ESG looms larger in dealmaking
Nomsa Mbere and Bruce Dickinson
For many years, shareholders and funders have expected that the companies in which they invest should demonstrate Environmental, Social and Governance (ESG) responsibility. But more recently, high standards of corporate behaviour in actively promoting and pursuing ESG goals have started to become integral to dealmaking.
Companies with a demonstrable commitment to ESG are favoured by socially-conscious customers; are more appealing to investors, both private and institutional; and are more attractive to financiers.
In a recent article, KPMG noted that “a strong ESG proposition can help create value and drive deal activity – and this will only increase in the coming years”.
ESG principles have become central to measuring sustainability and societal impact. Implementing ESG standards into corporate strategy is recognised as integral to social trust, responsible business practices and decarbonisation, all of which align with the UN Sustainable Development Goals.
For example, global mining companies are focusing on internalising and embedding an integrated approach to ESG. We expect that this trend will continue and intensify. Webber Wentzel has advised on prominent ESG-related transactions in this sector, as well as others, for more than a decade. Most recently, we advised on the high-profile separate listing of Anglo American’s South African coal assets in mid-2021. Our experience in ESG-driven transactions dates back even further, to Anglo American Platinum’s (AAP) Alchemy transaction c. 2010.
Alchemy is Anglo American Platinum’s community empowerment transaction, through which it invested c. R3,5bn to uplift communities around four of its mines, as well as labour-sending areas. The share ownership scheme which underlies Alchemy made the development trust the second-largest shareholder in AAP at the time. The purpose of the scheme was not only ownership, but ensuring the long-term sustainability of communities after mine closure. Alchemy is fully paid up.
A particularly important aspect of Alchemy was that it was built from the “ground-up”, based on a detailed stakeholder mapping exercise, followed by discussions about the proposals in relevant forums, and then the creation of the necessary community structures. The emphasis was on having proper governance structures to ensure proper accounting, transparency, and that trustees represent the broader community, rather than specific groupings, as in the past.
Alchemy won, amongst others, the Project of the Year category in the 2014 regional Core Value Awards for Excellence in Public Participation, hosted by IAP2 Southern Africa (IAP2 SA), the local affiliate of the International Association for Public Participation.
In response to the increasing aversion of leading sovereign wealth funds and other institutional investors to fossil fuels, Anglo American divested its South African coal interests to its shareholders through a new entity, Thungela Resources, which was listed in Johannesburg and London on 7 June 2021. Webber Wentzel advised Anglo American on the transaction.
The restructuring covered all aspects of ESG. The sustainability of Thungela as a coal miner is important to the South African power system, which will be heavily dependent on coal for several years, and to communities around the coal mines.
Anglo American has ensured that Thungela is fully capitalised and, on top of Thungela’s existing black ownership holdings, has granted employees and communities each a near-immediate and unencumbered perpetual 5% interest in the group. Shareholder dividends will be distributed from 2021 – exceeding the requirements of the Mineral and Petroleum Resources Development Act (MPRDA).
From a governance perspective, Thungela has a management team with long experience in the Anglo American group. Both the CEO, July Ndlovu, and the CFO, Deon Smith, held the same roles in Anglo American’s thermal coal business in SA. The Group’s management team has an average of 20 years’ experience in the mining industry.
Thungela also houses the eMalahleni Water Plant, which uses reverse osmosis to turn mining effluent into potable water, which helps to address a critical water shortage in the area. The availability of good-quality water in the area is critical for any future economic development in Mpumalanga.
Beyond water and mining, Webber Wentzel is advising various project developers, lenders, sponsors and investors in the renewable energy bidding rounds. The firm is also actively involved in the private captive power market, which was recently given a boost through the 100MW exemption decision.
Over many years, Webber Wentzel has advised, and is currently advising various mining companies, both in South Africa and elsewhere in Africa, on integrating, consolidating and transforming splintered community initiatives, community shareholding structures or socio-economic development schemes to make them more manageable and relevant. A central element of these projects will be to ensure that appropriate, fit-for-purpose legal and governance structures are in place to manage social projects effectively and transparently, for long-term sustainability post-mine closure. These strategic imperatives also drive policy development on mine closure from an environmental impact management perspective, to ensure that the transition of mining communities to more sustainable economies is justly implemented and does not leave ghost towns and stranded communities in its wake.
From the days of ensuring that a company had a “licence to operate”, through sustainable development initiatives, and now ESG (in its various guises and standards), companies have had to evolve and engage proactively. Investors and stakeholders demand it and they, in turn, are demanding it of their suppliers and service providers. ESG is consequently becoming ever more important in M&A and capital markets, whether as a result of investor pressure, driving long-term shared value, to become an attractive target for investment and/or acquisition, or as an acquirer.
Mbere and Dickinson are Partners | Webber Wentzel.