‘Governance’ is the indispensable umbrella under which all major issues, including environmental and social issues, are managed. As investor pressure increases on companies to strengthen their environmental, social and governance (ESG) performance, it will become even more important for natural resource companies to ensure their governance structures are robust and fit-for-purpose. Without further improving on ‘Governance’, companies may find their overall ESG performance falling behind fast-evolving investor and civil society expectations.
Critical Resource (CR) has developed this brief note with input from senior industry and investor experts to highlight some of the intensifying governance issues facing extractives companies in 2020.
As attention intensifies on the resource sector to respond to increased ESG pressures, investors and civil society will focus more deeply on how the approach of boards and executive committees to the ‘Governance’ element underpins their overall response. Within this context, it is crucial for companies to ensure that their leadership teams are not only attuned to ESG concerns, but are also willing to make tough strategic and commercial decisions today that will protect value in the long-term.
To help executives and board members navigate intensified investor and civil society concerns, we have identified three core ‘Governance’ challenges currently facing natural resource companies, and how they might respond:
Climate change concerns will raise more questions about companies’ strategies and capital allocation
In the face of a growing ‘climate emergency,’ many investors, insurers and civil society actors increasingly expect companies to systematically account for – and respond to – climate change-related risks alongside other material risks. This extends to how they make major investment and other capital allocation decisions. Boards and executive committees are increasingly expected to justify these decisions within a governance structure that is capable of accounting for both climate-related risks and opportunities. This includes clear accountabilities at the executive and board level, as well as internal teams, committees or board members with specific climate change expertise. Companies that fail to respond to this could find their access to capital diminished.
Furthermore, companies can demonstrate to investors and stakeholders that they are preparing for the future – and protecting long-term value – by incorporating a range of low-carbon scenarios into their business planning. Scenario analysis and portfolio resilience testing are among the areas where we have extensively supported extractives companies in recent years. We have seen a marked uptick in both investor expectations and civil society scrutiny around this, requiring companies to raise the bar on their internal approaches and provide greater transparency on how they are integrating the results into their business planning decisions.
Weak corporate-to-asset relationships can result in otherwise manageable issues spiralling into crises
Investors are taking a deeper interest in how companies ensure group-level standards are upheld at the asset level. However, for extractives companies with geographically dispersed operations, establishing effective and responsive communication channels between company leadership and operational units can prove challenging.
Company cultures that encourage strong and positive corporate-asset relationships enable leadership teams to better identify and digest early-warning signals, particularly those filtering up from local stakeholders and asset-level employees. This is especially critical with regard to corporate integrity and human rights issues. Companies need a culture where it is acceptable for bad news to travel upward fast. Ultimately, this protects long-term reputation and value.
Boards and executive teams can also engage more proactively with on-the-ground realities, for example, through more hands-on interactions at the asset level. Our assessments of over 300 projects have found that, among other things, frequent site visits and direct engagement with asset-level employees and community stakeholders by leadership teams are crucial for enabling meaningful strategic conversations about key risks.
A lack of diversity could expose companies to increased financial, regulatory and reputational risks
The extractives industry continues to suffer from a lack of diversity. For example, it is estimated that only 11% of the top global oil and gas senior executives and 14% of executive officers in the mining sector are women. Similarly, many companies fail to represent local people at a senior level both in operational management and within the company more broadly. This lack of diversity can limit awareness at the top, and lead to an inability to adequately understand specific local contexts, while simultaneously opening companies up to negative scrutiny.
Companies without diverse boards may also find it increasingly difficult to access capital. Investors, including Goldman Sachs and BlackRock, have recently announced more stringent diversity-based criteria, for example in relation to IPOs. Companies may also come under greater pressure from regulators to diversify. For instance, California-based public companies with all-male boards face a $100,000 fine, while several European countries have instituted quotas for female board participation. While it takes time to change existing cultures, companies can be proactive in identifying potential blind spots and taking remedial actions.