How ESG Consideration Rings Bell In Assessing The Quality of A Mining Stock?

  • Oct 20, 2019 AEDT
  • Team Kalkine
How ESG Consideration Rings Bell In Assessing The Quality of A Mining Stock?

Australia sits on the vast deposit of natural resources, which makes the country a favourable destination for mining companies to operate, and the national stock exchange of the nation, i.e., ASX is inundated with mining stocks.

While there is a vast number of options available to choose, it is always advisable to gauge the quality of a mining stock before jumping onto the valuation parameters.

To Know More About the Valuation Parameters, Do Read: An Investors’ Guide for Commodity Valuation and Mining Stocks

How to Assess the Quality of a Mining Stock?

Among many one major aspect that decides the quality of mining firm or a mining stock is the environmental responsibility shared by the miner.

The global mining activities account for a substantial carbon footprint, and apart from the mining activities, the end usage of raw material produced by the mining companies makes up a significant portion of the global greenhouse gas emission, which is known as the value chain emission or the Scope 3 emission.

Thus, it becomes crucial for a miner to share environmental and ecological responsibility.

The global agencies and the investment professionals judge the quality of a company on three core fundamentals aspect, and responsibility towards the environment comes under those three fundamentals, while rest being social responsibility and company governance.

We have witnessed many Australian giant miners working on their social responsibility and environmental responsibility with qualified management to ensure that these tasks are done in a timely and efficient manner.

While major iron ore miners Rio Tinto (ASX: RIO) and BHP Group Limited (ASX: BHP) have set their climate goal and working towards achieving the same, we have witnessed many other significant resource players such as Origin Energy Limited (ASX: ORG) participating proactively in the global cause to limit the carbon footprints.

To Know More, Do Read: Australian Giant Miners-Rio And BHP To Curb Value Chain Emission

Why Should You Consider ESG Parameters?

We have heard of many instances of investors-investees discrepancies emerging time to time in the industry, which cause tremendous losses to both the party involve in an agreement. It is well evident, and many academics points towards the benefit of symbiotic relationships among the investors and investees.

The symbiotic relationship between an investor and investee is crucial for a business or any model of business to survive over the long-run, and ESG- Environmental, Social and Governance plays a pivotal role in achieving that, which makes ESG an important item in many serious long-term investors’ checklist.

ESG helps both investors and individual companies to align their interest and work is a cordial and efficient manner. As per many investment professionals, the consideration of ESG risks before investing could lead to high-quality return stream, which is most likely to sustain over the long-term.

Also Read: BHP’s High ESG Considerations Kept Coal And Cobalt Out Of The Company’s Portfolio

Industry experts state that over 78 per cent institutional investors now consider ESG among other things within their investment strategies, and over 51 per cent institutional investors have witnessed return enhancement by incorporating ESG in their investment strategies.

Also, risk management is taking strong roots among asset managers and incorporating ESG risks into investment decisions provide an understanding of the crucial risks and opportunities that are associated with each asset class and individual companies.

The major risks related to the supply chain management, regulatory changes and environmental impacts should be included to capture the nitty-gritty of mining stock.

Environmental Concerns

The Global Warming of 1.5o C report from the Intergovernmental Panel on Climate Change (or IPCC) calls for an immediate action related to the climate change, and the report also delivers few key messages such:

  • The report states that the global annual emissions will need to be reduced by half until the year 2030, and the emissions level should not overshoot post the year 2050.
  • The decarbonisation is required on a massive scale.
  • The 2o C rise in global warming contains much high risk as compared to the 1.5 o C rise
  • The global emissions should reach a net-zero by the year 2050 from all pathways, while all the pathways should lead to carbon mitigation to some extent.

To Know More, Do Read: Origin Energy Joins the Cause of Reducing Carbon Footprints

As mentioned above, the resource sector and especially the mining sector is responsible for a substantial portion of the global GHG (Green House Gas) emissions and scope 3 emission, and while the world is in dire needs of reducing the global GHG emissions, many industry experts and large fund houses believe that the companies which will not focus over the environmental responsibility would face tough times to sustain over the long-run.

Social Responsibility

The responsibility of a mining company does not limit to the environment and the firms engaged in the sector share responsibility for many other aspects, such as the development of the nearby population, restoration of the damaged ecosystem and much more.

The mining activities typically involve leasing on the mineral rights of land and dig out for natural resource, which is responsible for dislocating a large number of the people such as minor tribes. Providing an opportunity for the local community to participate in the development of an economy is also a major responsibility of a mining company.

Commodities and their producers, i.e., the resource players and the mining companies play an important part in the development of an economy, as they produce the raw material for the production of the other vital products important for the development of an economy.

In doing so, the mining firms consume a large portion of land, which could be used for other means of income by either the local community or the mineral landowners, which are generally local governments, to develop the economy by providing income means for the people residing in a particular geography.

Thus, a mining firm should be able to compensate for the opportunity cost of allowing use of the land for exploration leading to the development of an economy.

A quality mining company should be able to compensate for the opportunity cost in terms of employment for the local people and other job-related benefits.

Corporate Governance

Last but not least, corporate governance should be looked upon very seriously. The application of corporate governance is just not limited to the mining stock, and it is applicable to other sectors as well, just like environmental and social responsibilities are.

However, while the application of the environmental responsibilities and social responsibilities could vary from sector to sector, corporate governance incorporates an industry’s nuances. Yet, its weightage on the quality of a company makes it a top parameter to look upon before any other parameters in the mining industry as well; thus, its incorporation should not come as a surprise for the readers. Moreover, a good corporate governance is the bed rock on which the execution of environmental and social obligations are effectively met.

Corporate governance includes the framework of mechanisms and practices by which a company’s Board of Directors ensures accountability, fairness, and transparency of the company with its respective shareholders, which in turn, promotes the symbiotic relationship between an investor and investee.

Thus, the glance upon the management, their past track record, education could help an investor to assess the quality of mining stocks.


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