When conducting due diligence “materiality” always matters. In essence, materiality refers to what is really important or has great consequences. However, what can be considered material in environmental and social due diligence?
Various definitions of materiality reflect differing views on this. Each due diligence situation is unique. An item that is material for one entity may well be of little or no importance for another.
Environmental and social due diligence approaches must be adapted to the nature, scale and location of the asset, and then materiality criteria should be defined, based on experience, projects and similar environments and discussions between the consultant team and the client.
Environmental and social due diligence generally focus on material risks, that is, risks that can affect authorisations, stop or delay projects and operations, result in reputational damage, and/or have a modifying effect on the financial value of assets.
Given these considerations, this article summarises the risk approach we have applied in developing an environmental and social due diligence, on behalf of potential lenders, for the expansion of two mining operations. The work included a review of the sustainability risks and an analysis of the gaps with respect to national and international standards.
To assess materiality of the sustainability risks, the criteria listed below were considered.
- Failing to fulfill the general aims of the existing Health, Safety, Environment and Community program, including: i) Timely permitting; ii) Security and integrity of HSEC information;
- iii) Execution of environmental obligations and compliance with regulations; iv) Execution of social commitments.
- Significant environmental and social incident.
- A significant regulatory action against the mining company.
- Widespread public protest against the mining company.
The materiality of risks was divided into categories of low, medium and high potential, which was a judgment based on the type of risk. The significance of non-conformances with standards was obtained by combining the likelihood and impact. An action plan to address risk and non-conformances was recommended.
