TMX POV - The ever-growing importance of ESG for mining companies: Insights from Toronto Stock Exchange

Today, environmental, social and governance (ESG) pervades most facets of corporate existence. From driving strategy, to attracting talent, to securing investment, ESG is now at the forefront of most corporate and investment decision making. Google searches for the term "ESG" have risen 4-fold in the last 3 years. According to Morningstar, funds that focused on ESG related issues saw their combined assets climb to a record high of $3.9 trillion at the end of September. This year, global issuance of bonds for ESG goals is set to hit $1 trillion for the first time ever; more than double the amount sold in all of 2020.

So pervasive is ESG that one forgets that it is still a relatively nascent term. Its first usage can be traced to the "Who Cares Wins" study by the UN and the International Finance Corporation in 2005, advocating the embedding of ESG filters into investing. Alongside it was the "Freshfields Report" (2005), which argued that ESG factors were relevant to financial valuation. The movement was unified in 2006 under the Principles for Responsible Investment (PRI), which today remains the world's independent standard bearer, providing a "blueprint for responsible investment". Signatories (mostly asset managers) to the PRI have grown almost 300% in the past year and now number over 4,300.

For as long as I can remember, ESG, or a form of it, has always been closely interwoven with mining. As a young engineer with Alcoa (Jamaica) and Fluor (Canada) a number of years ago, I witnessed first-hand the need for environmental and social consideration in the successful development and operation of mining/engineering projects. All too often, projects lie adjacent to settlements, protected forests, or across indigenous land, and ESG interests had to be taken seriously.

Larger companies were at the front of mining best practices. But as asset managers around the world embrace evolving ESG standards at an ever-quickening pace, the implications for mining companies large and small is clear: Get your house in order and size is no longer an excuse. For a time, it was widely expected that deep-pocketed majors would carry the ESG torch alone, and they have done a great job of spearheading the effort. But it is no longer acceptable for junior miners to shun ESG reporting or treat it as an afterthought. On most global stock exchanges, ESG reporting is now encouraged, with growing evidence that good ESG scores can improve equity returns.

According to PRI, recent industry research has strengthened the argument that there is correlation between ESG rankings and listed equity risk adjusted returns. PRI points to industry research that identifies a series of correlations between better management of ESG issues and risks and corporate financial performance, cost of capital, market valuations and volatility. It is certainly clear to us at the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) that these arguments are becoming more widely accepted across the industry.

So much so that, last year, the Exchanges introduced several new initiatives to assist issuers with understanding and preparing disclosure of ESG related information. These included our ESG 101 education hub, the release of a new "Primer for Environmental and Social Disclosure", and the addition of a new ESG Disclosure module to our Growth Accelerator education program (a complementary tutoring/mentorship services program to TSX/TSXV issuers on disclosure, investor relations best practices etc.).

Our resources for ESG reporting were further enhanced in May 2021, when TSX and TSXV entered into a strategic alliance with IHS Markit to endorse their ESG Reporting Repository. The repository facilitates the disclosure of issuer ESG information into a variety of frameworks and standards, such as SASB and TCFD, and has extensive distribution channels to disseminate the information to global investors and stakeholders.

Issuers, especially small-cap mining companies, are likely to be marginalized if they fall behind on ESG disclosure. Our mix of ESG resources can aid in the processes of ESG risk and opportunity assessment and ESG disclosure. We are incredibly proud of this initiative as it lays the groundwork to facilitate broader ESG reporting by issuers, and broader dissemination of their ESG disclosures to a global audience.

As mining investment becomes ever more mainstream (Berkshire Hathaway's purchase of a stake in Barrick Gold last year was a watershed moment of this trend), it is clear to me that ESG will take an increasingly central role in the sector. This will give rise to increasing focus on ESG training, reporting, and overall discipline when it comes to project development. We look forward to remaining at the forefront of this discussion.

About the author:

Dean McPherson is head of global mining for Toronto Stock Exchange and TSX Venture Exchange. He is responsible for the development and execution of the global strategy for attracting new listings in the mining sector to the Exchanges. Previously, he worked as an investment banker. Before joining the capital markets, he worked as a civil engineer, managing capital projects for Alcoa's bauxite/alumina operations in Jamaica and Fluor in Canada. In addition to an undergraduate honors degree in civil engineering, he earned an MBA from the Schulich School of Business and is a CFA Charterholder.

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