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Can investor risk lead to more sustainable mining?

By Gretchen Lyons, Manager, Conservation Communications, WWF International

It’s also a lucrative business, which is why governments and investors continue to accept the associated risk of environmental degradation and social unrest.

But what does the financial sector really know about the challenges hidden in their portfolios? In a new issue of the Chief Liquidity Series, the UN Environment Programme Finance Initiative, WWF and Pegasys Consulting look specifically at the mining industry and water risk to see whether mainstream credit risk analysis is keeping pace with today’s water-stressed world.

© Karen Rosborough, WWF-Canada

“Financial institutions, such as banks, investors and insurance companies, are often disconnected from water and other environmental issues,” says Ivo Mulder, UNEP FI Programme Officer for Biodiversity, Ecosystem Services and Water. “However, that does not mean that it does not affect credit risk, which is the prime denominator through which banks and investors do business.”

The paper cites the example of the Newmont mining company, which experienced significant delays in Peru because of concerns regarding the impacts of the mine on water availability. This not only resulted in costs associated with the delay, but also required an investment of approximately US$150 million from the investment partner Minera Yanacocha.

An additional investment of $150 million on a $5 billion project may be acceptable risk for some investors; but protests over mines in Peru and elsewhere have turned fatal, highlighting the severity and scope of risk associated with a vital resource like water.

UNEP FI and WWF recommend a proactive approach by banks and investors to clients in extractive industries, power, agribusiness and other water-intensive industries. This positive pressure can stimulate a reduction in water use and discharge and lead to lower credit, reputational and regulatory risks.

“We want to show governments and the private sector what’s at stake when water is poorly managed,” says Stuart Orr, WWF International Freshwater Manager. “Our hope is that highlighting risk catalyzes action to manage water sustainably.”

This issue of Chief Liquidity looks at the mining sector in South Africa, Australia, China, Canada and Brazil. In South Africa, where the sector contributes roughly 19 per cent directly or indirectly to GPD, monthly and annual water scarcity maps show that coal and precious metals deposits are located predominately in physically water-stressed regions. And the story doesn’t end there: The Olifants River system is projected to face increased water charges of up to 10 times compared to current levels by 2020, and the nearly 6,000 abandoned mines – many of which could lead to acid mine drainage –  require a more direct response from both governments and financiers. Without it a huge amount of hidden water risks are building up that is not on the radar of investors or banks.

A recent Ceres report found that 12 mining companies researched disclosed to the U.S. Securities and Exchange Commission about physical and regulatory water-related risks they face. “However, based on a number of interviews with UNEP FI members, it became apparent that few monitored and mitigated water risks across their bond and equity portfolios in a systematic way,” says Mulder. “So there’s still a lot of opportunity to raise awareness of risk and motivate mitigation responses that address social, economic and conservation concerns.”