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Lyceum 2021 | Together Towards Tomorrow

Environmental, social and governance (ESG) is increasingly referenced in corporate boardrooms and the financial sector, and verification of ESG metrics is a new condition of project financing.

For resource development projects, remotely acquired data is increasingly important for evaluating social and environmental risk. Meanwhile changes to orebody valuation requirements bears heavily on overall valuation and financing conditionality. Bruce will discuss why we need to make the leap from remote landscape monitoring and geospatial modelling to social proxy modelling.



Bruce Harvey
Director, resolution88


30 min

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Video transcript

(gentle suspenseful music)

<v ->Hello everybody.</v>

My name’s Bruce Harvey.

I’m coming into you from Melbourne in Australia.

I’m going to give you a presentation here

entitled “trust, but verify”;

there are the words in Russian.

I’m not going to attempt to pronounce them in Russian.

It’s a famous and ancient piece of Russian wisdom.

The subtitle for this is,

remote sensing for ESG assurance

and resource sector financing.

And it’ll become obvious what I’m talking about,

even though I’m skimming over the subject material

in the next 20 minutes.

This is what I will talk about;

the emergence of ESG

as a critical factor in the business environment,

why ESG is particularly important for the resources sector,

how ESG is currently dealt with in the resources sector,

how we ESG needs to be better managed,

why remote sensing,

I believe has an important role to play in this

particularly in the verification of performance,

and lastly I’ll finish with an example

of remote social evaluation and verification,

if you like “trust, but verify”.

Well look, ESG or Environmental, Social and Governance

has emerged in the last two or three years

as the financial and corporate institutional response

to sustainable development.

Sustainable development has been part of our life

The zeitgeists for 25, if not 30 years,

it emerged in the 1990s.

And there’s no better definition than the original one

that came from the Brundtland Report;

“development that meets the needs of the present

without compromising the ability of future generations

to meet their own needs.”

It certainly has become a major socio-political

and socioeconomic driver,

and it encompasses all ideas of environment,

social and governance performance.

When it first started,

it had an emphasis on environmental performance,

now it’s across the full portfolio.

And ESG has been the corporate and finance sectors

response to this in the last two or three years,

wanting to actually bring in the idea

of quantifiable performance metrics

to manage investor and operational risk.

So on that basis,

ESG performance needs to involve everybody at a work site.

We all need to be aware of the effects

of our work activities and behavior on others

and undertaking our professional work

with accountability for good health,

safety, environment and social outcomes.

Now, why is ESG particularly important

for the resources sector?

Well, here are some startling images,

mostly from Africa in this case,

but these occur all over the world.

And we know that 30% or thereabouts

of resource sector projects are suspended

or never proceed because of some form of social conflict.

We know this intuitively;

however, there’s more and more data

that supports this notion.

And there’s a very interesting paper there

from some years ago

and more have emerged in the meantime.

So we know that our projects did not proceed,

particularly because of social conflict,

which is often triggered by some form

of environmental impact.

So my assertion to you

and I am a geologist originally by the way,

and I presume I’m still a geologist,

that the oil body is not actually the asset.

Many of us geologists are inclined to believe

that the oil body in the ground is a real asset.

However, these data here

from Ernst and Young over the last three years, affirm

that licensed to operate as they call it,

is the number one risk for mining

and metals companies for three years in a row.

So I put it to you

that the exclusive right to explore,

evaluate, develop, mine and market

a mineral resource is the asset.

The rock and the ground is a rock on the ground

and if it remains in the ground, it’s not an asset.

So again, the oil body is not the asset.

The ability to develop it is the asset.

Very complicated slide, it’s an exhibit.

I don’t expect anybody to be able

to unravel the slide on the screen.

There’s reference to the paper it comes from,

if anyone is particularly interested,

you can come back later and download that

from the web and read it for yourself.

Essentially what it’s showing,

this is the first of a number of analysis

that are starting to emerge

in what might be called ESG related risks categories

across all bodies.

So on the left-hand column,

a list of the top 40 undeveloped copper deposits

by tonnage in the world.

Some of them are just starting to be developed.

So an enormous inventory there,

enormous latent inventory of copper in the ground.

And then across the top of a number of

ESG related risk categories

and some technical ones as well such as grade,

that the authors of this report

have managed to find from global desktop research.

Now we might disagree with the categories

that they’ve picked up on.

That’s not the point I’m trying to make here.

The point I’m trying to make is it’s now possible

to do a complete matrix of risk heat exposure

across a number of ESG related risk categories

against a list of oil bodies.

This work will continue to become very refined.

It’s a pity that this slide is in black and white;

I don’t have a copy of it.

It’s color coded, but essentially the darker the color,

the higher the risk.

And clearly, if you’ve got a row with a lot of dark colors,

the evaluated risk assessment would be that,

that oil body is got very little chance of being evaluated.

So that’s why this is particularly important

to individual asset owners and operators

who are wanting to develop projects.

Now, how has it currently dealt with

in the resource sector evaluations?

