Last February, Norway’s sovereign wealth fund announced it would vote against re-electing the boards of 80 major companies including Apple, Microsoft, Nestlé, and Samsung because they failed to set or meet ESG targets. The fund — the world’s largest investor — also cautioned other company directors that they could also be targeted if they did not extend their efforts on issues like climate change, human rights, and diversity. While this is just one example, it speaks to the need for boards to be in step with institutional investor expectations, as well as changing corporate governance codes/director’s duties. Moreover, mandatory disclosure standards and proxy voting guidelines increasingly require companies to articulate and demonstrate the board’s role and ESG responsibilities concerning ethical behaviour, accountability, and compliance. Against this changing governance backdrop, all boards need to assess whether they are appropriately equipped to meet these expectations.
Ill-equipped boards
Two decades ago, boards mainly responded to regulation stemming from the United States’ Sarbanes-Oxley Act, following the collapse of Enron and scandals at WorldCom, Tyco, and others. After the 2008 financial crisis, boards focused on complying with the Dodd-Frank Act. As a result, boards were dominated by legal and accounting professionals to ensure an unrelenting focus on compliance and returns to shareholders. Fast forward to the present and you will find those types of boards may not be best equipped to deal with current realities and risks, and able to respond to a wider range of constituencies and market forces.
Indeed, like Norway’s sovereign wealth fund, institutional investors increasingly consider ESG material to their decision-making. While investors including JPMorgan, Blackrock, recently withdrew from the Climate Action 100+ group, this retreat is the direct result of intensified U.S. partisan politicking and highlights growing regional regulatory differences. Many of these same investors have strengthened their internal ESG investment stewardship teams and ensured their international arms stay firmly committed.
ESG remains a fiduciary duty and its prominence in the boardroom will continue to evolve at an accelerating pace. The boards of mining companies need to be attuned to the raft of new ESG-related standards; increasing stakeholder proposals and activism; and the growing geopolitical, protectionist and resource nationalism agendas.
High-profile disasters
Until recently, most mining boards treated ESG as an acceptable risk since the associated legal risks remained somewhat hypothetical. Many believed the risk of doing nothing was less than the risk of doing something – and the pain simply was not worth the gain. This is no longer the case as witnessed by the boards of Vale after Brumadinho, Rio Tinto after Juukan Gorge, and Shell for allegedly mismanaging climate resilience. Such high-profile disasters are an affirmation that we are beyond the tipping point when it comes to the financial and reputational damage that can come with mismanaging ESG issues. Lack of expertise, insufficient board oversight or failure to adapt to ESG-related issues can destroy trust and a company’s reputation. It can also lead to more concrete consequences, such as permits being revoked, limiting access to capital, divestments, shareholder proposals and derivative actions, proxy fights and even litigation.
The fallout can be even more far-reaching. For instance, underwriters of directors and officers (D&O) liability insurance closely consider how miners are addressing ESG when making coverage decisions. Following in the footsteps of the U.S. Securities and Exchange Commission, the Australian and Canadian securities agencies have already warned companies against making overly promotional ESG disclosures. Today directors can and are being held personally liable for their company’s ESG performance and shortcomings. Boards need to assess their ESG risk appetite and resilience in the face of this increasing disruption and consider the cost of getting it wrong — i.e., what happens if there is no “forgiveness factor” in their ESG learning process?
What boards need to do
Duties of loyalty and care for the board are codified in corporate legislation and mean that substantive consideration of material ESG issues should be meaningfully integrated into board oversight. Many institutional investors and influential proxy advisory firms (such as Glass Lewis) are taking a firm stance in keeping boards accountable. They are also becoming more prescriptive concerning ESG accountability and the need to put in place an effective oversight structure.
ESG needs to be a regular topic for the board, whether at the full board level or delegated to the audit committee, nominating or governance committee. Or as a growing number of miners have successfully done, create a standalone ESG committee to centralize oversight of ESG – a practice that proxy advisor ISS endorses. Whatever the preferred option, the division of accountability for ESG matters and execution of those duties should be documented appropriately through regular board agenda items, and explicitly detailed in governance guidelines or committee charters.
