Environmental, Social, and Governance Best Practices Applied to Mining Operations
Critical minerals have become strategic inputs for a successful clean energy transition, as well as for economic development and national security. A future powered by low-carbon energy sources and protected by a technologically advanced military is one that will be heavily dependent on minerals. As such, demand for minerals is expected to grow over the coming decades, and mining will become a central theme in international development discourse.
According to different clean energy scenarios modeled by the International Energy Agency, the demand for each of the five most important critical minerals (i.e., lithium, cobalt, nickel, copper, and neodymium) will likely increase between 1.5 and 7 times by 2030. Meeting this rising demand will require scaling existing operations and developing hundreds of new projects.
To this end, Latin America—which holds considerable reserves of copper and lithium, supplying 40 and 35 percent to the global market, respectively—has attracted significant investments in mining. Between 13 and 19 percent of foreign direct investment in the region has gone to the mining sector. Unfortunately, many of the mining projects have been associated with environmental destruction, corruption, dubious economic returns, and the unfair distribution of benefits. According to the UN Economic Commission for Latin America and the Caribbean, the region has the most mining-related socioeconomic conflicts worldwide.
Many of these minerals are found in areas that are environmentally sensitive, with important biodiversity and sources of water. Closing the gap in mineral demand will have to be carried out in a manner that empowers local communities around the mines and does not exploit natural resources. As the race to secure critical minerals continues, there should be careful consideration of environmental, social, and governance (ESG) concerns.
The Importance of ESG Standards in Mining
The international community has developed an assortment of toolkits and guides to inform projects. The Group of Twenty, the Organization for Economic Cooperation and Development, World Bank, and the International Monetary Fund offer resources that detail how to avoid disputes, build trust, and properly secure access to essential resources. The private sector has also developed their own guidelines. For instance, the International Council on Mining and Metal has released many practical resources to help the industry in this area. The principles observed throughout such products strongly emphasize upstream planning, good governance, and enabling conditions. These same elements stress the importance of positively impacting environmental, social, and economic outcomes.
Applying best practices is not merely a nicety but a cost-saving endeavor. When there is a failure to adopt advisable practices, there is a greater potential for costly conflict. A 2014 study by the University of Queensland’s Centre for Social Responsibility in Mining attempted to quantify the cost of conflict with local communities. One case study saw an estimated $20 million loss in net present value for every week of delayed production. Consulting with local communities early on and incorporating best practices throughout the mining process can mitigate these risks.
One positive development is the June 2022 announcement of the Minerals Security Partnership (MSP), an initiative by Australia, Canada, Finland, France, Germany, Japan, South Korea, Sweden, the United Kingdom, the United States, and the European Union to increase mineral production. Its goal is “to promote responsible growth across the critical minerals sector via a shared commitment to high [ESG] standards; sustainability; and shared prosperity.” The MSP will be an important conduit to bolster mineral supply chains in a manner that meets high ESG standards. However, implementing these high standards will require the efforts of both the public and private sectors.
Sources of Conflict in Mining Operations
The conflict surrounding mining projects primarily derives from insufficient consultation with affected communities, the inequitable distribution of socioeconomic benefits, and environmental objections (see Box 1). The communities that live near mineral deposits are often poor and experience their own a set of unique socioeconomic problems. A report by the Inter-American Development Bank cites “deficient planning” as a consistent source of setbacks for mining projects.
There are several typical stages in the mining value chain: exploration, extraction, processing, transportation, and sales. Ideally, closure and remediation conclude the mining lifecycle. Conflict, malpractice, and missed opportunities can occur at any point in the minerals value chain, so thoughtful planning is necessary at each stage to account for all potential issues.
Having clear and detailed ESG standards is insufficient to protect Indigenous groups and the environment. Without the participation of both the public and private sector, conflicts will continue to arise throughout the value chain, costing both the mining companies and the local communities affected by their actions. The enforcement of these principles cannot be the sole responsibility of the mining company; commercial pressure and empowered regulators also have their roles in leveraging mining as a development tool.
