Sustainability isn't just a buzzword - it's a vital business strategy.
Research reveals that companies excelling in specific Environmental, Social, and Governance (ESG) areas can command valuation multiples 3% to 19% higher than the median, with profit margins up to 12.4 percentage points greater.
Yet, in resources and energy, many managers remain unclear about their role in driving these ESG initiatives forward.
Contrary to common belief, ESG isn't the sole domain of a dedicated few; it's a collective responsibility where every manager plays a crucial part. Embracing this approach can be your stepping stone to not only advancing sustainability but also enhancing your company's financial success and market position.
Managers in the resources sector should recognise that there are three key areas where focusing on ESG can significantly enhance their company's value:
Securing Social License to Operate: By adhering to environmental laws and regulations, companies ensure the continuity of their operations. This is the most fundamental source of value protection.
Boosting Profitability: Companies committed to robust sustainability and decarbonisation practices often find themselves at the forefront of increased revenue generation and cost efficiency. These initiatives are not just about doing good; they're about doing well financially.
Elevating Future Enterprise and Intangible Value: Firms with high ratings in sustainability matters often enjoy a valuation premium. This is driven by investor demand, particularly from those prioritising ESG considerations. Additionally, these companies benefit from intangible assets like enhanced employee capability and engagement, attracting talent who seek to work for ESG leaders.
As executives seek to navigate the evolving ESG landscape, the role of managers in driving value through these initiatives is becoming increasingly critical. However, many managers are still unsure of their role in this journey.
As a manager, embracing ESG responsibilities is not just an obligation; it's an opportunity to distinguish yourself within your organisation. By proactively engaging in sustainability efforts, you can position yourself as a forward-thinking leader.
Now, let's dive into each source of value and explore practical actions you and your team can take to enhance your company's performance in these areas.
Value Pool 1: Securing Social License and Operational Continuity
Understanding the Regulatory Landscape
For companies to mitigate the risk of operational disruptions due to regulatory issues, three conditions must be met:
Regulations must be clear.
Regulations need to be stable.
Companies should have the capability to meet these requirements.
While mining companies typically have the capability to comply with regulations, the challenge lies in the evolving and often unclear nature of climate regulations.
Navigating the ESG Reporting Maze
ESG reporting, with its myriad of standards, methodologies, and metrics, has become increasingly complex.
This complexity has resulted in inconsistent emissions reporting, allowing companies to selectively choose their reporting metrics. In 2018, there were over 600 ESG ratings and rankings globally, highlighting the diversity of reporting standards.
This veritable alphabet soup of reporting standards, methodologies and metrics can be seen in the non-exhaustive list below.
Scheme abbreviation | Description |
ACR | American Carbon Registry sets standards for voluntary carbon offset projects in the U.S., ensuring credibility and effectiveness. |
B Corp Certification | B Corps meet rigorous standards of social and environmental performance, balancing profit and purpose. |
BVCM | Beyond Value Chain Mitigation by SBTi emphasises broadening mitigation efforts beyond direct value chains. |
CAR | Climate Action Reserve establishes standards for carbon offset projects in North America, promoting transparency and environmental integrity. |
CBAM | Carbon Border Adjustment Mechanism adjusts the carbon cost of imports to the EU, encouraging global emission reductions. |
CBCO | CarbonBetter Certified Offsets offer hand-picked carbon offset portfolios blending various projects, geographies, and technologies. |
CDP | Measures and discloses environmental impacts, focusing on climate change-related information for entities like companies and regions. |
CDSB | Climate Disclosure Standards Board focuses on climate-related financial disclosure, providing a framework for mainstream financial filings. |
CER | Certified Emission Reduction represents verified emission reductions or removals achieved by CDM projects under the Kyoto Protocol. |
CFT | Carbon Financial Tool is used in carbon markets for managing carbon price risk and facilitating trading. |
CSRD | Corporate Sustainability Reporting Directive enhances sustainability reporting across EU member states, aiming for consistency and quality. |
DJSI | Dow Jones Sustainability Indices assess the sustainability performance of companies, guiding investment decisions based on ESG practices. |
EPA | Environmental Protection Agency in the U.S. sets and enforces regulations for environmental protection and compliance. |
ESRS | Environmental, Social, and Governance Reporting Standard offers comprehensive ESG reporting, encompassing environmental, social, and governance aspects. |
EU ETS | European Union Emission Trading System is a marketplace for carbon allowances, reducing GHG emissions in the EU. |
GHG Protocol | A framework for measuring and managing greenhouse gas emissions, assisting in understanding and reporting carbon footprints. |
GRI | Global Reporting Initiative provides a comprehensive framework for sustainability reporting, covering economic, environmental, and social impacts. |
GS | Gold Standard certifies carbon projects that contribute to sustainable development, enhancing the impact of carbon offset initiatives. |
IFRS | International Financial Reporting Standards integrate sustainability reporting to include relevant ESG information in financial statements. |
IPPC | International Plant Protection Convention focuses on preventing plant pests and promoting measures for their control under FAO. |