Boards need to ensure that they are overseeing their companies’ approach to ESG matters in an informed and deliberative manner and be prepared to demonstrate that to investors, stakeholders, D&O insurance underwriters and regulators.
However, a growing number of directors do not feel confident about their ability — or their board’s — to competently oversee a company’s approach to ESG. Numerous studies have pointed out that relevant ESG expertise is lacking among boards. More and more ESG issues are beyond the traditional mandate for boards but are now being scrutinized by many stakeholders, including an increasing number of those downstream in the supply chain. To serve this market need there are now many courses, executive programs, and ESG e-learning packages for directors.
However, just like all other vital board governance skills and competencies one cannot s replace experience in ESG, especially when gained from operating in challenging jurisdictions. The fact that ESG is easy to discuss and theorize about has led to an explosion in ESG “experts” and the rise of “competency greenwashing.” Boards should not inadvertently equate general awareness or passion for ESG topics with true subject matter expertise. One cannot substitute for genuine ESG experiences and leadership credentials, especially bridging the gap between knowing what to do and making it happen.
Thankfully, there are effective ways to bring crucial ESG fluency to the boardroom, ensuring nominating processes focus on recruiting directors who will bring valued ESG knowledge, expertise, insights, and problem-solving attributes. Such refreshment will give boards the essential fortitude to think the unthinkable and incorporate a multistakeholder perspective helping management think differently.
A board’s relationship with management is central to its effectiveness so that they can challenge and advise management on ESG strategy, performance, and disclosure through exercising their oversight on ESG implementation from corporate to mine sites, importantly without overstepping. There is a lot directors can do to embed ESG into the company’s ethical and cultural DNA. They can constructively debate and evaluate the company’s ESG posture, strategic direction, and performance; support ethical leadership and cultural change; re-examine risk management, oversight protocols and controls; inform due diligence processes for M&A activity; influence and incentivize behaviours through executive compensation; strengthen succession planning; and more actively participate in shareholder meetings. They can bring the confidence and judgment needed to navigate the evolving ESG landscape, especially with the growing attention to critical minerals, and the fast-evolving mandatory corporate ESG disclosure requirements and related securities laws.
Beware the boilerplate
One burgeoning challenge is that boards continue to be advised to “boil the ocean” as they move from ESG aspiration to actual accountability. Typically, they are sold the boilerplate ESG treatment based on a cursory materiality assessment and a superficial benchmarking assessment – all attractively packaged in a humdrum ESG report full of infographics and stock photos. What is most frustrating is that this type of advice frequently stunts internal thinking capacity, agility, and innovation, while obfuscating management and board accountability and blurring the lines between the two. Boards should only proceed after diligently considering their general duties, business ethics, potential liabilities, and market expectations. If boards do not assess their true ESG vulnerabilities through scenario planning, know what they are trying to change or improve, and how to react accordingly, they risk making matters worse. A subpar ESG strategy, ineffective internal structure or exaggerated disclosure could create corporate or personal liability and a target for litigation and reputational damage, especially considering the global crackdown on “greenwashing.”
While most miners have embraced the ESG value proposition mindset and are demonstrating strong ESG performance, others have fallen behind and succumbed to the myopia of short-termism, particularly on issues like human rights, security, Indigenous engagement, diversity, equity, and inclusion (DEI), biodiversity and climate transition planning. Miners that proactively reshape boardrooms and seek to better integrate business ethics, and such ESG issues into their strategy, decision-making and risk management processes better position, and future-proof their companies.
Looking ahead, ESG will continue to evolve, regulatory pressures will mount, politics and business will continue to collide, stakeholder activism will remain robust, and the energy transition will be at the forefront. The dynamic business environment will create new challenges, but also opportunities. Engaged and appropriately skilled boards, working as strategic partners to management, and exercising their ESG and business judgment to identify priorities and weigh competing interests and objectives, will be best situated to create long-term value for all stakeholders.
Kevin PCJ D’Souza is a responsible mining executive and ESG advisor with more than 30 years of experience in the industry. He has worked in more than 50 countries for juniors, mid-tier, and major mining companies. kevinpcjdsouza@gmail.com
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