Water in Mining: Disclosure Overview
By Mark Harper 9 May, 2013
Does current water disclosure in the mining sector provide investors with a full picture of water risk?
The global financial meltdown in 2008 raised the sensitivity of individuals, companies, investors and governments to unmanaged risks. Regular readers of China Water Risk will know that the World Economic Forum ranked water as one of the top five global risks in terms of likelihood and impact. Water scarcity clearly presents a material risk for companies, their financiers, investors and insurers.
Demand from investors for increased corporate disclosure on water related risk is on the rise. Yet current corporate disclosure around water issues remains patchy at best.
Research has shown that the mining sector is a leader in terms of water reporting1,2. However current corporate disclosure practices used by the mining industry and businesses in general do not provide the metrics and data needed for the financial community to determine the materiality of water risks in their portfolios.
ESG issues and disclosure linked to share performance
There is increasing evidence linking how a company manages its ESG issues (including water) to its share price and long term financial performance.4,5,6 e.g. research shows preservation of a social license to operate can explain the difference in valuation of two gold mines identical with respect to traditional variables: the amount of gold in the ground, the cost of extraction and the global price of gold7.
“ESG issues such as water are increasingly influencing investor decisions whether or not they immediately deliver return on investment”.
Specifically on China, a recent award winning study18 established a direct link between ESG risk assessment and financial performance in the stock market. Empirical results revealed ESG risks such as water scarcity were material for Chinese companies’ A-share performance.8
“ESG issues such as water are increasingly influencing investor decisions whether or not they immediately deliver return on investment”. Deloitte (2012)5
Increasing demand for disclosure
Investors, banks and insurers are increasingly aware of the risks and opportunities that water related issues represent within their portfolios and are looking for evidence of risk management. For example, more than 350 investors representing USD$43 trillion in assets, supported the 2011 CDP Water Survey. Also, mandated disclosure is gaining ground in South Africa and the European Union. Already 55 of the world’s stock exchanges are encouraging disclosure by issuing sustainability indices or via mandates e.g. Exchange Board of India, DJSI, FTSE4Good and the HKEX indexes
We are starting to see the impact of this increased interest. Of the world’s largest 250 companies (by market cap), 95% currently issue a separate sustainability report.9 As we move forward, and with the introduction of the International Integrated Reporting Councils (IIRC) Integrated Reporting Framework, there will likely be greater alignment of the traditional financial reporting and ESG reporting. We are pleased to note that in the recently released consultation draft of the Integrated Reporting Framework10, water and ESG issues were prominent.
State of play in the mining sector
“I see water security as being a major issue … I think people are going to be blindsided by it.” Tom Burke special advisor to Rio Tinto in an interview with Ethical Corporation (2013)11
Mines rely heavily on water, using it in all steps of the mining process. A total of 4.8m3 of water can be used to produce one tome of washed coal. Working with such vast quantities of water presents a variety of risks. See here for more information on the mining sectors water risks. Thus, not managing the use and discharge of water, can lead to fines, lawsuits, drive the development of new regulations and a loss of social licence to operate.
A recent report by Ernst and Young12 highlighted that maintaining a social license to operate has ranked consistently in the top six risks facing the mining & metals sector. As a result, the mining industry is one of the more active sectors with regards to water resource management and water disclosure.
In 2010, the Global Reporting Initiative (GRI) and the International Council on Mining and Metals (ICMM) collaborated to produce the GRI Mining and Metals Sector Supplement, documenting key performance indicators for the sector (see table below).
On the face of it the mining industry has long been conscious, and active in managing its water risks and the related disclosure. Many international mining companies are ahead of the curve in reporting water data. In 2010, analysis of 100 top companies from across eight sectors1, found the mining sector to be the global leader in water disclosure:-
- All surveyed mining companies reported physical and regulatory risks
- Around two thirds reported litigation risks
- More than one quarter reporting reputational risks
A more recent study of the global 250 companies by KPMG13 found the mining and pharmaceutical sectors continued to lead the way on water disclosure:
- All of the surveyed mining companies address water issues in their CR reports
- All of the surveyed mining companies report on the water usage for the full company
- All of the surveyed mining companies detail plans to reduce their water usage
- All of the surveyed mining companies detail of water treatment/reuse
- All of the surveyed mining companies report a long term water strategy in their CR reports
Good, but not good enough
According to the World Resources Institute (WRI), although many international mining companies are ahead of the curve in reporting water data, disclosure across the sector as a whole varies greatly. WRI indicated that despite representing a significant share of global mining equities, Chinese mining companies report little or no water related information2, 14.
