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ESG – Canadian Mining Review

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What this means for your insurance

ESG: three letters that have guided the evolution of global decision-making. In recent years, we have seen insurance companies make executive-level decisions to stop supporting certain industries that they believe are not “ESG-responsible”. But what does it really mean to have good ESG credentials, and how can mining companies adapt?

Mining operations are part of the problem and part of the solution for E (Environment). The global use of non-renewable energy, including coal, natural gas and oil, produces greenhouse gas emissions, which have a negative effect on climate change. The shift from coal-fired power generation has already begun; however, the energy transition will take time, especially in developing countries where the capital resources needed for cleaner energy are more difficult to obtain.

Thermal coal will still be needed during the energy transition if we are to keep our lights on, but some insurers have announced that they are phasing out support for this industry. Mining companies producing thermal coal are forced to find alternative risk transfer solutions, such as captive companies, increasing retention levels and using unconventional insurance markets. Some insurance companies realized they had made management-level decisions too quickly to stop supporting non-renewable industries after realizing the world could not quickly transition from non-renewable energy sources to energy. 100% renewable. The technology for reliable and constant renewable energy has not yet been created: we are not as advanced as we hoped. The world is still working on the solution, but it is clear that it will take a wide variety of energy options to be sustainable.

Copper, nickel, aluminum, chromium, zinc, lithium, rare earths, uranium, cobalt and their by-products are the main minerals and metals needed to provide cleaner energy technologies, such as as solar, wind, hydraulic, bioenergetic, geothermal, nuclear energy. , electric vehicles, battery and hydrogen storage. While there is growing demand for these minerals and metals as part of the transition to cleaner energy, mining companies tasked with producing them must do so in a sustainable manner. The mining industry depends on large amounts of water during the mining process, which is a problem as there are growing concerns about the depletion of water supplies in some jurisdictions. The energy sources that mining companies use to power their processing facilities and to power their mobile equipment are not 100% renewable energy. Mining companies should focus on better water management, reducing their energy consumption as well as their scope 1 and 2 emissions.

In the mining industry, the S (Social) is of utmost importance due to the typical geographic areas where mines operate. Mining activities tend to take place in small, remote communities where relationships with the local community are essential for the social license to operate the mine. Canadian mining companies operating in countries like Peru and Chile have the political unrest at the boardroom table on their minds and should review their political risk insurance coverage. Social activism has forced some mining companies to suspend operations due to supply or site access issues. This is a potential business interruption issue for insurers and mining companies will want to anticipate this by providing insurers with information on their risk mitigation and contingency plans that are in place to manage this exhibition. By making the insurer comfortable with your risk treatment plan, you will obtain more advantageous insurance conditions.

We’ve seen movements such as Me Too and Black Lives Matter impact how insurers think about the makeup of boards, senior management and the broader workforce. Diversity, Equity, Inclusion and Belonging (DEIB) has come to the fore, with companies expecting companies to find a better balance between representation and compensation. In an industry that has always been male-dominated, the mining industry has a well-known challenge in recruiting and retaining women. Executive risk and financial line insurers want to understand how mining companies are managing their DEIB given increased shareholder activism targeting companies with low diversity on their boards and the reputational damage this can cause.

The silent G (Governance) provides the insurer with assurance that the insured’s business practices are sound and ethical. The strong board and management structure, corporate policies and procedures support strong governance, which also determines environmental and social factors. Most Canadian mining operations are required to provide the Ministry of the Environment with financial security for mine decommissioning and reclamation. This financial assurance can be satisfied by placing a bond that offers competitive rates to companies with strong corporate governance and finances.

Telling your ESG story (e.g. net zero goals, good relationships and partnerships with local communities, and strong corporate governance) to your insurers is an important message as it shows that you are on the path to transition and that you are doing your part to ensure a sustainable future. The insurance industry is built on long-term relationships and insurers want to partner with policyholders who have a strong future. Mining companies that are unable to demonstrate progress towards improving their ESG performance may find themselves in more difficult reassurance situations than mining companies that can demonstrate ESG progress and achievable goals .

ESG is a board-level topic not only for mining companies, but also for insurance companies looking to partner with clients who set ESG goals and have an emissions reduction plan. . Unlike the financial industry, insurers have not yet taken an extra step in their underwriting and do not require an assessment of the ESG performance of the insured through credentials and ratings. However, it is very likely that during the assurance renewal process your insurers will ask more questions, perhaps even a questionnaire, regarding your company’s ESG strategy and commitments as they complete their own due diligence.

There is no doubt that some insurance markets will move towards evaluating ESG benchmarks, but it has not yet been determined what this will look like. In October 2021, a Lloyd’s of London insurance syndicate was formed with the sole purpose of underwriting risks that perform against ESG measures. There is a clear shift in the insurance industry to continue to support only “ESG-responsible” companies. My advice is to be proactive and continuously share your ESG journey with your insurers. Communication is the cornerstone of long-term relationships and the lifeblood of the insurance industry.

Katherine Dawal is Vice President, Risk Management at NFP Canada.