Masterclass: ESG

To view the full video, please go here: MASTERCLASS: ESG - March 2023

Overview

Asset TV asked three experts to discuss the constantly evolving discourse surrounding ESG, challenges faced in standardizing ESG ratings and ESG-based investing. The panel digs into how ESG can be integrated at an equity investment as well as mineral extraction level, and the reality of what the “energy transition” means in terms of commodity demand, the capital expenditure required and energy sources used.

• Edward C. Coyne, Senior Managing Partner, Global Sales, Sprott Inc.
• Jason Chen, Research Analyst, DWS Research Institute
• Shawn Reynolds, Portfolio Manager, Global Resources, Environmental Sustainability, VanEck

Video Transcript

Jonathan Forsgren, Asset TV: ESG has been grabbing headlines over the last few years, and the term ESG is ubiquitous in everyday life. Yet, while most people could tell you the acronym stands for Environmental Social Governance, there remains a wide range in the way it is interpreted, applied, and measured. Ed, to kick us off, can you give us a high-level overview of Sprott's business and how Sprott defines ESG?

Edward Coyne: First, thanks for having me today. Sprott is a unique firm. We've got over four decades of experience in the precious metals, real assets and, more recently, energy transition material and mineral markets. That four decades of experience focused on precious metals and real assets has given us a huge leg up in thinking about the global economy and how people are using and looking at energy transition materials.

At Sprott, with four decades of experience and over $21 billion in assets, we continue providing our clients ways to allocate to the physical markets, whether in traditional gold and silver or more modern assets such as platinum, palladium and uranium. We also have a full suite of equity solutions, including active mutual funds like the Sprott Gold Equity Fund and our factor-based ETFs that give clients exposure to both senior and junior mining companies.

We also have a suite of private equity and private credit offerings, where we raise capital and loan it to small to mid-cap mining companies for operating leverage purposes.

In short, we have a full suite of solutions in the mining and real asset space. We've been in this business for more than four decades. We're a publicly traded company. We trade on both the Toronto Stock Exchange and the New York Stock Exchange under the same ticker symbol SII.

The way we define ESG proceeds naturally from our history as a firm. You can't be in the mining business and not think about the environment. You can't be in the equity business and not think about corporate governance. You have to understand who the best actors and best managers are, and so forth. The mining industry has been playing a large role in the social space for decades.

In addition, mining is concentrated in parts of the world where there is not a lot of economic opportunity. There are not a lot of opportunities for the development of public roads, running water or electricity — just the basics. From a social standpoint, mining can bring a traditional lifestyle or benefit to those parts of the world that maybe didn't have them in the past.

ESG is clearly evolving, but it's really always been part of our industry and our business for decades, and we think that's going to continue to expand over time, and we welcome that.

Jonathan Forsgren, Asset TV: Ed, coming back to you, how has the ESG discussion evolved over the years in both your direct discussions with company management, boards, industry groups and peers in the context of a potential investible opportunity with clients?

Edward Coyne: A lot of our clients are still in the fact-finding mode. We make a lot of presentations to boards, family offices, state agencies, endowments and so forth. A lot of times they're still sort of figuring out where ESG fits in their portfolios. Many of these organizations are self-directed. When we talk about family offices and so forth, it's going to be on a family office by a family office basis.

Sometimes the source of the client’s wealth influences how important ESG is to them. It just really depends on the industry they came from. I think we're still very early days in how people are looking at ESG as relates to their portfolio. Having said that, we also do a lot overseas and in parts of Europe in particular, ESG has been a larger focus to the point where they have mandated X percent of their portfolio has to be ESG-focused or ESG-weighted in the portfolio.

Services like Sustainalytics give us ratings for stocks in our portfolios, which we use for reporting purposes. It's really interesting to see how the clients themselves or the potential investors or existing investors are still really thinking about this. We're not seeing a top-down mandate yet. Like I said at the start, many of these investors are still in a fact-finding mode.

At the advisor level, traditional brokerage firms and advisors are mostly reacting to clients. They have clients that want ESG to be a bigger part of their focus, they're looking for solutions that can check that box. It's an ever-evolving part of the market.

Returns certainly have an impact on that, and I think over time we'll become a bigger part of the narrative. We're still very much early days. ESG isn’t really driving the process yet.

Edward Coyne: There have been seismic changes in the narrative in the last four or five years. The reality has set in that all the things we have taken for granted have ESG implications. Even something as simple as a cell phone derives most of its components from the ground. Cell phones have synthetic parts as well, but a lot of that stuff came from the ground from real assets, minerals and so forth.