IR | Integrated Reporting integrates financial and non-financial information for a holistic view of an organisation’s strategy and performance. |
ISO | International Organisation for Standardisation develops international standards for sustainability aspects like environmental management. |
ISSB | International Sustainability Standards Board creates globally consistent sustainability reporting standards, including TCFD-aligned standards. |
MSCI | Morgan Stanley Capital International provides ESG ratings and indexes for assessing companies’ sustainability performance in investments. |
NDC | Nationally Determined Contributions outline targets for reducing GHG emissions and adapting to climate change under the Paris Agreement. |
NFRD | Non-Financial Reporting Directive mandated large EU companies to disclose non-financial and diversity information for transparency. |
PRI | Principles for Responsible Investment guides investors in incorporating ESG factors into investment decisions, promoting sustainable practices. |
RGGI | Regional Greenhouse Gas Initiative is a mandatory cap-and-trade system in the northeastern U.S. for reducing power plant emissions. |
SASB | Sustainability Accounting Standards Board offers industry-specific sustainability accounting standards for material ESG information disclosure. |
Scope 1 Emissions | Direct emissions from sources owned or controlled by a company, representing the most immediate carbon footprint. |
Scope 2 Emissions | Indirect emissions from the generation of purchased energy, reflecting the carbon footprint of energy consumption. |
Scope 3 Emissions | Indirect emissions in a company’s value chain, including upstream and downstream activities. |
SEC | Securities and Exchange Commission in the U.S. oversees financial markets, emphasising disclosures on climate-related risks. |
SRG | Sustainability Reporting Guidelines by IFAC offer a framework for sustainability performance reporting. |
TCFD | Task Force on Climate-Related Financial Disclosures provides recommendations for disclosing climate-related financial risks. |
TNFD | Task Force on Nature-Related Financial Disclosures develops a framework for nature-related financial risk assessment. |
UN SDGs | United Nations Sustainable Development Goals provide a global framework for sustainable development by 2030. |
UNGC | United Nations Global Compact aligns business operations with universally accepted principles in areas like human rights and environment. |
VBCS | Voluntary Biodiversity Credits support nature restoration and nature-positive initiatives, assigning value to ecosystem preservation. |
VCM | Voluntary Carbon Market allows entities to purchase carbon credits to offset emissions, providing flexibility for sustainability goals. |
VCS | Verra Carbon Standard is a leading standard for voluntary GHG reduction and removal projects globally. |
VER | Verified Emission Reduction represents certified GHG emission reductions, ensuring credibility in carbon offset initiatives. |
WCI | Western Climate Initiative establishes a cap-and-trade system to reduce GHG emissions in the western U.S. and Canada. |
WEF | World Economic Forum promotes sustainable and inclusive economic development, fostering collaboration on global challenges. |
Legislative Changes and the Resources Sector
The resources sector is currently experiencing significant changes in environmental regulation at both Commonwealth and State levels. This ongoing shift underscores the dynamic regulatory environment impacting the sector.
In 2023, mining industry associations made submissions on the following legislative changes.
Name of Scheme/Change | Agency | Level of Impact on Resources Sector | Description of Proposed Changes |
Carbon Leakage Review | Commonwealth Department of Climate Change | Medium | Focused on assessing the risks of carbon leakage for Australian industrial activities and examining policy options to address these risks, including the feasibility of a Carbon Border Adjustment Mechanism (CBAM). |
Climate Change Bill 2023 | WA Department of Water and Environmental Regulation | High | Aims to establish a framework for emissions reductions and enhance climate resilience in Western Australia. Formalises the State Government's goal of reaching net zero emissions by 2050, includes requirements for developing strategies and plans to reduce emissions, and mandates annual progress reporting to Parliament. |
Changes to NGERS | Commonwealth Climate Change Authority | Medium | Updates to the National Greenhouse and Energy Reporting Scheme (NGERS) include the introduction of optional, supplementary reporting of market-based 'scope 2' emissions, associated with the consumption of electricity, along with other amendments to improve reporting accuracy and relevance. |
Climate-related Financial Disclosure (CRFD) | Commonwealth Treasury | High | Implementation of mandatory climate-related financial disclosure requirements, expanding reporting scope for large listed and unlisted companies and financial institutions, with phased implementation starting in 2024-2025 and full implementation by 2027-2028. Focus on financial materiality and specific requirements for scenario analysis. |
Australian Carbon Credit Unit (ACCU) Review Discussion Paper | Commonwealth Department of Climate Change, Energy, the Environment and Water (DCCEEW) | Medium | Discusses improvements to the ACCU scheme, proposing changes to improve governance, transparency, and project outcomes. Focuses on bolstering the scheme's integrity and supporting effective emission reduction practices. |
Safeguard Mechanism Reform | Department of Climate Change, Energy, the Environment and Water (DCCEEW) | High | Proposed reforms include declining emissions baselines, flexibility measures for certain Emissions-Intensive, Trade Exposed (EITE) facilities, modifications to crediting arrangements, and phased implementation. The reforms aim to support Australia's largest greenhouse gas emitters in reducing their emissions and aligning with national climate goals. |
Stabilising Climate Standards and Regulations
However, there is a move towards stabilisation. The ISSB's introduction of standardised climate reporting, rooted in existing frameworks like TCFD and SASB, marks a significant step towards harmonising climate reporting standards.
