Market Pressure Yields Results – Disclosure Increasing in Multiple Industries

 

Gail Glazerman, CFA
Analyst, Sector Lead – Resource Transformation and Renewable Resources

Effective decision making depends on relevant, reliable information. For investors, that need often extends beyond traditional financial data, as two recent developments illustrate. First, several leading global mining companies started reporting details related to dam safety. Meanwhile, an Ireland-based airline became the first in its industry to report monthly carbon emissions. Both of these moves toward increased transparency were driven by heightened scrutiny, and the availability of this data should enable markets to better assess risks and opportunities.

 

Global industry responds to investor demand for improved disclosure

On January 25, 2019, a tailings dam in Brazil owned by Vale (B3: VALE3) failed—tragically killing at least 246 people. While eclipsed by the human toll, there was also a high financial cost; Vale’s first-quarter earnings release estimated the dam failure cost nearly US$5 billion.

Global attention to this disaster sparked action. In early April, a group of 96 investment groups representing US$10 trillion in assets penned a letter demanding mining companies disclose how they manage waste storage facilities, noting “this disclosure is urgent and essential for investors to be able to understand how your company manages tailings facilities and any associated risks.” The letter added, “it is of critical importance that this can be transparently verified for all mining companies.” The Wall Street Journal further reports that regulators have also started to request additional transparency on dam safety. In fact, the event has sparked renewed interest in broader regulation; about a month after the tragedy Brazil’s Senate voted to tighten dam safety, including a measure to ban upstream tailing dams.

Heightened scrutiny led to the Global Tailings Review project, an initiative formed by the International Council on Mining and Metals, the UN Environment Programme and PRI (Principles for Responsible Investment) with the objective of establishing an international standard for managing tailings storage facilities. Although the work of the Global Tailings Review is ongoing, the industry has already started to respond. As reported in the Wall Street Journal, several large mining companies, including Anglo American, Barrick Gold, BHP, Glencore and Newmont Goldcorp, have published inventories of their tailing dams, including location, size, and design. The information surfaced some instances where engineers have flagged risks.

These recent disclosures are well aligned with the SASB standard for the Metals & Mining industry and other SASB guidance. For example, the standard includes the topic Waste & Hazardous Materials Management, which incorporates a metric for companies to report the number of tailings impoundments they own (such as dams), broken down by their hazard potential, using classifications developed by the U.S. Mine Safety & Health Administration. Accordingly, the SASB Engagement Guide suggests that investors ask companies to discuss what they are “doing to ensure the integrity of [their] tailings impoundments and how significant is their hazard potential?“

 

Ryanair ‘lays down the gauntlet?’

Meanwhile, a similar narrative has unfolded in the Airlines industry. In early April, the EU released a list of the region’s top carbon emitters, and Ryanair (IRE: RY4C) landed in the 10th spot. As the BBC noted, this “is the first time a company that does not run a coal-fired power plant has come near the top of the ranking.” The news garnered significant media attention, including the Telegraph headline “‘Ryanair is the new coal’: Airline joins list of Europe’s top carbon emitters.”

The airline responded to this unwanted attention by increasing its public disclosures. On June 5, the company became the first airline to publish monthly carbon emissions. An aviation expert interviewed in the Financial Times noted “the publication of monthly CO2 data by Ryanair would ‘throw down the gauntlet’ to other airlines.”

While it is too early to determine if or how the industry will respond, Ryanair’s move, in conjunction with conventional reporting, will allow markets to better assess the company’s positioning, particularly in light of existing regional and pending global emissions regulations. In fact, as part of a UN carbon regulating scheme agreed to by 192 nations, the global airlines industry will need to start reporting third-party-verified annual carbon emission data for global operations, which will ultimately be available to the public, creating a comprehensive, consistent, reliable data set.

The SASB standard for the Airlines industry identifies carbon emissions and fuel consumption as factors that are reasonably likely to have material financial impacts on companies in the industry. In addition to related quantitative data, the standard recommends companies provide a qualitative discussion of their strategy to manage their emissions.

 

The Bigger Picture

SASB has developed 77 industry-specific standards intended to provide financial markets with consistent, comparable, and reliable data on financially material ESG factors. Greater transparency around these business-critical issues will help both corporations and investors make better informed decisions, while facilitating more efficient price discovery by markets.

The speed with which the mining industry responded to investor demands for information and Ryanair’s conclusion that improving transparency was the best way to counter concerns about its carbon emissions are powerful examples of how quickly markets are coming to value the added insights that can be extracted from enhanced disclosure.

 

 

Photo by Ahmed Muntasir from Pexels