Institutional capacity, which varies widely, determines the degree to which suggested or required practices are administered. Regional and local governments tend to lack the technical capacity, personnel, and budgetary resources to effectively address illegal activity and provide adequate land governance, law enforcement, and public services. In many instances, the process of land titling and registration at the subnational level is not well defined, leading to land grabs and clashes with local communities and Indigenous people. Often, areas that are delimited for Indigenous ethnic groups and natural parks are not safeguarded. This is partly because laws and governing principles are typically created at the federal level, not in the municipalities charged with enforcing the law.
Due to a lack of institutional capacity, local governments are often unequipped to enforce laws or combat illegal mining. This creates a low-risk environment that enables legal mining entities not to adhere to espoused ESG guidelines and encourages illegal mining activity (any such activity that takes place without receiving state permission, such as land rights or exploration permits). This has resulted in illegal mining into protected areas and the displacement of Indigenous people in many regions. For example, Interpol found that Bolivia and Colombia are major sources of illegal gold, while Ecuador, Panama, and Peru are both sources and processing centers for illegally extracted ores. Illegal mining is highly associated with transnational criminal activity, as well as with human rights violations, environmental degradation, and corruption. Like many illicit activities that exist where rule of law or enforcement capacity is weak, it is a symptom of inadequate governing authority and a lack of alternate employment opportunities.
Abandoned or improperly closed mines are attractive to illegal mining operations. Proper closure protocols have not always been common practice and remain underutilized. Nearly a quarter of jurisdictions globally do not require mine closure plans, according to a 2019–2020 survey conducted by the Intergovernmental Forum on Mining, Minerals, Metals, and Sustainable Development. Only 45 percent of the IGF member governments that responded to the survey require companies to provide adequate financial assurance for rehabilitation and other closure costs. Failure to effectively manage a post-mining transition can result in unnecessary, lasting damage to local communities and the environment around them.
- Rio Blanco, located in the lower Andes of Peru, is owned by Hong Kong’s Junefield Mineral Resources and the Hunan Gold Corporation. The mine has faced criticism for ramping up production despite expert warnings that such endeavors could release heavy metals and increase the risk of acid drainage from the mine to local water sources.
- The Mirador and San Carlos Panantza copper mines, located in the Ecuadorian Amazon, have become infamous for the tensions between the Chinese mining consortium CRCC-Tongguan and the local Indigenous community. Natural sites around the mines are ceremonially significant to the Shuar Arutam people, who have grown increasingly frustrated by the mine’s misuse of sacred areas in the Arutam region. The Ecuadorian Constitutional Court found in September 2022 that the Shuar were not sufficiently consulted before Chinese investors opened the San Carlos Panantza mine, thereby delaying its opening. In response to criticism, Chinese investors have tried to co-opt local leaders, avoid cultural and environmental guardrails, and force residents to relocate. According to a report by the Carnegie Endowment for International Peace, CRCC-Tongguan worked to turn Ecuadorian national elites against the Shuar and employed divide-and-conquer tactics among Indigenous communities.
- Brazil’s Juruti Mine, run by Alcoa World Alumina, has been assessed as having 700 million metric tons of bauxite, the raw material used to make aluminum. To address its environmental impact, the Juruti Mine has put forward a biodiversity action plan that aims to make mining operations carbon-neutral by 2030 via offsetting the land used for mining each year by an equal acreage of rehabilitated land. Alcoa partnered with the International Union for Conservation of Nature (IUCN) to explore how to best contribute to biodiversity. The Juruti mine is also employing a new reforestation method called nucleation to replenish destroyed fauna. In their efforts, they are mindfully creating non-timber forest jobs, such as harvesting Brazil nuts or cultivating honey, as well as developing small-scale farming projects for locals.
