance between taxes and royalties, the host countries were still receiving very significant numbers. So we had a downturn in 2016 and even in the downturn five and a half billion dollars of royalties were paid to those countries. They've got this balance where, "Hey, even if dividends are not being paid, the countries are still receiving some income."

Tom Butler:

And of course, the narrative around this is the tax goes to infrastructure, healthcare, education, and ultimately diversification and getting that right is, and spending the money wisely, is dependent on having good governance, which is why ICMM supports the Extractives Industry Transparency Initiative, EITI, because that's all about disclosing what you pay for the companies, just disclosing what you receive if you're a country. And through that transparency, trying to improve good governance and making sure that it's spent wisely.

Dan Barclay:

I think those are great ways to expand the narrative on contribution for the mining industry. I think the last one, as we expand the narrative is the future of metals in a low carbon world. And how does an EV car get built? And BMO has done a bunch of work since then trying to be a thought leader around the impact of mining on a lower carbon future. How do you feel about that story? How do you feel about the narrative around the transition to a low carbon economy, I think both of you and I are optimistic about the future, it sounds like, and the progress around ESG?

Tom Butler:

On the transition, I think you're exactly right. And I don't think there's any dispute. All of the commodities, whether it's commodities for batteries or electric cables, which is obviously copper and lithium and cobalt, or whether it's iron ore to go into steel, so you can build your wind turbines or aluminum, they're all going to be needed for this transition. The challenge for us is to deliver what's needed to support the transition and to do it as responsibly as possible. I am optimistic because I think there's great convergence, which we haven't seen before. ESG is on the lips of all investors today, and that really only took off two years ago, perhaps. I think end consumers were thinking about it a little bit earlier.

Tom Butler:

And some of the responsible frameworks that we've produced were driven by end consumers, but are now being adopted or looked at carefully by investors as well. And of course, that was driven by climate change, but it's also being taken up for addressing such issues as social performance and human rights in the supply chain. And I think because we've got this convergence, I'm optimistic about being able to get there. We do have to get it right. We've seen some groundbreaking commitments on climate change. And as I said, it's led to alignments. I think when everyone's aligned, when a CEO is starting to set KPIs on meeting the targets that have been announced, then I think you start to see major change. And I think that's a one way street. I don't think there's any return. Everyone knows that this is critical for us as a society, and it's going to be critical if you want to access capital. So yes, I am optimistic. And I think the next decade is going to be very exciting for this industry.

Dan Barclay:

Well, Tom, let me say thank you once again. I've really enjoyed our podcast. I think we've really brought to light, I think in an interesting way, the progress made in the last 12 months. I wanted to thank you and ICMM, 'cause you guys are taking a leadership position on sustainability. Our industry Titans, if I can call them that I believe are true believers and are really into this, why we should do it is for the right reason. Whereas I would have said with you 12 months, 24 months ago, it felt like people were being dragged in. And today I think not only that they're trying to be leaders in embracing it. I think you really brought that to life today. Thank you again. Thanks for joining us at the conference. We really appreciate your contributions.

Tom Butler:

Thank you so much, Dan. Thanks for having me and thanks for the opportunity.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group to access all the resources we discussed in today's episode, and to see our other podcasts, visit us at bmo.com forward slash sustainability leaders. You can listen and subscribe free to our show on Apple podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance have a great week.

Speaker 4:

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