Eric Rasmussen, Director Natural Resources at the European Bank for Reconstruction and Development (EBRD), discusses the growing importance of ESG issues in the natural resources industry, and argues that greater government action is needed within Europe to encourage better societal outcomes from natural resource companies.
Mr Rasmussen joined the EBRD in 1995 and was appointed Director Natural Resources in April 2013. The EBRD was created in 1991 after the fall of the Iron Curtain in Central and Eastern Europe. Today it operates in 38 economies on three continents and has invested more than €130 billion in over 5,200 projects since its establishment. Natural resources, including oil, mining and gas, are a vital sector in which the Bank makes a significant impact. The Natural Resources team focuses its efforts on improving standards as well as enhancing energy efficiency and energy security.
Leaders and laggards in the sector
“Most of the mining companies that the EBRD works with are making very good progress on environmental, social and governance (ESG) issues. One reason for this improvement is the increased pressure and scrutiny from NGOs and the financial sector, particularly regarding the measurement and disclosure of ESG-related data. Many companies, including major extractive groups, now take ESG very seriously – though there are still grave failings, often caused by insufficient management oversight and quality control at the asset level. There are, however, also a significant number of companies in the extractive sector, which are far from making progress on ESG. Increasingly grave concern stems from companies involved in the extraction and supply of minerals or metals for which the market has become hungry, like cobalt. The lucrative demand for such critical raw materials has motivated companies with limited ESG expertise to operate in countries with endemic problems such as human rights abuses, child labour and widespread corruption.”
Standards must be enforceable and not just voluntary, if bad practices are to be driven out
“Pressures from voluntary initiatives has so far not deterred those companies that pay little attention to ESG standards. Large western companies would often pull out of very challenging areas due to external pressures and reputational risks. However, these gaps are subsequently filled by mining companies and metal traders that operate without regard for ESG standards. It cannot be right that companies that disregard ESG standards can operate and grow, evading detection, at the expense of reputable companies. One solution would be the introduction – for example at the EU or US level – of a system for the tracing of minerals and metal products. Many consumers would like assurance that companies complying with ESG standards are certified and those that breach standards face consequences. Such a system would clearly reward companies that are upholding ESG standards. In time, the economic logic would also drive out bad operators and compel governments of challenging mining jurisdictions to raise standards and support independent verification of compliance. The alternative scenario, in which those companies that disregard ESG standards are unchecked and grow more competitive, is a downward spiral of standards in the industry.”
Action needed to ensure supply of strategic resources to Europe
“Europe has fallen behind other parts of the world in securing access to critical resources, for example many high-tech products and processes. The need for materials critical for production of batteries is a well-known case in point. Access to these materials is an important global strategic issue. The US and the EU focus on the security of supply of several critical raw materials, of which a number currently depend on supply from China. The US and the EU have launched strategic initiatives to accelerate exploration efforts to secure critical resources and accelerate research efforts to find substitutes for many critical materials. The EU has also launched initiatives to intensify innovation around the recycling of materials. However, Europe has until recently not prioritised development of mineral deposits within its own territory. There is now a need to rethink these priorities to improve the strategic security of material supply to EU – where 30 million jobs and many industries depend on imported materials. It is now time to look seriously at how to increase exploration for deposits within the EU. This is where finance also plays an important role. There needs to be a source of capital that is prepared to take some degree of risk on companies exploring for material deposits. For example, the EBRD could possibly play a role in setting up an exploration investment facility earmarked for exploration companies operating in known prospective regions like the Tethyan Belt in south eastern Europe. The EBRD would be active in monitoring compliance with high ESG standards. People might, however, question how a bank could become comfortable with exploration risk. If feasible, the exploration risk should probably be mitigated with some degree of seed money from an institution such as the EU. Some exploration investments will be unsuccessful, but with an adequate portfolio of investments the risk and return balance should meet sound banking criteria. Setting up such an investment facility will not happen overnight as seed money is difficult to mobilise, but it is this kind of vitally strategic and unique work that the EBRD can help with in partnership with private investors and government institutions.”
Community challenges are complex and project-specific and often require specialised help to solve
“Anti-mining opposition in Europe can often be particularly challenging due to the sophisticated way opinions can be articulated in order to influence decision-makers. Some community issues are similar across countries, but others are regionally and even locally specific. We have to accept that from time to time projects will have to be abandoned because their social or environmental impact simply cannot be justified. However, a widespread public distrust of the mining industry means that projects are often presumed to be bad for local communities before they can prove otherwise. Transparency and engagement may help mining companies to build greater trust with communities and show their win-win potential in Europe.
The ability to solve above-ground problems is critical to the survival of mining projects. To ensure they have effective problem-solving capacity, companies increasingly need support from partners like EBRD or specialised groups like, for example, Critical Resource. Failures in addressing these problems can directly affect the economic viability of projects and long-term success of companies.”
Tackle emissions by European industry, but climate change can only be addressed globally
“The EU has a parallel role to play on climate goals. It cannot be right that when European companies (in metals or other sectors) are pressed to decarbonise, making production more expensive, jobs move to regions where there is less environmental control. There needs to be a serious look at a carbon tax at the border which accounts for the carbon footprint generated by extraction or smelting of a product elsewhere. This is clearly an issue about fairly sharing the burden of climate change.”