Embedding ESG into organizations

Authors:

Henry Stoch, Sustainability Leader, Deloitte Canada

Harsha Desai, Associate Director, Consulting, Deloitte Africa

Pressure on mining and metals companies is growing to reach beyond environmental compliance and make high-level commitments in the public domain around environmental, social, and governance (ESG) issues that are shaping the future of the industry.

Although commitments to voluntary targets and standards around matters such as climate change or tailings management are usually set with the best of intentions, without the proper internal structures in place, companies will find it hard to make effective progress toward them. They also run the risk of failing to demonstrate, when asked by investors and ratings agencies, how they are honoring those commitments from the boardroom to the mine site.

Research shows that this issue is fairly pervasive; the Responsible Mining Foundation’s RMI Report 2020¹ assessed the policies and practices of 38 large-scale mining companies around the globe. It found that, while most companies mention the United Nations Sustainable Development Goals (SDGs)² in their sustainability reporting, and a few have integrated the SDGs into their business strategies.

Create senior-level accountability in the structure

To move from pledge to action, mining and metals companies must be functionally set up to respond to and deal with ESG-related opportunities, challenges and risks. At a practical level, this requires an operating model that facilitates visibility, accountability, and collaboration between departments, along with a clear governance structure.

A decade ago, the sustainability, or corporate social responsibility, agenda was overseen by a leader of sustainability, either at the executive level or reporting into another senior decision-maker. However, with the rise of ESG, the implications are far more cross-cutting, expanding to cover areas such as investor relations, finance, human resources, operations, supply chain, communications, and corporate development. In many respects, ESG now represents a wider transformation of the business.

Today, many organizations have large teams of people focused on environmental and safety issues, with a chief sustainability officer role (or similar) overseeing them. This is a good start and will help ensure compliance with environmental-permit regulations. However, to move beyond this, operational teams should be properly connected to corporate strategic initiatives; they should understand that ESG commitments are steadfast, and there should be clarity on how they translate into business or operational processes within their specific function.

We are also seeing different models emerge. Where ESG initiatives are led by the sustainability function, it’s important that this function is elevated to have sufficient corporate representation at the executive level, i.e., a vice president or executive vice president of sustainability role might be required in the case of large or multinational companies.

In other cases, we have seen executive roles, such as the chief financial officer (CFO), taking responsibility for the ESG agenda, particularly as they need to face off with investors and market analysts. In many ways, it doesn’t matter who leads the effort, as long as integration takes place across the organization and the individual in question has sufficient organizational authority.

Henry StochꟷSustainability Leader, Deloitte Canada, says, “There’s a more sophisticated level of expectation now from external stakeholders, particularly large institutional investors, around ESG. Many are asking very complex questions and are keen to understand how companies are integrating targets around issues such as climate change or diversity, equity and inclusion (DEI) throughout their organizations.”

He goes on to explain: “If organizational structures are not yet designed for a high level of collaboration and interaction between certain departments and business units, then companies are going to struggle to demonstrate how these issues form part of their strategic planning, or budgeting and forecasting processes, for instance.”

Design processes for transparent information flow

For ESG commitments to be properly met at the operational level, information must be able to flow freely up and down the organizational structure, rather like through neural pathways. Leaders must be able to look into the business and check that the commitments they have made publicly are being understood and reflected in practices below them.

Likewise, information must also flow back up from operational teams in the form of risk registers, internal audits, operational plans, and capital commitments that show whether teams are on track with the commitment or not. Digital transformation will go some way toward this, making timely, critical information transparent and available on demand.

The danger is that, if companies don’t implement and test these structures and processes, and they cannot answer stakeholders’ questions or, worse still, if a failure in governance occurs, they could lose an important source of capital or be accused of greenwashing. The latter isn’t just damaging to an individual company’s reputation, but to the industry as a whole. Creating accessible engagement structures through which plans and progress can be discussed with key stakeholders can foster a more cohesive and responsive approach.

This is why ESG needs to be incorporated into a broader corporate strategy as well as enterprise risk management (ERM) and performance-management systems. Using past examples of tailings dam or social failures, it’s now possible to quantify both the financial and non-financial impacts of not having the appropriate operating model in place. Leading companies are starting to question traditional ERM approaches, and are developing their language and thinking to reflect this.

Embed ESG into roles and incentives

As ESG starts to be reflected in corporate strategy, it should also be reflected in the functional strategies and plans of the organization and within each function’s roles. Every function across the organization has a part to play in delivering the overall ESG strategy, whether that is operations, finance, human resources, or any other key corporate role. Harsha Desai, Associate Director, Consulting, Deloitte Africa says: “This is an opportunity to make the day-to-day choices in the business very personal for people, so they are empowered to make many little or large shifts that directly affect their community. Whether this is water consumption at the operations or working with local vocational training institutions to bring more females into the workforce.” With time, these elements will become embedded in role profiles, development plans, and performance systems.

Like many organizational transformations, ESG will require people to change their individual behaviors, and how people are incentivized will be a significant driver of this. Individual and functional incentives should therefore reflect the wider ESG agenda, so that companies can create the required level of accountability.

Designing and testing ESG-driven operating models

• Factoring ESG into organizational establishment: For companies that are either just establishing themselves or are reorganizing following an acquisition, it’s important to set up the organization in a way that creates clear accountability for external commitments from the outset. In these cases, ESG can be designed into the heart of the business and becomes part of the way the company operates from exploration to mining, to operations and decommissioning.
• Test structures regularly: Established organizations that have made bold ESG commitments have begun to put structures and processes in place to support them, and it’s crucial that these connections or lines of reporting are tested regularly. Audits are an effective way to do this. Internal or external auditors can assess whether a company is meeting its commitments at every level. A key success factor is then ensuring that the results of the assessment go beyond the mine manager and that information is shared at senior executive levels. This enables change to be effected from the top if shortcomings are identified.
• Quantify the risk: Once companies quantify the level of risk associated with social or environmental failuresꟷsuch as the impact of an ESG re-rating among key investors or the exclusion of a stock in an indexꟷit becomes easier to make the case for capital allocation into ESG-driven organizational restructures, resource allocation and the creation of new roles. The latter will cost much less than the former.
• Create a transparent and agile ESG culture: If an audit or risk-management exercise reveals that the organizational structure is not working as it shouldꟷperhaps a key role or communications channel is lackingꟷthen it’s important that leaders facilitate positive action based upon it. This is a learning journey for many organizations, and adjustments and changes will need to be made. Being congruent in what is said and what is do will be the most important currency to build credibility
• Revaluate incentives: Incentives are a powerful behavioral lever within organizations. Companies should re-evaluate current incentive structures and align these with the broader ESG agenda.
• Define ESG responsibilities across the value chain: ESG-related expectations and responsibilities need to be written into roles at every level of the organization and at every stage of the value chain. Aligning these responsibilities within functional mandates to ensure that individuals are empowered to make decisions and take action should be considered. Miners should clearly communicate their expectations around key internal and external interfaces, both verbally and in writing, so that there’s strong alignmentꟷparticularly with regard to supply-chain partners.

End notes

1. “Mining and the SDGs: huge potential, limited action,” Responsible Mining Foundation, published 17 September 2020 https://www.responsibleminingfoundation.org/media/sdgs2020/, accessed 29 October 2021.

2. “Sustainable development: The 17 goals,” United Nations Department of Economic and Social Affairs, 2021 https://sdgs.un.org/goals, accessed 1 December 2021.