Well, here’s a map of showing the various mineral codes

that are around the world.

Some of you will be familiar with some of them

by attempt to coordinate and come together

and increasingly collaborate through

the Committee for Mineral Reserves

International Reporting Standards.

And I just want to mention a couple of them in detail.

So the Australian code very well known as JORC,

the Joint Ore Reserves Committee Code,

has some reference to ESG related modifying factors.

There they are.

I don’t expect you to be able to read them,

but the point is,

two very minimal references

to environmental modifying factors

and social modifying factors.

Modifying factors as the language that’s been around

for some time relating to these codes.

It has to be said that the South Africans

have done much better.

So the South African codes for ESG,

are actually more voluminous,

more helpful

and somewhat more detailed than well,

actually way more detailed than any of the other codes.

You can find them at that web link if you want.

There are other codes;

here’s the Russian minerals evaluation code.

I can’t read Russian.

So I don’t know whether there’s any reference in there

to modifying factors,

but I’m just giving you a taste

of what some of the codes are.

So here’s a slide.

There’s the reference to it

if anyone wants to pull down the paper

that shows that ESG related modifying factors

as portrayed in this diagram on the Y axis.

So this is an attempt to demonstrate in three dimensions

that there’s geological knowledge,

which on the bottom axis there,

and then in the depth axis project feasibility

taking into account other technical and commercial factors,

and then in the vertical axis an attempt

to indicate that ESG related modifying factors

are now a critical third dimension

in the categorization of risk and likelihood

for unrestricted development of an oil body.

Now it’s more and more important all the time now,

not so much because of regulatory requirements,

but because of emerging financing requirements.

Some of you may be familiar with the IFC,

the World Bank IFC Performance Standards,

increasingly commercial banks

have signed up to what is called

the Equator Bank Principles.

And I think there are something like

a thousand commercial banks in the world now,

which are signatories

and are looking particularly since July, 2020

with what’s called Equator Principal’s 4

at a very high degree and more rigorous evaluation

of ESG related factors

before they will provide finance to projects.

Now, there are just some examples there

of the type of banks we’re talking about.

So I think you’ll all find some banks there

from your own place of work,

your own continent, your own country.

This is a right across the board now,

including in China.

Now I just want to very quickly point out

that when it comes to social performance,

and that’s what I’m particularly wanting

to highlight in this presentation,

I work in the area of social performance.

There are a whole bunch of quite technical matters

that require competence

in the way that they are evaluated and managed.

Here’s a list of some of them,

probably about half of them.

We’re not going to go into them,

but I have actually circled

resettlement and population movement there

because I’m going to come back to that later

as an example,

an on-ground example of how that needs to be managed.

The points there that are in green by the way;

what you would call, enterprise management system factors.

So they are common across environmental performance,

social performance, governance,

and general management.

So they are EMS type requirements.

The others are quite explicit to social performance.

So just to point out again,

we’ll come back to discuss resettlement

later in this presentation.

Now, just to step aside for a moment,

and say when it comes to assurance

and audit or review, if you like

of any effects for that matter,

you need to have a set of auditors or observers.

And in particularly in the social area,

there’s a prevalence and a real exposure

to what is called,

even in physics, the observer effect.

Now, the observer effect is that

in the act of trying to measure something or observe it,

you actually necessarily alter the state

of what you’re attempting to measure.

So that even applies in quantum physics.

But it particularly applies in social science

for a number of well-known effects,

which are now well discussed by sociologists.

So for instance,

the Hawthorn effect,

people will modify their behavior

when they know they’re being observed.

Survey fatigue, is when people are so tired of being

frequently surveyed that they just express dissatisfaction

and start saying whatever they like.

So it’s particularly difficult to get reliable,

replicable data in the social science domain

because of this extreme observer effect with human beings

being active agents in their own destiny.

They have a tendency to tell the survey

what they think the surveyor wants to know

or what they themselves want to do

to influence the outcomes.

So that means that looking for a way

to objectively verify

survey data in the social domain

is wide open for experimentation and development.

And there’s quite a bit of work being done there

by international agencies and others in the space,

but I’m not sure much of it is being done

in the resource sector.

So I put it to you that remote sensing

has an important role to play in verification.

And here are some examples.

So for instance,

looking at the social domain, completely

the number of maintenance of buildings over time,

including retrospectively,

because we can recover satellite images from the past,

can be a proxy for family size and wealth change.

So you can imagine

it’s possible to look at the roofing materials

and see how they’re changing over time.

The patterns of yearly and seasonal use of tracks

and arable lands can be indicators of shifting land use

and the changes in nighttime light patterns, for instance,

as a proxy for electricity availability and uptake.

And there was a nice report back there in 2015

by the World Bank that covered that in Africa.

And then this one at the bottom I have highlighted again,

because I’m going to come back to that as an example.

The number of maintained household compounds and structures

as a measure of in migration and out migration.

Now the movement of peoples

and in migration and out migration

as a result of resource development

can have a major effect

on the societal stability

around that resource operation.

