At M&G, where a number of our funds have significant exposures to natural resources sectors, ESG factors are taken into account when analysing potential or existing holdings.
When investing in the mining industry, long-term investors like M&G have always looked at non-balance sheet factors when making investment decisions. The mining industry creates jobs, generates tax revenues for governments and plays a part in providing most of the items we use in our everyday lives. Because of this widespread impact, there is a higher level of ESG risk. It is a sector where all three of the ESG pillars – Environmental, Social and Governance – can have a major impact on company performance.
- In Governance, strong oversight of management strategy is an important part of the Board’s duty to its shareholders; executive remuneration and incentive structures evidently have a tangible impact on management actions and, in turn, outcomes for investors.
- From a Social perspective, the mining industry is arguably the most impacted of all sectors globally. Issues including employee health & safety, labour relations and local community interactions can be intrinsically linked to the success of a company, and can make or break what is often described as a business’ ‘social licence’ to operate. Companies that get this right can develop strong and lasting relationships with the stakeholders they interact with at every stage of their business process.
- Environmental issues within the industry are numerous and can have a huge impact. Mines of every sort affect their local environment, and all of these effects need to be carefully managed. Just a few of the issues include: water usage and pollution, impact on local habitat, carbon emissions, etc.
All of these environmental, social and governance issues – so called ‘extra financial’ factors – can be as important as the quality of the underlying ore body and the company’s financials in determining the likelihood of business success; again, failure in any of these areas can jeopardise a company’s social licence, and hence ability to operate.
At M&G, where a number of our funds have significant exposure to natural resources sectors, all of these factors are taken into account when analysing potential or existing holdings. The issue of safety, for example, is a central discussion point during all meetings with company management and, where we consider it necessary, pressure is applied to encourage progress.
We believe that it is part of our role as co-owners of a company to hold management to account in this regard: it is not acceptable to tolerate fatalities as an unavoidable consequence of operating a mine, whatever the hazards. Aside from the human cost, such accidents cause disruption at numerous levels, from flagging employee morale to project delays and cost overruns. They also highlight operational and organisational flaws that can reflect weakness in the corporate culture.
Executive remuneration is another area of significant focus for us at M&G. Setting the right incentives for management is central to influencing how they run the company. Aligning these incentives with the company’s stated strategy, and therefore with the interests of us as shareholders, as well as other stakeholders, is an important responsibility for long-term investors. While certainly pertinent in the mining sector, it goes without saying that these, and various extra financial issues, are also important considerations when assessing other companies and industries.