ESG Best Practices for Royalty and Streaming Companies: Where Corporate ESG and Responsible Investment Meet

Published on August 1, 2023 - In Blog Posts

By Rebecca Zentner-Barrett, Director, ESG Global Advisors

Since its inception, ESG Global Advisors has worked with several royalty and streaming companies on ESG strategy and disclosure. Through this work, as well as our work with investors and extractive companies, we have developed a strong understanding of ESG best practices for royalty and streaming companies and the unique challenges and opportunities they face.

This article shares key insights and offers recommendations for royalty and streaming companies who are looking to enhance their approach to ESG.

The Royalty and Streaming Business Model

Royalty and streaming companies offer financing solutions to their partner companies, who are typically operators of assets that require exploration, development, and construction and are therefore capital-intensive (such as mining or oil and gas projects). Under the royalty and streaming model, the royalty and streaming company pays an upfront sum for royalty or stream rights, providing operators with the capital needed to advance their projects. The royalty and streaming company then receives the right to a share of the final product, which can take different forms depending on the terms of the contract (e.g., gross revenue, net smelter return, per ton payment).

It is important to note that royalty and streaming companies are not the operators of the projects. Often, royalty and streaming companies are grouped in with operators (i.e., mining companies, oil and gas companies) when being assessed by ESG research and ratings providers, which is a source of significant frustration for the companies because they do not have direct control over the operations of the projects.

ESG Disclosure Challenges
Royalty and streaming companies face challenges providing ESG disclosure in alignment with investor-preferred ESG reporting frameworks, notably the Sustainability Accounting Standards Board (SASB) Standards. There is no industry-specific SASB Standard that adequately captures their unique business model. Royalty and streaming companies typically report in alignment with the Asset Management & Custody Activities Standard; although there are many recommended disclosures under this Standard that do not apply to them. Additionally, many investors feel that the Asset Management & Custody Activities Standard does not recommend metrics for disclosure that allow them to assess royalty and streaming companies’ management of indirect ESG risks (i.e., asset-level ESG data such as portfolio greenhouse gas emissions). Given that the SASB Standards form the basis for the International Sustainability Standards Board (ISSB)’s IFRS Sustainability Disclosure Standards, it is important to be aware of this challenge. The ISSB is revising the SASB Standards to ensure that they are suitable for global use so this could be an opportune moment for royalty and streaming companies to engage with the ISSB and provide feedback.

ESG Disclosure Challenges

Royalty and streaming companies face challenges providing ESG disclosure in alignment with investor-preferred ESG reporting frameworks, notably the Sustainability Accounting Standards Board (SASB) Standards. There is no industry-specific SASB Standard that adequately captures their unique business model. Royalty and streaming companies typically report in alignment with the Asset Management & Custody Activities Standard; although there are many recommended disclosures under this Standard that do not apply to them. Additionally, many investors feel that the Asset Management & Custody Activities Standard does not recommend metrics for disclosure that allow them to assess royalty and streaming companies’ management of indirect ESG risks (i.e., asset-level ESG data such as portfolio greenhouse gas emissions).

Given that the SASB Standards form the basis for the International Sustainability Standards Board (ISSB)’s IFRS Sustainability Disclosure Standards, it is important to be aware of this challenge. The ISSB is revising the SASB Standards to ensure that they are suitable for global use so this could be an opportune moment for royalty and streaming companies to engage with the ISSB and provide feedback.

How are ESG Factors Relevant to Royalty and Streaming Companies?

Identification of Direct vs. Indirect ESG Risks and Opportunities

There are many parallels between the ESG profile of a royalty and streaming company and an equity investor. Both royalty and streaming companies and equity investors face exposure to a set of direct ESG risks and opportunities that could directly impact the value of their business, such as their ability to attract, retain and develop sufficiently skilled and diverse employees to execute on strategy (i.e., human capital management), business ethics, etc.

However, the most significant exposure that they face with respect to ESG risks and opportunities that could impact of the value of their business is indirect via the operators of their assets (for royalty and streaming companies) or portfolio companies (for equity investors).

For a royalty and streaming company, the most significant potential impact to value would be an interruption in operations at an asset, disrupting the royalty or stream. Asset operators are exposed to a range of ESG risks that could impact operations and financial performance, such as relationships with local communities and the ability to access key inputs for production like water and energy. These ESG risks for operators represent potentially material indirect ESG risks for their royalty and streaming company partners.