The ISSB was finalised in mid-2023, with the Australian Government moving to adopt the climate portions of those standards and expecting the new regime to apply to Australian companies starting in 2024-2025, with full implementation by 2027-2028.
Proactive Leadership in Anticipating Change
As a manager, you can demonstrate leadership by preparing for the integration of ISSB standards into your company's reporting processes. Collaborating with Legal and Regulatory Affairs teams to understand, analyse, and comply with these emerging requirements will be key.
Action Steps for Managers
To ensure compliance and maintain social license to operate, consider taking steps to:
Understand the impact and requirements of the ISSB standards.
Determine material topics for reporting and assess their relevance.
Evaluate and improve the maturity of your company's reporting processes.
Transform your reporting to comply with new standards, including change management and training.
Prepare for formal assurance processes by assessing data quality and control environments.
By engaging with these developments, you can ensure your company not only adheres to the latest ESG standards but also positions itself as a leader in sustainable practices within the resources sector.
Value Pool 2: Driving Greater Profitability Through Sustainable Practices
Sustainability in business is not just about environmental stewardship; it's also a pathway to heightened profitability.
At its core, sustainability focuses on maximising efficiency — doing more with less.
This approach leads to a significant reduction in resource usage, such as energy consumption, waste generation, and supply chain costs, ultimately translating into substantial cost savings.
Actionable Strategies for Managers
Optimising Operational Efficiency: Seek opportunities to reduce input costs. Consider making operations more energy-efficient, thus cutting costs and emissions. Implementing environmentally friendly technologies can reduce waste management volumes. Enhance supply chain management through improved maintenance and effective spare-part inventory management, leveraging environmentally friendly inputs.
Developing New Customer Value Propositions: Tap into the growing market segment that values sustainability. Offer products and services with clear environmental or social benefits, which can command premium prices due to their sustainable appeal.
Investing in Sustainable Innovations: Channel resources into new technologies and infrastructure that bolster sustainability. This often involves forming strategic partnerships to foster innovation, especially in developing sustainable products and services.
Identifying Opportunities Within Your Operations
Cost Reduction Analysis: Scrutinise your team's energy, waste, and supply chain expenditures. Assess how existing costs can be minimised through enhanced efficiency. If the business case is positive, delve deeper into designing specific initiatives.
Exploring Revenue Opportunities: Survey the market for demand or potential demand for sustainable products. Research the cost implications of developing these products and evaluate the business viability.
By taking these steps, managers can not only contribute to their company’s sustainability goals but also significantly impact its bottom line. This dual benefit of cost reduction and revenue generation positions sustainability as a central pillar in modern business strategy.
Value Pool 3: Elevating Enterprise Value through Sustainable Practices
Redefining Business Externalities
Historically, businesses have often viewed their environmental and social impacts as externalities, with society and the environment bearing the cost. However, this perspective is shifting.
There's an increasing awareness that these externalities will eventually become internal challenges, directly influencing a company's cash flows, access to finance, and thus its enterprise value.
Impact of Sustainable Practices on Market Perception
Consider two hypothetical coal companies: Company A, committed to net-zero emissions with a transparent action plan, and Company B, continuing operations as usual.
Initially, they may have similar enterprise values, but over time, their paths diverge due to factors like environmental regulation, carbon pricing, and market demand for sustainable options.
Company B risks facing higher stranded assets than Company A, affecting its long-term value.
Action Steps for Managers
To navigate this evolving landscape, managers can:
Assess Environmental and Social Impact: Evaluate how your company's activities affect the environment and surrounding communities. Understand the concerns of key stakeholders like investors, employees, and local communities, and how your actions contribute to or mitigate major systemic issues.
Analyse Financial Implications: Determine how these impacts currently affect or could potentially affect your cash flows and access to finance. Use economic modelling and scenario analysis to understand these effects in monetary terms.
Transparent Reporting: Report on your company's impact, focusing on stakeholder needs. Be open about both positive contributions and areas needing improvement. This transparency builds trust and informs better business decision-making.
In conclusion, understanding and effectively communicating your company's impact on the environment and society is not just about compliance – it's about building a sustainable business model that aligns with the values of today's stakeholders and secures your company's future in an ever-changing market landscape.
Conclusion
It's clear that ESG initiatives are not just about corporate responsibility — they're strategic levers for enhancing value in the resources sector.
Managers who proactively engage in these efforts can significantly impact their company's profitability, operational continuity, and enterprise value. By understanding and navigating the complexities of sustainability, you position yourself and your organisation for long-term success.
Get in touch with us at Transformation Partners
We're committed to helping managers and teams across various sectors find value in innovative initiatives. Our expertise lies in enhancing team efficiency and operational effectiveness, alongside ESG strategies.
Let us assist you in navigating these complex areas to realise tangible results and sustainable success for your business.
Contact us to explore how we can support your journey towards operational excellence and strategic growth.
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