If there are many thousands,

in some cases, tens of thousands

of people coming in from elsewhere

looking for opportunity,

that can cause severe socio-political

and other conflictual situations.

And so we want to be able to monitor that.

And in some respects,

we want to be able to manage it to the best extent we can.

So that’s…

Knowing what’s going on,

can be a very important part.

What gets measured, gets managed.

Now here’s an example,

and thank you Seequent for providing this example

that I could use from the Emilia Romagna

region in Italy.

So, technology is already being used

as a way of enabling geo-scientists to better engage with

and communicate and discuss

development affects involving for instance,

in this case subsurface environment

with members of the public.

So this sort of thing is pretty standard practice

at the moment.

But what I want to talk about and suggest

is that it can be extended now with the new technologies.

Here is an example that I want to bring to your attention.

This is an example that I was involved in

about four years ago.

It’s from Mongolia,

from a little town called Khanbogd

in the province of Omnugovi

in the southern part of Mongolia.

There it is out in the Gobi Desert,

where it’s associated with the new…

Well, it’s always been there of course,

but 40 kilometers away to the west

is the giant new Oyu Tolgoi copper deposit,

and many of the employees and others now live in this town.

And so there’s now a very close relationship

between the mine and this the nearest town.

Now what happened is we were managing closely all along

the number of people who were turning up

to live in Khanbogd,

and we didn’t want to have an in migration effect

where suddenly instead of two and a half thousand people

who were living there in 2004,

we ended up within three or four years with 20,000,

’cause clearly that would be a unstable

and in fact, unsustainable,

so that there was careful management of this over time

and the lenders and the base lender for this, by the way,

was the International Finance Corporation,

and many other lending institutions

joined the lending consortium,

we’re very keen to keep an eye on

and expected the proponent

to actually manage effectively risks of in migration,

which was done pretty successfully.

And then suddenly in 2014/16,

there was an apparent surge

in the in migration based on registration numbers

in the local government registration office.

And that came to the attention of the lender auditors

and they asked for an explanation.

Now we believe that

the reason was that what might be called ghost registration.

So people were registering,

but not actually moving and living there,

and the government was willing to allow those registrations,

but people were wanting to register because

then they could become available,

they could become potentially employable

as people who were local employees.

So we believe that they were ghost registrations,

but we needed to actually provide some other proof,

and it’s not actually that easy.

So it occurred to us that

we could actually go back and look at satellite imagery,

whatever we could achieve,

whatever we could retrospectively recover

during that period

and we could do a count

of various residential buildings and the like.

Now, many Mongolians in the steppe

and out in the Gobi Desert live in gers,

which Russians call yurts by the way,

but these round felt tents

that have been around for a long time.

So they can erect these and take them down

within an hour or two.

So everyone would have these

and when they move into a place even temporarily,

they’ll put up some gers.

So from overhead of course,

that’s a very distinctive round shape,

and we figured that we would

be able to count the number of gers

in as many retrospective satellite images

as we could put our hands on; and indeed we could.

Now, you probably can’t see these very well,

but these are rendered images

that some very good Mongolian consultants

put together for us of the village.

Now you can see there in 2004,

the soum center was really quite small.

You can make out some roads,

you can make out public buildings

and you can’t actually see the gers

in the way that this image is portrayed,

but you can count them on the satellite image.

Now, the next satellite image available,

unfortunately was some eight years later, 2012,

but you can see the town,

the soum center has increased

quite substantially in size.

Now, if we go forward to the next two satellite images

and do the same,

so render the satellite images

into these countable portrayals,

it’s growing again substantially by 2014

and by 2016, not much.

So between the years of 2014 and 2016,

not much growth in the town,

you can see that with the naked eye

and you can intuit that that is the case.

However, using algorithms and manual counting

and manual identification,

we were able to actually count the number of gers.

We could count other things as well,

but gers were the definitive feature

that we were trying to to count.

Now between 2004 and 2012,

there was a considerable increase

in the number of gers

that went up in the town.

And many it would have come down and going up again

and come down and going up again.

So that’s a mean count.

Now that was a period of managed expansion

and managed immigration.

So there were no issues about that.

We manage that all the way through,

and we were able to correlate it with the registrations

on the official residency registration.

Now, the period of concern

based on the surge of registrations

was 2014 to 2016.

And as you can see,

there was actually no dramatic increase

in the number of gers that went up

in the soum center during that period.

So we were able to take this back

to the lenders and to the mine management actually,

and provide comfort and verification

that the apparent surge was not real.

It was a factor of ghost registrations.

So I did very very nice, tidy objective verification

that there was no actual in migration surge.

So I finished by repeating

the Russian maxim, “trust, but verify”;

and I put it to you that this kind of work

is wide open for development in the resource sector;

social performance verification with objective means,

and that some of the people in this…

Some of you in the audience

should see this as a business opportunity that’s wide open.

Now, I’m going to leave it at that.

Hopefully that’s sparked a few thoughts with people,

and it’s been my pleasure to present to you.

Thank you.

(gentle suspenseful music)