Great Power Competition in Mining
Political leaders in Latin America are eager to unlock the potential of their natural resources, even if it means awarding bids to China’s state-controlled mining operations. China has experienced undeniable success in the region. According to the American Enterprise Institute’s China Global Investment Tracker, 21 percent of the $148.9 billion Chinese entities invested in Latin American and Caribbean countries between 2005 and 2022 was in the mining and metals sector. In January 2023, a consortium of the Chinese firms, Contemporary Amperex Technology, Guangdong Brunp Recycling Technology, and CMOC Group, won the rights to extract Bolivia’s lithium deposits. The $1 billion investment is estimated to yield 50,000 metric tons of battery-grade lithium carbonate per year. Moreover, China has invested over $10 billion in Peru’s mining industry and now owns two of Peru’s five largest copper mines.
China’s mining advancements in Latin and South America should concern environmentalists and humanitarians as much as it worries national security policymakers. Chinese companies frequently fail to conduct adequate environmental impact assessments or consult with local Indigenous communities. A 2023 report presented to the UN Committee on Economic, Social, and Cultural Rights documented 14 cases in Latin America where Chinese companies committed environmental destruction or violated human rights. Western firms are certainly not all without incidents and controversies, but none of the top ESG performers, according to trade publication Mining Technology, are of Chinese origin. Western firms are ESG leaders in the industry and should continue innovating and implementing towards that end to better offer alternatives to Chinese investments.
U.S. companies are competing against Chinese state-subsidized companies that do not adhere to the more stringent ESG standards or anticorruption requirements Western firms must abide by. Though Chinese regulators are working to standardize corporate ESG disclosure reporting, the Guidance for Enterprise ESG Disclosure that took effect in June 2022 mostly requires data reporting and complying with (often weak) local regulations. Rather than doing the minimum required by the host country, U.S. companies usually maintain high standards wherever they operate. Western firms are more likely to incorporate community engagement and consultation, while Chinese firms had 23 allegations of insufficient consultation from January 2021 to December 2022. It was not until May 2023 that the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters (CCCMC), launched a pilot consultation mechanism. It is in U.S. companies’ interest to build the capacity of local governments, which would give these companies a comparative advantage over Chinese state-subsidized firms. The United States cannot make China's offers less financially attractive for host nations. A level playing field will never be achieved so long as there is the possibility of a firm underbidding others by cutting corners on ESG best practices. Navigating the stakeholder landscape to achieve this will require collaboration among government officials, corporations, and local communities.
Additionally, in instances where companies do not self-regulate, government authorities could develop traceability programs. Accessibility leads to transparency, which improves adherence to best practices. While traceability is not a substitute for good governance and strong rule of law, increasing transparency does support and improve governance. Western companies and the U.S. government cannot do due diligence if knowledge of relevant supply chains is lacking. Moreover, as global consumers and investors become increasingly conscious of ESG goals, companies that demonstrate their dedication to these principles can attract more capital. Traceability may give consumers and end users the information needed to shape the market in a way that rewards ESG best practices even when host countries lack the capacity to do so.
Implementing ESG best practices will make the Latin American region more stable and prosperous. The sooner such practices are well established, with all stakeholders in the mining value chain adhering to them, the less exploitation and environmental conflict there will be. In this regard, U.S.-based companies should view responsible mining and the implementation of ESG standards not as a burden, but as a selling point. Fortunately, many firms already share this perspective, and aim high by going beyond the minimum standards. Yet there is still work to be done throughout the entire mine-to-market value chain to enhance the comparative advantage of firms that are ESG-conscious. Companies, regulators, and end users need to collaborate to continue moving in the right direction.
Romina Bandura is a senior fellow with the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Austin Hardman is a research assistant with the Project on Prosperity and Development at CSIS.
This white paper was made possible by support provided by the Rio Tinto Group and was informed by a roundtable of experts held on July 26, 2023, also made possible by support from the Rio Tinto Group.