From ESG to authentic ESG: cycles of change

There is a line in The Who's "Won't Get Fooled Again" about the new boss turning out to be the same as the old one. Cycles of change and innovation repeatedly play out that way.

Tech was an example. The internet started in the 1990s, and it was supposed to change the world. The dotcom boom came, lots of millionaires were created. The dotcom bust followed, with lots of folks losing their shirts. Today we have the FAANGs, a handful of enormous companies. The value that was originally promised turned out to be real, the world was changed and is still being changed, but the change was not straight line.

A little bit of history on ESG

Looking at a completely different topic, Paul Clements-Hunt coined the phrase ESG (Environmental, Social, Governance) in 2004, which was followed by the founding of the Principles for Responsible Investment (PRI) in 2006. The Freshfields Report bridged these two events, as Paul Watchman and his team worked with Paul Clements-Hunt and UNEP-FI to define how ESG was an essential part of fiduciary duty.

The logic of why ESG is tied to broader fiduciary duty is clear – social and environmental stakeholders create risks and opportunities that need to be managed, and are therefore part of a fiduciary duty to optimise long-term value. The need for quality governance, the G in ESG, speaks for itself.

I have heard the brilliant Paul Clements-Hunt describe ESG as an attempt to inject a virus into the financial system, one that gradually matures into a focus on environmental and social (my words, not Paul's). His thinking, as I interpreted it, is that the concepts inherent in the acronym will gradually mature into generally accepted practices that shift investor and ultimately corporate behaviour due to greater recognition of risk implications.

ESG took off, first growing slowly, then explosively. The term, and at the least superficial demonstration of the discipline, became table stakes for the investment community as it grew dramatically between 2015 and 2020. Even as this dramatic growth took place, there were headwinds that would eventually undermine the take-up of ESG, ranging from political headwinds – DEI related in particular – through to economic headwinds – the fossil fuel industry focusing on undermining a discipline that encouraged shifts from oil and gas – as well as process related headwinds – countless frameworks, ratings and consulting firms that looked for ways to monetise the concept without necessarily focusing on the value-creation that ESG can generate. If this were the end of the ESG story, it would be the equivalent of a dotcom boom followed by a dotcom bust. The thing is, it's not the end of the story.

The value and integration with fiduciary duty that Paul Clements-Hunt and Paul Watchman highlighted is clear. Where there is value, there is business interest. Paraphrasing Clements-Hunt again, what will "authentic ESG", a sort of 2.0 reboot, look like? The short answer – good business practices that add tangible value will take the place of performative words.

Let's get specific – what about ESG in the mining context?

Mining has its own history with ESG. The term is everywhere – the industry knows that engaging stakeholders – earning social licence – is essential for de-risking operations as collaborative value takes the place of potential conflict. Disciplines are inconsistent, and performance words often take the place of substantive practice.

"Authentic" ESG in the mining context, just like in the broader context, means transitioning to rock solid good practices that are grounded in value, aligned with values and executed as well as measured in transparent ways. Some mining companies do a good job on engagement today, but performance is clearly inconsistent.

This is where Stakeholder Prosperity Bonds, an ICMA-aligned subset of the sustainability bond market, support authentic ESG in mining by providing a framework that integrates capital, transparency and ground-level risk management through a stakeholder-oriented focus that supports paths toward alignment and collective value.

What this means:

• Scopes that combine regional stakeholder and large mining company requirements – infrastructure (road, water, power system) development, artisanal mining professionalisation, regional capacity building, processing facility development and transformed value chain flows that transition product from smuggling to formal economies
• KPIs that provide discrete transparency on commitments and on the status of delivery; tying KPIs to bond interest rates creates a strong accountability mechanism
• International Capital Market Association (ICMA) compliance, ensuring conformance to good practices
• Commitments: a minimum of 30% of proceeds are impact related, the other 70% does no harm to stakeholders, the aggregate bond is bankable. Commitments ensure that everybody wins

The term Stakeholder Prosperity Bond is appropriate for this financial instrument because it reflects how it is architected around aligned stakeholder outcomes and increased felt prosperity. Loren Stoddard coined the phrase Prosperity Engineer as a term for the underlying architect who aligns disparate stakeholder requirements into a KPI supported scope that reflects the needs of all primary stakeholders in a mining region. Put differently, prosperity engineering in this context relates to targeting scope elements in integrated ways that make sense for locals. Said yet differently, prosperity engineers develop the moorings of stakeholder prosperity bonds.

In summary

Disciplines that create value, whether technological, process or hybrids of the two are taken up over the course of time because businesses want to optimise their own value. That makes sense. It also makes sense that growth in fundamentally revolutionary disciplines is not straight line – concepts need to be understood, good practices need to be defined, and there are those who would coopt change for their own benefit. This has been true for ESG just as much as it was true for tech, but in both cases, authentic value based on authentic use cases is ultimately derived as opportunities for good practice are defined and delivered against.

The Stakeholder Prosperity Bond example used in this article demonstrates an authentic use case for what authentic ESG is meant to be – tangible work that delivers tangible shifts in outcomes in bankable ways. Whether or not we call it ESG at this point doesn't matter, the point is that the discipline around these bonds reflects the genuine concepts that are inherent in the concept. Looking forward across coming years, it is natural to expect more applications where genuine value takes the place of performative words – put differently, it is natural to expect ESG's equivalent of the FAANGs to arise out of ESG's equivalent of the dotcom bust. To return to that Who song, maybe the new boss is different from the old boss, because the new boss is authentic.

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