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10 August 20206 minute read

ESG in 2020: What African resources-developers should do to prepare

The risks inherent in sourcing and bringing to market a diverse range of mineral commodities has meant that the natural resources industry has always been particularly exposed to environmental, social and governance issues, particularly in Africa.

However, even for the most experienced operator, the ways in which ESG is evolving pose a real challenge. These include how ESG performance is defined, measured and reported; the speed with which communities, investors and other stakeholders are responding to real or perceived ESG failings; and the continued innovation in accountability, in terms of financial instruments, regulations and legal proceedings.

In this article, we explore some key developments and suggest a framework for integrating ESG performance into corporate values, strategy and risk management, in order to ensure continued access to capital and customers, and ultimately to sustain value creation.

Project debt

One of the most significant changes in ESG performance standards in 2020 will be version four of the Equator Principles, scheduled to take effect from July 1, 2020 – but which are already being implemented, either in whole or in part, by some lenders.

The Equator Principles have, since 2003, set the environmental and social baseline for the majority of international project debt financing, drawing on environmental and social guidelines published by the International Finance Corporation.

Three key changes to the Equator Principles will significantly lift ESG performance requirements for project debt finance for new mining projects, or the expansion of existing mining projects:

  1. Climate change risk assessment. The amended Equator Principles introduce a requirement for climate change risk assessment, taking into account the extent to which a project may be exposed to “physical risks” of climate change (i.e. exposure to acute weather events, such as fires or floods, or chronic changes in weather patterns, such as sea level rise) or “transition risks” (i.e. risks associated with the transition to a low or net-zero carbon economy, including in terms of the cost of regulatory responses, changes in suppliers and inputs, and changes in consumption patterns), in a manner aligned with the recommendations of the Task Force on Climate-related Financial Disclosures.
  2. Human rights impact assessment. The amended Equator Principles also require a human rights impact assessment, aligned with the UN Guiding Principles on Business and Human Rights, that identifies potential adverse human rights impacts of the project, including through consultation with affected stakeholders, and establishes effective grievance mechanisms for use by both affected communities and workers.
  3. Indigenous peoples. The amended Equator Principles underscore the requirement to obtain the free, prior and informed consent of affected indigenous communities. Though not a new requirement for Africa, this has now been elevated to a global standard, with certain high-income OECD countries having previously been exempt.
Private equity

Investors are also playing their part. Private equity is increasingly applying ESG due diligence to investments and M&A transactions, both in traditional and specialist ESG-oriented funds. This due diligence goes beyond traditional legal due diligence, which is much more oriented to regulatory compliance. It interrogates consistency with underlying international instruments and multilateral conventions, as well as sector best practices, to identify latent ESG risks that might form a basis for re-evaluation, or a decision not to proceed, with an equity investment.

As a companion to ESG due diligence, a diverse range of ratings are increasingly being applied as a proxy for the ESG performance of corporates, particularly listed companies. Though the utility of some of these ratings is still limited (particularly in private M&A transactions) and there is considerable divergence between them (a recent study from the MIT Sloan School of Management found an average degree of correlation of 0.61 between ESG ratings, which stands in contrast to a 0.99 score for traditional credit ratings1), over time these should converge and as a result become more influential.

Public equity

Public equity markets are also having their say, with corporate regulators making moves to require enhanced disclosure of ESG risks and performance across several markets. The most prominent example is climate change, where the recommendations of the Task Force on Climate-related Financial Disclosures are rapidly emerging as the global standard for disclosure of climate change risk. Though the lack of a common terminology for ESG risks other than climate change (or a lack of consensus over a number of existing options) is holding back more rigorous requirements on disclosure of other risks, the trend is toward convergence over the medium term.


Lenders and investors are not the only market players pushing for improved ESG performance; consumers and end-users are also having their say. Commodities markets operators like the London Metal Exchange, and industry bodies such as the Responsible Jewellery Council, have introduced or updated responsible sourcing requirements. These examine whole-of-supply chain handling and introduce disclosure, verification and certification processes. Increasingly, commodities unable to meet these standards will be not just devalued, but unfit for sale.

How African natural resources developers can respond

These changes are structural and permanent. Corporates that approach the increasing visibility of ESG issues and the elevated expectations of stakeholders as a fleeting phenomenon will see their value quickly eroded, as they and their projects become unable to attract capital and the market for their products evaporates.Corporates should embrace the ESG challenge, starting with a board-level commitment to sustainability and to monitoring ESG performance on a regular basis. Identification of ESG risks should be integrated into, not sit separate from, more traditional risks. In the same way, attributed targets and metrics should make performance quantifiable and allow executive and operational teams to be held accountable.

Stakeholders should be comprehensively mapped and consultation should take the place of assumption in order to understand the diverse motivations, expectations and objectives. Stakeholder feedback, together with internal risk identification, should be used as a lens to interrogate corporate strategy to ensure that the proposed course is capable of creating long-term, rather than fleeting, value.

The outcomes of risk identification and strategic re-examination should be fed into revised policies and procedures and operationalized in a way that incentivizes individuals to ensure performance, including regarding employment. Performance should then be communicated back to stakeholders, consistently and coherently, in terms that avoid exposing the business to additional risk, whether by inflating expectations or by failing to deliver.

There is a growing body of evidence – in particular, work done by Ioannis Ioannou at London Business School and George Serafeim at Harvard Business School2 – that robust sustainability-oriented practices are positively associated with both increased market valuation and, where genuinely strategic, improved return on capital. Focusing on sustainability and meeting the ESG expectations of lenders, investors, customers and communities are not just safeguards against wrongdoing, but a legitimate business strategy, as much for participants in the African natural resources sector as any another.

2 See : and (requires account)