Could ESG mitigate the insurance risk of climate change to mining?

Matthew Hall 17 September 2020 (Last Updated September 17th, 2020 16:55)

Climate change and Environmental Social Governance (ESG) will transform the energy industry risk landscape, according to global risk management, insurance brokerage and advisory company Willis Towers Watson on the launch of its annual Mining Risk Review.

Could ESG mitigate the insurance risk of climate change to mining?
Climate change increases water stress – a problem some mines have already had to face. Image: josealbafotos on Pixabay.

Willis Towers Watson publishes its Mining Risk Review each year. While the review discusses the long-term challenges facing mining, the industry itself has faced an unforeseeably difficult year in wrestling with the Covid-19 pandemic and its effects and as such the company underscores the unique nature of this year’s edition.

ESG forms the key theme of the report, which highlights that the transition to a low carbon economy will need “fundamental systemic change” on a global level, and achieving a satisfactory ESG rating will be critical for mining companies to attract the support of stakeholders as issues around climate change become more pressing.

How climate change affects risk in mining

Despite making strides to reduce the negative environmental effects of mining, the industry remains a heavy polluter, responsible for between 4% to 7% of Scope 1 and 2 greenhouse gas emissions, and consuming up to 11% of worldwide energy use. A changing climate considerably affects the risk landscape for mining endeavours. Risk has always been a business consideration, with companies evaluating their exposure to various factors from market movements to geopolitical events. But climate is becoming a greater risk factor: The World Economic Forum’s Global Risk Report 2020 saw environmental threats as a dominant issue for business leaders for the first time.

Physical risk constitutes the direct risk to mining operations – not just in terms of the world getting warmer, but in increasingly common extreme weather situations. For example, climate change will increase water stress – an issue that miners in Chile and other countries are already facing.

“Mining is a thirsty business, especially for materials such as copper and iron ore, and water (or lack of it) is one of the primary ways that the mining industry may feel the effects of climate change,” Climate Markets & Investment Association executive director Margaret-Ann Splawn wrote in the review. “It’s no secret that some miners have had a major impact on water resources, sometimes depleting water supplies through high usage and, in certain instances, polluting them with discharged mine effluent and seeping from tailings or waste rock impoundments.”

Methods to mitigate this risk could include water recycling and using greater amounts of seawater with desalination technology, Splawn suggested.

The consequences of not addressing physical risk could mean severe impacts on operations and workers, as well as infrastructure and supply chain issues. But, perhaps more significantly, heightened physical risks from environmental issues could make some mining assets uninsurable.

The importance of ESG

Willis Towers Watson’s review highlights the increasing relevance of a company’s ESG in measuring a company’s sustainability and risk management. Writing on the topic for the Mining Risk Review, Jamie Strauss, founder of fintech data and research platform Digbee, said: “Higher rated ESG companies have, generally, outperformed and proven greater resilience to those that are not – the recent period incorporating Covid-19 has further demonstrated this.”

Mining companies wrestling with the industry’s reputation have made strides in recent years to improve their commitments to host communities and the local environment. From BHP’s multi-million-dollar partnership with CSIRO in research and conservation works at the Ningaloo Reef off the coast of Western Australia to mining majors’ community efforts against the Covid-19 pandemic this year, miners want to be seen to have a positive effect on their host communities.

It doesn’t always go according to plan, though. Just last week, a group of Rio Tinto executives including CEO Jean-Sébastien Jacques announced their resignations as a result of the Juukan Gorge scandal earlier this year, when the company destroyed ancient Aboriginal heritage sites as part of mine expansion works.

“The mining industry is at the forefront of the raw material supply chain and has mines located in many disadvantaged areas of the world; so as well as its obvious environmental impact, it has an oversized level of responsibility to act,” Strauss said. “The benefit of sustainably-mined products, from electric cars to windmills, solar energy and even health, should and can be positively recognised.”

A barrier to more widespread or comprehensive ESG policies being adopted by mining companies is the cost, but Strauss underscored that the importance of ESG going forward makes it a worthwhile investment. Improved ESG ratings can differentiate mining companies give them an advantage over competitors, as well as improving a company’s reputation locally. But ESG can also provide companies with better access to financing – Willis Towers Watson’s review highlights the importance of ESG over the next decade and beyond for potential investment, financing, and insuring of mining projects.