SRK Consulting Highlights Importance Of Integrated ESG Due Diligence In Mining Investments

From early-stage risk assessments to valuations for mergers and acquisitions, due diligence reviews of environmental and social compliance need to cover a wide range of potential issues

From early-stage risk assessments to valuations for mergers and acquisitions, due diligence reviews of environmental and social compliance need to cover a wide range of potential issues. According to SRK Consulting (South Africa) partner and principal consultant in environment, social and governance (ESG) Darryll Kilian, the bases to cover also stretch across multiple disciplines.

“The environmental and social aspects of any mining project are broad – and the ESG field is even broader,” said Kilian. “Experts in these areas therefore make up a significant part of the multidisciplinary team required for an effective due diligence.”

Integrating disciplines

The skills that make up such a team typically include specialists in environmental management, groundwater, surface water, mine closure and social impact, as well as safety and health. These professionals must not only be experienced in their respective fields, but must be able to understand the mining context so they can integrate their input with the technical engineering aspects.

As a ‘status quo’ report to the client, a due diligence generally does not provide solutions to the risks that it highlights. However, depending on what the client aims to achieve from the due diligence process, it offers a firm starting point for finding strategies that would mitigate risk, according to Roanne Sutcliffe, principal environmental engineer at SRK Consulting (South Africa).

“Based on the circumstances, the client might want to take the process further,” said Sutcliffe. “Once the potential risks have been identified, the next step would be to find the best ways to manage or mitigate those risks.”

She notes that a due diligence can be a dynamic process, starting with a relatively narrow purview and evolving organically into a more detailed and forward-looking engagement.

Laws and standards

Andrew Caddick, principal environmental scientist at SRK Consulting (South Africa), highlighted the importance of understanding the client’s expectations and goals – and the benchmarks against which they position themselves.

“Conducting a due diligence on the environmental and closure elements of a project will include assessing compliance against the relevant national laws and regulations,” said Caddick. “Equally, the client may want to work to the highest international standards – which could raise the bar when identifying gaps and assessing compliance.”

Kilian pointed out that some countries’ legislation can contain more prescriptive and detailed requirements than global standards in specific areas such as water management or biodiversity. This makes it vital that the due diligence team is familiar with a wide range of national and international regulatory frameworks for environmental, social and mine closure compliance.

Material factors

“At the same time, a due diligence tends not to be as detailed or systematic as a full compliance audit,” he explained. “Rather, the focus is on materiality – on the relevance of the identified key risks for the viability or future success of the project in question.”

One of the key roles of the due diligence process is to assess whether those responsible for the project are aware of the risks raised, and have a strategic response to mitigate those risks, he continued. This requires an assessment of the systems, documentation and strategic intent that underpins the project.

Focusing on the field of closure, SRK Consulting (South Africa) partner and principal environmental scientist James Lake noted that the financial provision for the future costs of closure was a key measurable in any mining project plan or acquisitions. Reviewing the quantum of this provision and funding for closure was a valuable function of due diligence. He also mentioned that effective monitoring is often a gap that is identified in a due diligence or review process.

Monitoring for risk

“While a mine may be conducting certain monitoring functions required for legal compliance, the data generated from these activities is not always being well utilised in service of mitigating risk,” said Lake. “It is important that this kind of gap is highlighted in a due diligence if ineffective monitoring could be regarded as a material risk.”

Sutcliffe added that a due diligence in a mine acquisition can also help in highlighting any lack of clarity relating to the apportionment of environmental and closure liability between shareholders.

Kilian pointed to the dependency and compliance risks related to associated infrastructure of large mining projects, emphasising the need for due diligence to consider all elements of these complex developments.

“If a new or expanded mine is relying on new rail or powerline facilities for logistics and power, then securing compliant environmental and social permits for these structures will be as critical as those for the mine itself,” he says. “A thorough due diligence should flag issues like this at an early stage – giving time for the appropriate rectifying steps to be taken.”

Failure to appreciate the full impact of environmental and social risks can lead to costly project delays, he noted, where the delays translate into severe financial implications for project stakeholders and lenders.