‘WHEN investing in renewable projects to meet stakeholders’ environmental, social and governance (ESG) requirements, it is crucial to take a long-term view and not focus too much on the here and now,’ says Vusi Mpofu, Sector Lead of Mining and Chemicals at Nedbank Corporate and Investment Banking (CIB).
There’s no doubt that many mining companies have benefited from the recent surge in commodity prices. However, we are seeing a pullback in those prices as global demand slows due to growing concerns about a pending recession across the world as the impact of the conflict in Ukraine becomes entrenched. Nevertheless, miners can take advantage of current bolstered balance sheets to accelerate investments into renewable energy to meet their ESG requirements. The long-term benefit far outweighs the short-term cost, and it makes good business sense.
As with other sectors, the mining industry must invest in renewable energy if they want to meet the United Nations’ (UN’s) Sustainable Development Goal, ‘nett zero by 2050’. To reach this goal, companies must ramp up their spending on clean-energy assets, such as wind, solar PV and hydrogen electrolysers. These may have relatively high upfront investment costs, but companies will see the benefit on their bottom line in years to come as operating costs are contained. The International Energy Agency (IEA) Net Zero Emissions by 2050 Scenario estimates that around 70% of clean-energy investment will need to be carried out by private developers, consumers and financiers over the next decade. To achieve a just transition, we will also need low-cost financing.
Nedbank has taken the lead in providing innovative funding for green and renewable energy. We were the first bank in Africa to release our Energy Policy, in which we committed to stop the financing of fossil fuel projects by 2045 – well ahead of the UN’s goal. Nedbank is an active participant in both the renewable-energy and sustainable finance space by supporting multiple projects in this arena. Recent successes in the mining space include Harmony Gold mandating Nedbank CIB as global coordinator, bookrunner and sustainability coordinator on a significant sustainable finance debt package. We also see opportunities to offer similar innovative sustainability-linked funding to other players in the mining sector.
Investing in the future
The real value comes from making decisions with a long-term lens instead of being swayed by the current market sentiment. Any sound capital allocation framework must take a much more measured approach in that current conditions must be considered, but companies must also look at the future environment. At the same time, they need to consider ESG, which has seen mining make decisions around capital allocations based on this drive, especially regarding the environmental aspects, which is helping to ensure that future generations will still have a planet.
Another critical point is that a company should not make capital expenditure decisions based on an expected rise in the price of the minerals they are mining. Instead, companies must consider where prices will be over a longer-term horizon, typically, in this case, over the next 5 to 10 years. This means working out the cycle to take a responsible view of investing in either expansion or renewable-energy projects.
Deciding when and where to allocate capital investment can be tricky. Investors will always want to see a return on their investment, regardless of the unpredictable long-term outlook for commodity prices, which may affect profitability. The question then becomes how to improve the effectiveness and efficiency of capital allocation when the outlook is constantly changing.
According to Ernst & Young (EY), the drivers behind capital allocation are changing as more companies seek to achieve a balanced range of the objective. These include ensuring that the business is sustainable and providing returns to shareholders while being agile enough to adapt to a changing environment. This is in aid of a social licence to operate, supplied through all its stakeholders, including shareholders, employees, consumers and the public accepting a company’s business practices. As a result, capital allocation is no longer about assessing, planning, reviewing and prioritising of how a company spends its money but about benefitting all stakeholders. However, the EY report, which sampled chief financial officers across the world in all sectors, found that the actual process of capital allocation requires improvement, as only 40% of them said capital allocation had enough flexibility to cater for an ever-changing operating environment.
When it comes to mining, other factors affecting capital allocation are the ever-changing exchange rates and commodity price uncertainty. Fortunately, it is a mature industry with a well-bedded approach to capital allocation – the fact that mining has been the cornerstone of the South African economy for so many years is testament to this. Miners have the experience to make decisions in consideration of current volatility but are keenly aware that the best actions are informed by a through-the-cycle perspective of their operating environment.
Capital allocation to invest in the future is the only sustainable option for ensuring a social compact with all stakeholders and leaving a better planet for future generations.