How calculated risk-taking in mining can help the world transition to a more sustainable future

Russia’s invasion of Ukraine and the West’s response look set to change the very architecture of the global energy system, forcing governments to rethink even recently formed assumptions on the availability of fossil fuels – and fast.

Against a backdrop of looming net-zero targets, the pressure on Europe in particular, to find new ways of meeting its growing energy demand, has intensified. Alternative supplies of hydrocarbons will help bridge a gap in the short-term as governments consider their new long-term energy policies. But the events of the last month are a stark reminder of the great challenge of our lifetime – the transition to long-term viable, secure, and sustainable sources of energy.

There is cause for optimism. Dramatic technological advances in renewable energy generation and storage of the last decade, are beginning to be matched with coherent policy that will drive investment in infrastructure. But a fundamental challenge remains – the supply of raw materials needed to achieve this change.

The conflict in Ukraine has cast new light on the geopolitical fault lines which run through the markets for key raw materials and the fragility of the global supply chains. As governments continue to impose unprecedented economic sanctions on Russia and big brands extricate themselves from the Russian market, the impact on the global energy system will reverberate for decades to come in ways we can’t yet predict. Great challenges lie ahead, but as we saw during the COVID-19 pandemic, crises can be the catalyst for innovation.

The mining conundrum

The mining industry carries the key to the transition to a sustainable future, but it does so from a deeply damaged position.

Often unfairly perceived as poor performers against the investment community’s ESG screening criteria, mining companies for many institutional investors are a risk not worth taking – other sectors are a safer bet offering comparable if not greater returns. Consequently, many of the big mining companies have become increasingly risk averse, opting to mine in more tractable risk environments in favour of more readily accessible capital. 

But if miners can cast off the old image, prove that their ESG intentions are genuine, and mobilise quickly, the opportunity is there for the taking. For the junior and mid-sized exploration and early-stage production companies, whose speed and agility offers competitive advantage, this is certainly achievable.

Predictions of a seven-fold increase in the size of the market for ‘green metals’ – those used to make wind turbines, batteries, and other components of the electrical economy – by 2030, are particularly striking. BHP’s recent forecasts highlight a need to double its copper production and quadruple nickel production in the next 30 years and Anglo American aims to expand its copper output by 50-60 % by 2030. In his annual letter to BlackRock’s shareholders last week, Chairman Larry Fink wrote that ‘Higher energy prices will meaningfully reduce the green premium for clean technologies and enable renewables, EVs and other clean technologies to be much more competitive economically.

A return to calculated risk taking

To meet the global demand for raw materials, mining companies will be forced to operate in novel places and, in doing so, will be exposed to novel risks. 

Calculated risk-taking is nothing new in mining. ESG, security and political risks have always been a factor. But the complex and interconnected nature of these issues combined with increasing regulation and investor scrutiny, means that the consequences of poor risk decision making at the operational level, can cause ventures to fail. Yet, these issues are still being addressed using compliance-driven approaches in ESG, or the persistent but wooden risk matrix approach to security risk assessments.

The challenges of dealing with complexity.

In our 17 years of advising organisations facing complex political and security risks, several themes consistently emerge.

Security, political and ESG-related risks are often treated as standalone issues – they are not. 

Security incidents are frequently a manifestation of the broader environmental or social issues affecting local populations impacted by projects. Yet security risk assessments rarely even reference social or environmental impact assessments, and when they do it tends to amount to no more than a couple of sentences in a spreadsheet. Even fewer SIAs or EIAs reference security in a meaningful way. The root-causes of these issues all overlap or are, at the very least, intrinsically linked. So why are they seldom addressed in concert?

Considering security issues too late leads to ‘risk blindness’.

Once commitments to investors and host governments have been made and a project has gathered momentum, emerging security risks tend to be brushed aside or consigned to ‘management’ at the operational level. Optimism bias creeps into risk reporting and decision making, causing organisations to become blind to serious risks and potentially fatal flaws in their operational plans.

This is best characterised in an example of early-stage oil exploration in Somaliland where seismic surveying activities became governed by the project’s contractual milestones rather than the operational reality on the ground. Failure to engage with local communities and understand the potential impacts of surveying operations on their water supplies and grazing land led to a violent backlash. The operation was cancelled within 24 hours of having started, resulting in a three-year freeze in Somaliland’s progress in hydrocarbon extraction.

ESG is not just an investment issue.

Being good at ESG is not just about securing capital. In fact, this approach misses the point altogether. It is about minimising the negative impacts on people and the environment and maximising the benefits. The aim is to create long-term sustainability and value for shareholders and local stakeholders alike. The two are not mutually exclusive. In mining, this means early identification of the hidden constraints on projects that can cause them to fail and enabling the associated risks to be treated at the source. We call this Applied ESG and it is not about compliance-driven metrics and ratings. 

There’s a good example of this in part two of Baillie Gifford’s ‘Let’s talk about actual investing’ publication, in which Stuart Dunbar provides an excellent account of the value of long-term investing and diligent engagement with the companies in which they invest. They call this, Actual ESG. The basic principle of this approach is that long-term sustainable growth is unlikely to co-exist with unacceptable social and environmental behaviour. Furthermore, companies that don’t adequately address these issues will be found out sooner or later. 

The point here is that quantitative snapshots, metrics, and ratings are not the objectives themselves. Instead, they should be the starting point for discussions on how actual impact is measured and managed.

Risk reporting is hard to engage with.

Part of the reason why serious risks are brushed aside or not taken seriously by decision makers is to do with the way they are presented. Risk reports are often longwinded and use robotic or unnatural language which makes them hard to engage with. But the principal reasons are more straightforward. Writers often fail to define the ‘exam question’ in the context of the project, and they fail to provide directly relevant evidence to back their assertions. 

Without a clearly defined objective a good answer is hard to achieve. Establishing the right question to answer requires first-hand operational experience. One thing that continues to surprise us is how few so called ‘experts’ in security and ESG have any experience in the field. Consultants are often unfamiliar with the operating context which can cause operational issues that drive security risks to be missed.

The assumption that risk reports do not get read by senior executives is false. They do, but they often lack the evidence, and therefore the credibility, to convince the reader that the risks are worth further consideration. Evidence doesn’t always have to be quantitative to be convincing. In some cases, quantification may be impossible. But there must be clear linkages with the organisation’s operational reality and reports must provide specific and unambiguous advice on what to do next.

There is a better way of dealing with complex risks.

Our experience has taught us that by rethinking fashionable ideas about security and ESG we can solve real-world risk problems that extend beyond the reach of templates, tick-box exercises, and generic advice. Hidden constraints which can quickly escalate and cause projects to fail can only be uncovered by addressing these issues early, thoroughly and in unison. 

We bring together first-hand experience in managing the security of mining operations in some of the world’s most challenging environments with unique insight gained from acting as expert witnesses in mining disputes.

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