Investors are increasingly vigilant about the environmental, social and governance (ESG) performance of mining investments. Corruption affects many mineral-rich countries, and this has a real impact on ESG outcomes, especially for communities impacted by mining.

The aim of this briefing paper is to answer the following three questions:

1. Why do investors need to include corruption risks as part of ESG screening?
2. What corruption risks and red flags should investors look out for?
3. How should investors respond when they detect corruption risks?

This paper is focused on the corruption risks in the licensing of new mining projects. This focus stems from the fact that the licensing phase is particularly susceptible to corruption given the frequent touch-points with government, communities, and high business stakes to secure the deal. When a company secures its mining rights through corruption its automatically classified as a risky investment because the company and its directors could face prosecution, legal penalties, economic sanctions, or blacklisting.

Corruption risks are a financially material consideration for due diligence on a potential investment. As part of ESG screening, investors need to recognise that corruption, environmental and social impacts are interconnected. Human rights abuses and environmental damage often co-exist with corruption where government institutions are weak and/or where the voice of civil society and the media is stifled. For investments in mining to be truly responsible and not complicit in illegal or unethical conduct, investors must investigate the corruption risks related to the mining project and their impact on ESG outcomes.

Moreover, the briefing argues that the following three risks are a function of a mining company’s overall investment risk and as such should be evaluated in the ESG screening process:

1. Country risk: refers to the corruption risk profile of the country where the asset is located.
2. Licensing risk: refers to the potential presence of corruption risks in the process of allocating mining rights.
3. Company risk: refers to the presence of red flags in how the company secured its mining rights and the strength of internal anti-corruption controls.

The paper lists various strategies that investors can undertake to drive sustainable business practices within mining firms to avoid corruption risks:

• Learn about the types of corruption risks in the licensing process of the mining sector in target jurisdictions.
• Screen for corruption risks as part of responsible ESG due diligence on mining investments considering country risk, licensing risk, and company risks and red flags.
• Clearly communicate their anti-corruption expectations and standards so that companies know what to disclose and what they need to change.
• Engage with companies at the due diligence stage to better understand their anti-corruption policies, implementation, and culture.
• Continue engagement and monitoring after investing to promote company uptake of responsible business practices and improvements in anti-corruption policies, practices, and culture.
• Escalate pressure and work with other investors to influence reluctant companies to improve their systems and practices.

1. As part of ESG screening, investors need to recognise that corruption and environmental and social impacts are interconnected with human rights abuses and that environmental damage often co-exists with corruption.
   
2. No investment that contributes to, or profits from, corruption and unethical conduct is a responsible investment. Investors need to be concerned about corruption affecting their investments in mining.
3. The licensing stage of new mining projects and expansions is particularly susceptible to corruption given the frequent touch-points with government and communities and the high business stakes to secure the deal. According to the OECD, one in four cases of corruption in the extractive sector occur during this initial phase.
4. A company that has secured its mining rights through corruption is a risky investment and as such corruption risks are a financially material consideration for due diligence on a potential investment. There are three key areas investors need to consider as part of due diligence on mining investments: country risk, licensing risk and company risk.
5. Investors need to make corruption risk management and responsible business conduct an expectation of the mining companies they invest in. This is especially critical because of increasing demand for investment in high-risk and emerging markets to source the minerals and metals required for the energy transition.
6. Screening potential investments by the level of corruption risk in the country or jurisdiction is a critical first step to inform investment decision-making.
7. Investors also need to investigate the level of corruption risk in the mining licensing process, particularly in high-risk jurisdictions. This will provide more granular information about the extent to which the company has been or is likely to be exposed to pressure to engage in bribery and corruption when securing the rights to mine. This also includes screening co-owners or joint venture partners of the mining project.
8. To guard against investments that enable or are complicit in corruption and adverse impacts, investors need to investigate (1) how the company secured its mining rights, including the involvement of any business partners, and (2) the company’s internal governance and track record on preventing corruption in its business.
9. While beyond the scope of this briefing paper, investors should also consider the exposure of the company to ongoing corruption risks throughout the lifecycle of the mining project, as these can create systemic problems for the asset. These include corruption risks related to import/export permits and dealings with customs officials, licence renewals and site inspections.
10. Throughout the paper, there are helpful indexes, frameworks, standards and other databases that can help an investor report and assess levels of corruption. Refer to pages 5, 9, 10, 13, 16 and 20 for more information.