As we move toward a carbon-neutral future—and companies like Ford and Honda are saying they want to be fully electrified by 2030 to 2035—it will be difficult to make progress without a robust mining industry. There's the perception of a mine, and then there's the reality of its need. I like to define them as two separate terms. On the extraction and refinement side of the industry, ESG has a long way to go, but an increased focus on sustainability will allow better actors and better companies to rise to the top.

An emphasis on ESG makes them hold them more accountable, and more transparent and allows these companies to shine by doing the right things. That part of the industry, the mining part of the industry, we think is going to continue to thrive as more investors say, "I realize that we want wind and solar and battery and electrification of cars and so forth, but we also realize and understand that that has to come from somewhere."

The extraction side of the business I think is benefiting greatly from ESG. Then, you get to the consumption side, and it's not “either/or” but “and/or.” Fossil fuel and renewables have to work together. Oil and gas are going to be around for a very long time. They are not being replaced tomorrow. It's the old concept of the hybrid car.   

We need all baseloads. Whether you're talking about energy or electric cars, whatever the case may be, you need baseloads like nuclear, and then you need alternate loads like wind and solar, and so forth. Those that want to support and protect the environment and allow it to thrive, are recognizing that mining is a very important component of that approach.

You really can't get away from it. I would argue that ESG has been one of the best things to happen to the mining industry because it's starting to shine a light on it in a more transparent way. It’s allowing the better actors, the better companies, the companies have done great work for decades to start to get recognized and say, "There's a way to do this where you can be environmentally conscious, you can be sustainable.”

You can care about the environment and protect the environment, and yet still bring these resources to market and provide for all the technologies that we've started to take for granted, such as the iPad and the technology that we're working on today. Precious metals and real assets and minerals are part of this equation. All the touchscreens we use come out of the ground. We need to mine for those materials, but we can do it in a way that’s cleaner and more energy efficient.

So, there’s this whole question around how we consume minerals going forward. You can have an environmental impact and be pro-mining at the same time. We think that can exist, and we're seeing more investors embrace that.

Edward Coyne: The World Gold Council does a lot of wonderful research and they put out a lot of white papers. We reference their work all the time on our website. There's also a Silver Institute, and then there's basically every metal and mining industry out there has a specific institute, a Copper Institute and so forth. They're all out there championing their particular marketplaces.

A couple of years ago, people didn't even think about that. And more and more people are reading about these different markets in a way they haven't in the past. I would say for those that are interested, I would start with World Gold Council. They do a great job. They talk predominantly about gold and silver, but they're starting to talk more and more about ESG in general also.

They do a lot of great work and a lot of the other companies out there are creating more white papers and intellectual capital that you can reference. There are a lot of agencies out there that look at this and say, "What are the best practices? What are we seeing from the largest cap companies, the most established companies out there? How are they operating?" They are creating some standards.

Again, I go back to what I said earlier, it's still very early days and still evolving. Also, about it's not a rating that's a one or a zero, it's an evolving process that you have to look at over time. Yes, those do exist.

There are times for each of these in factor timing. It’s quite a complicated topic in general, but value typically does better in early recovery cycles, while growth will do better in monetary easing cycles. I would think about high dividend approaches more as a general bias towards less risk. In a way, you are mitigating some of the risks of companies that are unable to grow dividends over time, for instance.

Edward Coyne: At Sprott, we're not necessarily running any particular screens and looking at the ESG rating, and then deciding if a stock gets included or excluded from the portfolio. However, having said that we do have a lot of internal tools and we do use external tools. The external tools mostly look at our portfolio after the fact. We look at what percent of it has a higher rating versus a middle rating or versus low rating.

We report that to our investors where that's part of their mandate. We create heat maps, for example, particularly in the mining industry where green zones, yellow zones and red zones indicate where you'd want to invest and where you wouldn't want to invest. It's based on very simplistic things like the rule of law, the risk of being nationalized and that kind of thing.

Even when there's a great deposit, you may not go there because the rule of law is not recognized or they have a history of nationalizing productive mines and so forth. We're looking at all those things as part of our portfolio construction process when deciding whether to include or exclude holdings, but we're not specifically looking at any single rating. I think that's largely because the ratings are still evolving.

Just two years ago, the most established rating agencies were still looking at apples to oranges, meaning they were comparing car manufacturers to mining companies to tech companies. Of course, a mining company is going to have a lower ESG score as it relates to the environment, just based on the pure nature of what they do for a business.

Now, we're seeing more and more of these companies say, "Within the mining sector, who are the best actors? Who are the best operators, who has the best corporate governance and so forth within that sector?" We're seeing this evolve literally as we're having this conversation, and that's going to be a much better way to think about it. Certain industries are going to have a more negative or positive impact on things like the environment than other industries.

Once you start to categorize these things, I think that we'll all benefit. Then you can start truly looking at an apple versus an apple versus the mixed bag. I think mining in general will benefit. You’ll be able to see who has better management and more sustainable mines from a construction standpoint and so forth.

