In today's rapidly evolving investment landscape, the spotlight isn't just on financial returns; it's also on environmental sustainability, social responsibility and governance — better known as ESG.
According to a 2021 report from Accenture Global (NYSE:ACN), 59 percent of investors want miners to aggressively pursue decarbonization and be market leaders in that effort. The report, titled "Global Institutional Investor Study of ESG in Mining," was based on responses from 200 public and private institutional investment firms from around the world.
On a similar note, 63 percent of respondents said they would be willing to divest from or avoid investing in mining companies that fail to meet their decarbonization targets or don't pursue decarbonization aggressively enough.
These numbers are reinforced in a 2023 report from EY on business risks and opportunities in the mining sector.
The annual report, which surveyed 150 mining executives, ranks ESG as the top risk on the radar for businesses.
The importance of ESG was also reiterated at the annual Prospectors & Developers Association of Canada (PDAC) convention, which was held at the Metro Toronto Convention Center in early March.
During a panel called “Mineral Financing and the Banking Ecosystem,” mining experts from Canada’s top banks weighed in on the value of ESG for investors and the challenge of attracting capital to the sector in the current market.
“I think now (ESG) is kind of the price of admission,” said Andrew Thompson, director of global mining equity sales at RBC Capital Markets. He said investors are approaching the sector with the expectation that a company’s ESG work is strong.
Due to this expectation, he believes ESG is less top of mind than it was a few years ago.
“Now it's part of the overall investment thesis as opposed to determining the investment thesis,” he said.
The idea of good ESG metrics being the price of admission was reinforced by Jackie Przybylowski, managing director at BMO Capital Markets, who noted at PDAC that “(ESG) doesn’t feel as performative as it has.”
She explained to listeners that in the past it felt like companies were only adding ESG slides into their presentations to lure investors, and now it feels more genuine and holistic.
Raising capital a key challenge for juniors
While ESG was the top concern identified by companies in EY's report, the second spot went to raising capital, a challenge that junior miners in North America have been especially impacted by.
The need for capital has also been compounded by the speed at which the energy transition must occur.
“Capital has moved up in the ranking as the sector competes for investment and incentives to accelerate exploration and development of minerals and metals vital to the energy transition,” EY's report reads.
“We’re seeing a shift from a short-term focus on returns to a long-term view of value, encouraged by recognition that longer-term investment horizons are required to meet 2050 net-zero goals.”
Although some investors are taking a more long-term stance, the PDAC panelists noted that risk aversion has also spiked.
The market has become less tolerant of disruptions compared to a decade ago, when there was a more favorable environment for investment and growth, explained Przybylowski.
“Investors these days are much more scared or skittish of operational risks, geopolitical risk — any kind of disruption,” she said. “And so we see a much bigger response in the share price today than we would have when I started my career.”
Aside from the growth of risk aversion, there has been a loss of speculative capital since the late 2010s.
“In the last five years, we haven't seen the big wins in the exploration space, the big wins being the big premium takeouts that we saw in the past,” RBC’s Thompson said. “That's probably keeping some of the capital on the sidelines. You've also lost capital, that more speculative capital, to Bitcoin, to cannabis a few years ago.”
Thompson added that there isn’t the same amount of capital going into the exploration side as there once was.
For her part, Przybylowski noted that some of the capital raising may be hindered by portfolio managers avoiding stocks with market caps below US$2 billion. “When I'm talking with generalist investors that are looking for new ideas, that's basically the cut off for a lot of them, and that's even considered sort of small-cap funds in the US as well,” she said.
“Everybody knows raising capital for junior mining stocks is getting increasingly difficult."
With audio files from Lauren Kelly.
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
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