“current reporting frameworks do not guide companies to disclose the full scope of potential water risks.”
Current corporate water disclosure, even among the most conscientious of reporters, typically does not fully capture the complex and location-specific nature of water resource dynamics and the corresponding corporate action. As Ceres point out2, “current reporting frameworks do not guide companies to disclose the full scope of potential water risks.” In a recent report it highlights the following gaps in disclosure by international mining companies:
- Inconsistency in reporting as there is no single agreed upon set of water standards for the mining sector. Here the mining sector is behind other extractive industries. IPIECA, the global oil and gas industry association for environmental and social issues, has for example established a set of reporting guidelines for its members, as well as linking in with the World Business Council for Sustainable Development, and the Global Environmental Management Initiative to develop global and local water management tools. ICMM is however working on this in partnership with the Minerals Council of Australia to develop their framework for water reporting and accounting
- Water discharge data is not sufficiently reported
- Impact of mining activities on other water users is rarely reported
- Water consumption and footprint metrics lack local context, meaning potential risk cannot be determined
As a result the financial community does not have a complete picture of water risks facing mining companies see water risks in the mining sector – still murky and getting critical. Without this, investors and financial institutions can be blindsided, for example:
- Vedanta’s share price fell by 10% after a group of UK pension funds slammed them, for ignoring shareholder lobbying on ESG issues15
- Zijin Mining Group Companies planned to make at least two overseas acquisitions in 2010, but was hampered by regulatory probes and cleanup costs for the waste leakage on July 3 that polluted a river in Fujian province16.
The opportunity to improve
It is clear that most major international mining companies have started to focus and address water related risks17. But it is equally clear that current reporting frameworks do not guide companies to disclose the full extent of their exposure to water related risks. Looking forward, the following initiatives may help improve the consistency and fullness of water disclosure by the mining sector:
- IIRC’s Integrated Reporting Initiative, currently open to public consultation
- GRI g4, the next iteration of GRI’s reporting guidelines, to be released later this month
- ISO’s new standard on water footprinting, due to be released later this year.
- Mineral Council of Australia’s Water Accounting Framework
- For Chinese mining companies they have a lot of catching up to do. They need to follow their international colleagues and start reporting fully against the GRI Mining Supplement indicators.
The financial community plays an essential role in driving change by continuing to encourage improved water disclosure. Ultimately this helps investors navigate the tricky and murky depths of water risk that are becoming more apparent as water becomes a major factor affecting growth and profitability.
- Water for Coal: Thirsty Miners? With up to 83% of China’s coal reserves in water stressed & scarce regions, the recent CLSA report asks if there is enough water to grow coal production. If not, what are our options? Debra Tan expands
- Want to find out more about disclosure of water risks? Check out our Disclosure section.
- Want to know what the government are doing? Check out our section on Regulations.
- See what else is happening in the mining sector in our Intelligence by Sector section.
1. Murky Waters? Corporate Reporting on Water Risk. Ceres 2010
2. Mine the Gap: Connecting Water Risks and Disclosure in the Mining Sector, World Resources Institute, 2010
3. Corporate Water Disclosure Guidelines. CEO Water Mandate, 2012
4. Non-financial performance measures: What works and what doesn’t, Financial Times, 2000
5. Disclosure of Long-term Business Value. What matters? Deloitte, 2012.
6. Show Me the Money: Linking Environmental, Social and Governance Issues to Company Value. UNEP FI, 2006
7. Spinning gold: The financial returns to external stakeholder engagement, Henisz W. et. Al, 2011
8. Responsible Investment and the Chinese Stock Market. Michael Barnett et al 2012
9. International Survey of Corporate Responsibility Reporting, KPMG, 2011
12. Business Risks Facing Mining & Metals 2012-2013. Ernst & Young, 2012
14. Water for Coal. Thirsty Miners Will Share the Pain. CLSA & China Water Risk, 2013
17. Water Management in Mining: A Selection of Case Studies. ICMM, 2010
18Professor Michael Barnett and his team at the Centre for Corporate Reputation at Oxford University won the European FIR/PRI award for Investment Strategy
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