JANA Sustainability Advisory Council Member Renee Grogan talks to [i3] Insights about how to spot ESG trouble before it blows up.
Incorporating environmental, social and governance (ESG) issues into the investment process needs to go beyond simply pulling in scores from external providers.
It requires investors to delve deep into the bottlenecks companies face and how they deal with those constraints.
Renee Grogan has recently been appointed as a member of the JANA Sustainability Advisory Council. Grogan is the Co-Founder and Chief Sustainability Officer at Impossible Mining and also advises organisations on ways to spot ESG trouble.
“I look at where the likely bottlenecks or limiting factors are,” Grogan says in an interview with [i3] Insights.
“Take construction for instance, there you can see there is an obvious bottleneck around space. So koala habitat is a really obvious one [to keep track of] because it’s been so topical recently.”
In New South Wales alone, the government has committed over $100 million to protect and restore koala habitat, which will place new restrictions on the construction sector to build.
“But it will be different things, in different industries. It might be the cost of fuel in the logistics industry, for example,” Grogan says.
“Once you understand that you’ve got a constraint point, then you look at what the legislation is around that and what are the things that might change in that space.”
I look at where the likely bottlenecks or limiting factors are. Take construction for instance, there you can see there is an obvious bottleneck around space. So koala habitat is a really obvious one [to keep track of] because it's been so topical recently
The destruction of Juukan Gorge by Rio Tinto is a key example of a catastrophic failure in ESG policy in recent times. Asked whether better ESG analysis could have prevented this event from occurring, Grogan answers carefully.
“It’s pretty unlikely that you would have seen a smoking gun, but certainly when I looked at the five metrics that I decided were probably important around the indigenous heritage side of things, there were definitely trends that pointed to the fact that there was a potential mismatch in terms of how much effort was being put into those issues internally versus how important external stakeholders have found those issues,” she says.
She argues the issue of Juukan Gorge probably wasn’t ignored totally by Rio Tinto and it would have come up in internal discussions. But the mistake the mining giant made was to focus only on regulatory compliance and not draw the discussion wider to social licence.
“I obviously wasn’t there, but I assume somebody would have said: ‘Do any of these options cause us to be out of compliance?’, and the answer would have been ‘no’. And that was the correct answer, but it was just the wrong question,” she says.
“What was the right question? What are the social licence issues associated with each of these options? And in the next 30 seconds someone would have said: ‘Well, there’s a 45,000-year-old cave that’s going to be destroyed if we pick option four.’
“Immediately, you would have gotten a sense for how the risk profile has changed. But I assume that question wasn’t asked because there wasn’t enough active questioning from outside of the organisation.”
Grogan has a background in the mining industry and worked for many years on permits for mine expansions. She is now looking to apply the knowledge gained in these processes to help investors ask the right questions of companies when dealing with issues such as expansions or greenfield projects.
Forward-looking statements are often a good place to start, she says.
“If, for instance, you look at a mining company’s forward-looking statement and they say that they have got six greenfield projects that will all come online in the next two years, that means they have discounted the permitting risk to zero,” she says.
“They’ve assumed all six of those mines will be permitted successfully in the next two years. I don’t care which mining company you’re talking about, it’s never realistic to assume that outcome.”
The Energy Transition
Much of Grogan’s analysis focuses around the issue of how serious a company is in making efforts to move to a more sustainable way of operating and how realistic they are in their projections.
The energy transition and the move towards a low-carbon economy is a key example of this. Some companies merely offer suggestions for compliance, while others make real strides to transform their business models.
“There are three things that I look for when I’m looking at these [transition] plans to see if they pass the initial sniff test. The first is around offsets; to which extent are offsets used?” she says.
“If you’re a larger miner and you’ve got a transition plan that includes 30 per cent in offsets, then you’re making a pretty big assumption that you’re going to have access to that kind of volume of offsets.
“The second thing is the percentage of remuneration around ESG and the extent to which they impact KPIs. Are KPIs even disclosed? Because quite often they’re not and so you have this fictional ESG KPI that looks a lot like a financial KPI in sheep’s clothing.
If you're a larger miner and you've got a transition plan that includes 30 per cent in offsets, then you're making a pretty big assumption that you're going to have access to that kind of volume of offsets.
“Then the third is around scope III emissions. Scope III is this hugely controversial mess that probably will never be solved, but I still use it as an indicator of the extent to which there is any kind of credible, meaningful plan in place.
“Are they having a crack at all at scope III or is it just a general kind of number that somebody came up with?”
She argues that while scope III emissions are a hard nut to crack, there are some fairly simple measures companies can take to at least make a start with addressing the issue. For example, using a company’s influence over its suppliers is an effective way to drive down emissions in the supply chain.
“If you take a really large resources company, energy company or logistics company, anyone who is in the top three of their industry, we know that those companies have huge sway with their suppliers,” Grogan says.
“We know that they make their suppliers jump through innumerable hoops in order to engage with them in a contractually meaningful way, so adding another few hoops around the scope III aspect is not a difficult thing for those companies to do.”
Divestment
So what should investors do once they have identified serious ESG issues in companies? In the great debate of divestment versus engagement, Grogan firmly stands in the engagement camp. And this is not just a philosophical standpoint; it is based on her experience in the mining industry.
“I have been on the inside when investors have come to a big mining company and said: ‘We’re considering divestment. Tell us everything we want to know about this particular issue because if we’re not satisfied, then we’re going to divest,’” she says.
“But I’ve also been on the inside when an investor has come and said: ‘We want to engage with you on this issue and we want to see meaningful milestones over the course of the next two years.’
“Not surprisingly, one of those is a clear winner in terms of actual outcomes and that is the latter one.
Divestment, from the experience that I've had, almost never effected change because the companies are of the view that the damage is already done
“Divestment, from the experience that I’ve had, almost never effected change because the companies are of the view that the damage is already done.”
Instead of divestment, investors should make their engagement public and draw other stakeholders into the conversation.
“But the more you report on your engagement, the more the other investors in that company are going to say: ‘Hang on a minute, that seems like a good idea. Why aren’t we having those conversations?’” Grogan says.
“They might not ask a question about energy transition this week, but in three months’ time they might ask a question about pollution, indigenous heritage or any number of biodiversity issues.
“You are creating a bit of a snowball effect with active engagement. That is what changes the culture of these really big companies.”
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