Friday, 18 October 2013

Canadian Mining Companies - How do they rate on Sustainability, Environmental, Social and Governance issues?

Many investors cast an interested eye on how well their potential purchases perform beyond purely financial factors - they want to know whether a company is adhering to a higher standard than mere conformance to the law with respect to environmental protection, treatment of communities where the company operates, inclusiveness from the bottom workers to the upper reaches of the boardroom and worker safety. At the same time, companies are recognizing that their long term future sustainability depends on retaining a social mandate to operate. Such considerations are given the term Socially Responsible Investing (SRI), or Environmental, Social and Governance factors (ESG), or simply Sustainability.

Previously we have looked through this lens at Canadian Oil and Gas stocks and Consumer stocks. It is easy to also imagine that Sustainability would concern the mining industry, as the big employer in many small communities undertaking dangerous work with a huge potential impact on the physical environment. And as we noted in the previous posts, it is worthwhile for investors to pay attention. The paper The Added Value of ESG/SRI on Company and Portfolio Levels – What Can We Learn From Research? reviews the literature and finds a positive relationship between company financial performance and the adoption of Sustainable practices. In another paper, The Impact of Corporate Sustainability on Organizational Processes and Performance, Harvard Business School researchers Robert Eccles, Ioannis Ioannou and George Serafeim found that SRI/ESG adopters outperformed both in stock market and accounting terms. Moreover, "The outperformance is stronger in sectors where the ... products significantly depend upon extracting large amounts of natural resources ...".

Finding the stocks
As before we used the TMX Money Stock Screener and picked the metals and mining industry, taking the largest companies by market cap. Then we added two fertilizer miners, Potash Corp and Agrium Inc. Three companies - Silver Wheaton, Franco-Nevada and Royal Gold - were eliminated since they do not operate mines, only invest in others to pay out income streams or royalties to investors. The remaining list of 17 companies comprises eight gold producers, two uranium producers, four multi-metal miners, one silver miner and the two fertilizer producers.

The ESG Criteria
The first three critical assessment factors are taken from the above-cited Harvard article. To get the answers in the table we had to do a lot of digging through each company's website and in its annual Management Information Circular (aka the Proxy Circular on the regulator website where the official version is always to be found when it is not on the company website):

  • Board Committee dedicated to Sustainability - The involvement of the highest level of the company ensures real action and commitment.
  • Executive compensation tied to Sustainability - Linking executives' pay to results is the next step towards results.
  • Formal stakeholder engagement processes are in place - The existence of mechanisms like surveys, focus groups and audits, to engage with suppliers, with customers, with employees, with the communities where they operate reduces risk and improves adaptability of the companies. We looked for evidence of planned, pro-active, focussed programs seeking feedback and involvement, not merely unidirectional "spreading the company word" outward communications.
We have added several other criteria to the list:
  • Stock selected by the iShares Jantzi Social Index® Fund  (TSX symbol: XEN) - It's a plus if the company has been evaluated as conforming to "... a higher standard of environmental and social performance" and is in the XEN portfolio.
  • Rating in the Board Shareholder Confidence Index of the Clarkson Centre for Business Ethics and Board Effectiveness - This helps us know whether the company's board of directors adheres to best practices for corporate governance. C is the lowest / worst and AAA+ is the best.
  • Number of women on the board - As we wrote about here and here, it is an advantage for companies to have women directors. This is a hot topic in governance these days - see the Financial Post's recent article here and the Ontario Securities Commission's request for comments on whether and what it should force companies to do.
  • Recognition, awards, disclosure practices and reports, standards pursued relating to ESG action or achievements by the companies - We have highlighted in green text what look to be the most exacting norms according to the Canadian Business for Social Responsibility, which is a non-profit organization promoting corporate social and environmental sustainability in Canada. The chart below comes from its CSR Frameworks Review for the Extractive Industry.
Who's the greenest of them all?
Green is good and the more green in our comparison table below the better. We have roughly sorted the table putting the best at the top.

Big Canadian mining companies generally take Sustainability seriously - There is a lot of green in our table. Except for the bottom three or so, every company is evidently devoting a lot of board and executive management time and effort to ESG and the results are visible to external ratings organizations. Comparing the results of our previous examinations of Consumer and Oil and Gas companies, these Mining companies generally look better. However, the companies at the bottom of the list, whose ESG characteristics are not quite as good as those above, are also the smaller companies. There are scores of mining companies listed on the TSX and we suspect, though we have not compiled the data, that as companies get smaller, the poorer the ESG performance is likely to be.

In short, our findings are very encouraging, both for those investors who explicitly want to hold high ESG performers and for those who view ESG ratings simply as an extra tool to finding good long term investments.

ESG is not the only thing that makes a good investment. Another key question is, of course, how the financial numbers for these companies stack up. A quick look at the performance of various indices for metals, mining and gold producers shows hefty declines year-to-date and for the past year. Are there buying opportunities? Which companies look best? We'll take a look next week.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Postscript: TD Economics' Special Report The Greening of the Canadian Economy reviews the environmental performance of the Canadian mining industry.

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