Integration of ESG Factors in Due Diligence

To a certain extent, the fates of the royalty and streaming companies are in the hands of their operators which makes asset selection particularly important. This is akin to the importance of ESG due diligence for private equity investors. Time horizons for royalty and streaming companies are a lot longer than typical equity and debt investors – so who they partner with really matters.

During the due diligence process, it is important for the royalty and streaming company to assess the ESG profile of the asset over the long term considering key questions such as:

How will the community feel about the project?
How will the project fare during the transition to a lower carbon economy?
How could the physical impacts of climate change impact ability to access key inputs for production or ability to generate value?

The most significant opportunity for royalty and streaming companies to influence a project arises when they are making the initial investment. So, it is important for ESG factors to be considered and raised during the due diligence process, which requires an understanding of operating companies’ exposure to ESG risks and opportunities.

Monitoring of ESG Factors

Once the initial investment is made, royalty and streaming companies will monitor performance of assets to ensure key risks are being managed. This should include monitoring assets’ material ESG risks. Royalty and streaming companies are long-term holders of their assets, but a key challenge is that they have little influence over operators once the initial deal is done. This is a significant difference from traditional equity investors, who are able to exert influence over portfolio companies via engagement and proxy voting and who can change their ownership position. Royalty and streaming companies do not have the same opportunities for engagement on ESG factors or flexibility with respect to their ownership position.

Additionally, royalty and streaming companies are owners of specific assets and not entire companies. This ownership model raises significant challenges in monitoring ESG performance of specific assets because operators rarely disclose ESG data at the asset level. If royalty and streaming companies do not include the provision of specific ESG data in initial agreements with operators, it will be challenging for them to formalize the assessment of ESG performance on an ongoing basis over the life of the project.

This challenge is similar to the ESG data challenge faced by private equity investors. Private equity investors take positions in unlisted companies that often do not disclose ESG data publicly. The ESG data challenge for private equity investors was so significant that it led to the creation of the ESG Data Convergence Initiative which aims to create a standardized set of ESG metrics for private markets transmitted directly from General Partners to the Limited Partners/investment managers to enable assessment of ESG performance of portfolio companies.

Despite the challenges, there still exist opportunities for royalty and streaming companies to monitor and manage ESG factors. An important benefit of the royalty and streaming model is that royalty and streaming companies share expertise with operators, which could include expertise on ESG. A notable emerging practice in the industry is the inclusion of financial support from royalty and streaming companies for ESG initiatives at the asset level to ensure asset operators are in a strong position to manage ESG risks.

Recommendations for Royalty and Streaming Companies to Enhance their Approach to ESG

Developing a robust approach to ESG is important for royalty and streaming companies because of the long-term nature of the agreements with operators and the range of ESG risks to which operators face exposure. Royalty and streaming companies looking to enhance their approach to ESG should consider the following recommendations:

Conduct an ESG materiality assessment to identify, assess and prioritize material ESG factors. This should include assessing exposure to both direct risks faced by the company and indirect risks via operators.
Develop an ESG Policy. ESG policies can take many different forms and there is no single approach to developing an ESG policy. Ultimately, the policy should communicate the company’s views on ESG and commitments related to the consideration of ESG factors in company practices. Best practices exist for the development of ESG policies for investors, including private equity investors, which could serve as a good starting point for royalty and streaming companies looking to develop an ESG policy.
Develop an approach to formalize the integration of ESG factors into the due diligence and monitoring process. The main way that royalty and streaming companies can reduce exposure to ESG risks and capture opportunities is to integrate ESG factors into the investment process. Most companies are already considering ESG factors via these due diligence and monitoring processes given their potential to impact value, but formalizing this approach is an important step to ensure all material ESG risks are being considered appropriately.
Disclose details on the company’s approach to identifying, assessing and managing ESG factors. There is increasing investor interest in enhanced ESG disclosure for all companies. Specific to royalty and streaming companies, investors are primarily concerned with how these companies are assessing and managing indirect ESG risks via operators. Generally, investors have expressed preference for ESG disclosure in alignment with the SASB Standards and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As outlined above, the SASB Standards in particular present a challenge for royalty and streaming companies. Therefore, it is important for royalty and streaming companies to clearly explain in ESG disclosure their unique business model and offer alternative relevant information on their strategies to assess and manage ESG factors.

It is important to keep in mind that the development of a robust approach to ESG is an ongoing journey and the ESG landscape continues to evolve rapidly. Investors are not expecting perfection on ESG right at the outset; they seek continuous improvement over time. Companies building a strong ESG foundation today will be well positioned to meet investor expectations now and in the future as the market continues to evolve.