We’ll also be able to compare how companies bring the mine back to or back to its original form, pre-mining, pre-extraction. Companies that do this well will continue to rise to the top. It’s still evolving. There's no black and white to this yet. However, we certainly consider it, look at it, and certainly after the fact we look at our rating and try to understand that rating. We’re not doing that on the front end necessarily because we're still looking for the best companies out there. We want to recognize who we own and why we own them.

Jonathan Forsgren, Asset TV: Speaking of transition, Ed, Sprott's history has traditionally been in gold and silver, but more recently Sprott has expanded into many more metals and minerals that potentially support a carbon natural future. How do you see silver and gold playing a role going forward?

Edward Coyne: Sprott, as you mentioned, has focused primarily on gold and silver for more than four decades. Gold was my first focus. I call it the original alternative investment. When you think about gold's role, it is really an alternative currency. It's still a monetary metal. There are some technological uses for gold, and in some cases, gold is the only solution for some of the technologies out there, but it's a very small part of gold.

It would be disingenuous to say, well, gold is going to have a huge impact on the environmental future. It's still going to be living in that monetary metal part of the market. Silver, on the other hand, is different in that it’s used more and more in technology. From 5G network cell towers to the reflective technology of solar panels, silver is playing a big role.

As the reflective technology of self-driving cars has evolved, silver has become more of a consumer metal and less of a monetary metal. Platinum and palladium are another great example. I always joked that platinum and palladium were ESG before ESG was cool. Platinum and palladium are used in catalytic converters to help clean the air from the tailpipe.

We're seeing all these traditional precious metals in many cases be reinvented. Silver is leading the charge. Then, of course, there are all the real assets and minerals out there like cobalt and copper. Copper is a metal that we have in downspouts on our houses, the wiring in our homes, the electronics that we use in batteries and so forth. Copper is one of the oldest most traditional metals out there, and it's becoming one of the more modern metals.

Really we can't do any of this without copper. We're seeing this natural progression in all metals and minerals within our space. I think having the four-decade-plus track record, having over $21 billion, and having the relationships we have has really put us at the center of this change. We can have a voice and do these deals and create these partnerships with all these industries out there.

We in fact have an ESG-specific physical trust. It’s an ETF that allows investors to own physical gold that comes from the highest-rated mines out there. These things are going to continue to evolve for us, and we're excited about that. Being a traditional gold and silver company, you would think on the surface sort of puts you in the back seat. The reality is it's really put us front and center and allowed us to have a conversation and put us at the table as it relates to all real assets.

We're going to continue to evolve in that way. We've had tremendous success getting involved with physical uranium, for example, which I know we'll talk about in a bit. We've had some tremendous success raising capital both on the physical side and on the equity side. We think that growth will continue as the market seeks further solutions in the real asset market.

Edward Coyne: Right now, about 20% of the US and 10% of the world is powered by nuclear energy. France is leading the charge. They're at about 70%. In contrast, until recently, Germany had basically no nuclear power until the war in Ukraine forced them to reconsider.  

That's changing drastically, right? It's important to note that it's not one versus the other.  A couple of hundred years ago, we were heating our homes with wood and then coal. We continue to move more efficiently into oil and gas, natural gas, and now wind and solar and so forth. Nuclear has been coming along also.

You need all of these things to work. You have to look at different parts of the world and different economies. You have to understand what their particular needs are and what natural resources they have access to. China is currently building 20-plus new nuclear reactors, but they're also building coal plants. It's not one or the other on these things, you need all of them.

Nuclear power is proving to be one of the cleanest forms of energy, as well as one of the most dependable that you can run 24/7. It's really the baseload. Other energy sources like wind, solar and hydro can support that. Battery technology is way behind as far as storing massive amounts of grid energy. You can certainly do it on a home basis, but to do it from a power plant basis, we have a ways to go on that.

I think you're going to need all these things. We recognized that a few years ago. We were like the dog catching the car. We weren't really sure what we had until we had it. Then, it expanded rapidly. We've raised over $3 billion in the physical market and over $1 billion in the equity market to invest in uranium. We took it from monthly subscription pricing to daily nav pricing. We think that's going to continue.

We see the same thing in the battery metals market, whether it's cobalt, nickel, lithium or copper. We’re getting more involved in all those metals. Uranium was our first test into that space, and we had tremendous success there. We think the market's appetite for that is going to continue to expand, particularly if we stay tethered to the 2050 carbon neutrality goal.

If that's a true goal of governments around the world, we can't get there without sources like nuclear. If that remains a viable goal, then we would expect nuclear to continue to play a larger and larger role globally in providing power to the world.