Why ESG Matters
ESG permeates through every level of a company. Internally with its employees, with the environment in which it operates, with its external stakeholders and, most importantly, with the communities that may be affected by a project. It is critical that ESG matters be considered and managed upfront to avoid future misalignment that could hinder a project’s schedule and costs, or impact on the availability of funding.
ESG considerations are driving project design, development, operations and closure. They have become a priority on stakeholders’ agendas and a focal point for investors and financiers.
At HCF, we excel in this matter and ESG is embedded in our financial advisory services.
External ESG Drivers
Sponsor / Board / Management
Board and management have a duty to confirm the company’s compliance to the ESG standards it has set out.
From a reputational perspective, companies should consider who they are contracting with and what minimum standards they may wish to require compliance with.
Most lenders will now only lend to a company or a project if they are in compliance with a set of ESG standards. These will include country standards, but also international standards and company specific standards which the institution has committed to comply with.
A key question will be whether the security forces you will employ at site are government or private forces. In any case, this is where human right violations are most prevalent and will thus require further scrutiny.
National, provincial and local ESG requirements will typically apply and drive the granting of permits and authorizations. Funding and offtake will be contingent on obtaining these permits and authorizations.
Investors are becoming more ESG savvy. They have increased focus on sustainability matters, given the growing requirement to report on investments and their GHG emissions. Transparency, communication, and a strong Environmental and Social Management System will be important. Potential impacts include loss of funding and investors exiting the company or the project.
Non-Governmental Organizations may release news hinting at potential ESG non-compliances. These could have an impact on the viability of a project. Transparency and communication are key.
New non-financial sustainability standards require the disclosure of information on a company’s exposure to sustainability-related risks and opportunities (incl. climate change related) as well as how a company manages those. This will become a focal point for any investor looking to assess an investment opportunity. Having a strong EHS team in place and starting early on building one’s Environmental and Social Management System will be key in building investor confidence, but also in defining and organising the company’s disclosure strategy given the various disclosure requirements imposed at the national/federal, accounting, lender, investor and company levels.
Communities are key. Their buy-in will be crucial to the success of your project. Do you really know them? Have you listened to them? Do you understand what their expectations are? Are they fully on board? Have you incorporated them in your training and social development programs? Do you have the adequate means to communicate with them and to hear them?
Offtakers may have their own requirements in terms of who they contract with and vice versa. Ensuring compliance with ESG requirements increases the available pool of companies that will work with you.
internal esg dimension
In the current environment, with areas being affected by severe drought and others by severe floods, water management is on top of the agenda for many. How can you minimize water drawdown? Can you recycle your water? Are there alternative sources of water? Do you monitor the flow and quality of the water in your area of influence? Will your discharge water affect the quality and volume of the water in the area?
Protecting and conserving biodiversity is essential for the maintenance of ecosystem services such as food security, access to clean water, flood protection and climate regulation. Project impacts include loss of habitat, disturbance, hunting, new diseases, loss of stopover for migratory fauna, loss of means of subsistence, etc.
Your workforce is your “most valuable asset” (IFC Performance Standard 2). It is important that you treat them fairly and, above all, no child or forced labour will be tolerated.
Health & Safety
Since 2022, the ILO Declaration on Fundamental Principles and Rights at Work includes “a safe and healthy working environment” as a fundamental principle and right at work. Ensuring safe and healthy working conditions are paramount. Impacts include absence, reduction in productivity, downtime, prosecution, fines and possible closure.
TSF & Waste Management
Tailings will be a focal point for lenders and investors on the back of the Brumadinho dam failure tragedy. Governments are also introducing new measures aimed at de-risking these tailings storage facilities (prohibition of downstream TSFs, further monitoring etc). Please carefully think about your TSF: upstream/downstream? Dry stacked? In compliance with the Global Industry Standard on Tailings Management?
A company’s set of policies, management and monitoring programs, plans, procedures stemming from its analysis of the risks inherent to its current and future activities and their impacts, which enables the company to identify risks, assess their impacts, define ways to avoid, mitigate, manage these impacts and maintain the right reporting and recording standards. The ESMS will evolve as a project develops.
Air & Noise
Projects in the extractive sector (such as mining) may create dust, air pollution (from the emissions of gaseous pollutants) and noise. Impacts include noise and air pollution for the communities around, and disturbance for the local fauna and flora.
The Equator Principles IV, which has been adopted by a large proportion of financial institutions, requires the preparation of a Climate Change Risk Assessment which will depend on whether the project is a Category A or B project, and whether the project is expected to exceed 100,000 tonnes of CO2 equivalent in annual emissions. Impacts of climate change can include damage to assets, changes in water availability, disruption to operations, etc.