There are clear signs that many investors are adopting the “Toronto Principle”, so-called after the University of Toronto announced in 2015, following signature of the Paris Agreement on climate change, that it would be selling all its fossil fuel investments. .The Financial Times reported in September 2019 that the number of institutional investors pledged to completely remove fossil fuels from their portfolios by 2030 had jumped from 180 in 2014 to over 1,100, representing around US$11tn in assets¹⁰. Other signs that the mining industry will face an increasingly hostile investing environment include the European Central Bank’s consultation, published on 20 May 2020, to guide banks to price their loan products in correlation to the environmental risks of the borrower/enterprise in question¹¹.
So, at the same time as demand for renewable energy continues to grow, enthusiasm for investment in fossil fuels and mining is shrinking, and the mining sector (not only that part mining fossil fuels) risks facing a market that is smaller, pricier and subject to a much greater degree of investor oversight. Accordingly, we expect that lenders and investors will require a far more rigorous covenant package in their loan agreements over the coming years when lending into mining activities to manage their exposure to environmental risks and incentivise change towards a more sustainable industry. To make this work will require a detailed – and achievable – ESG performance improvement plan above and beyond mere agreement to principles.
It is worth mentioning the increasing focus on whether the law should require companies and their directors more actively to combat climate change. To date, directors have been required to ensure compliance with all applicable environmental laws and regulation, rather than being under any obligation to actively take steps to reduce the environmentally damaging aspects of their business. There is no suggestion that the law will change imminently in this regard, but a recent article¹² penned by Lord Sales of the UK Supreme Court suggested a new legislative requirement for companies to appoint a board member specifically to address environmental impact issues. The point here is that discussion is already underway as to whether we can trust directors to “do the right thing” when it comes to making decisions that impact on the environment, or whether a more prescriptive legal framework is required. Directors who take proactive steps now may put themselves and their businesses in better stead in the future.
