2019 REVIEW: ESG issues no longer niche

Environmental, social and corporate governance (ESG) is no longer a niche concern in the natural resources sector.

Corporate governance and community issues have typically dominated the sustainability and ethical criteria of mining companies and their investors. But more recently, the focus has shifted.

Environmental factors, particularly decarbonization, have come to the fore amid increasingly stringent regulation and intensifying consumer pressure to reduce greenhouse gas emissions.

Think of 16-year old Swedish student-turned-activist Greta Thunberg addressing the United Nations, climate change strikes around the world, and activists from environmental group Extinction Rebellion gluing themselves to trains and to the entrance of the London Stock Exchange.

It was impossible to attend key major international conferences in 2019 without hearing industry executives discuss ESG issues.

For metals and mining firms, this has meant added pressure to increase transparency in a plethora of metrics including carbon emissions, waste and dust management, and water usage.

It has also led to a shake-up in the product mix of major producers as well as a push to achieve higher prices for low-carbon material.

Eco-metal efforts
Aluminium, which already has relatively strong environmental credentials due to its infinite recyclability, has been an early mover in this area.

Large producers such as Alcoa, Norsk Hydro, Rio Tinto and UC Rusal have been producing metal with a low carbon footprint, nicknamed “green aluminium,” for the past several years. They are building on the work of the Aluminium Stewardship Initiative (ASI), which began around a decade ago and now has several performance and chain-of-custody standards applicable to the entire supply chain.

In steel, an industry that is 10 times larger than aluminium, the world’s four largest iron ore producers – Vale, Rio Tinto, BHP and Fortescue Metals Group – are working on ways to restrict the environmental impacts of their operations. Their sector was shaken earlier in the year when the fatal rupture of Vale’s Brumadinho iron ore tailings dam in January catapulted ESG issues to center-stage.

There is now a third-party certification and standards program for the steel value chain, approved in November by multi-stakeholder organization ResponsibleSteel. Its 12 principles cover ESG management systems, climate change and greenhouse gas emissions as well as noise, emissions, effluents and waste.

Manufacturers of electric vehicles are meanwhile increasing scrutiny of the carbon footprint of the raw materials they use, including copper, nickel and lithium. Some producers are falling short in areas such as energy consumption, water use and pollution. The respective industries are reacting, with each promoting the varying green properties of their material and the methods they are using to cut emissions.

Investor pressure
Investors are meanwhile putting increasing pressure on producers of fossil fuels such as coal and are changing the asset structure of corporates in the process.

Glencore will prioritize electro-mobility materials and not increase coal production further, In February. The move followed talks with shareholders who signed the Climate Action 100+ initiative, backed by around 300 investors with more than $32 trillion in assets under management.

But clearly that was just a starting point. In June, Norway’s Wealth Fund further tightened its rules on investing in companies that mine coal, saying that it would no longer invest in firms that mine more than 20 million tonnes per year of coal or generate more than 10GW per year of coal power.

The sovereign wealth fund, which is the world’s largest, has stakes in Glencore, Anglo American and BHP, each of which produced more than 100 million tonnes of coal last year. It was another reminder to coal producers that climate change is at the forefront of investors’ minds.

In contrast, the fund has reinvested in Rio Tinto after an absence of more than a decade due to an assessment of the risk of environmental damage related to the Grasberg mine in Indonesia. Rio Tinto divested its stake in the mine last year and has also exited the coal business.

Increased transparency requirements could also drive miners to exit certain markets or, at the very least, improve their ESG records.

Green premiums
The new technologies required to achieve improved ESG do not come cheap and, quite naturally, resources firms that invest in them are looking to recoup their monies.

For aluminium companies, this has meant promoting the message that the eco-friendly metal they produce is worth a premium. How big that premium is and who is paying it is another matter. No producer is yet willing to openly quote a commercial price; no consumer to date has publicly stated that it will pay up for greener metal.

At least one major exchange is already looking at green aluminium premiums although, with a lack of data sets from which to work, progress may be fairly slow.

To be fair, the marketing of green products is at a nascent stage, with the first goal seemingly to differentiate the clean producers from their less environmentally friendly peers.

That is an objective that has been relatively successfully achieved in aluminium this year, with green producers expounding the mantra that fossil-fuel-dependent nations such as India and China risk being left with assets that it will not be viable to mine, process or refine when ESG issues gather momentum.

Whether that is the case or not, it is entirely possible that government regulation or shareholder activism will eventually push green premiums over the line. Expect other metals to follow suit while producers sharpen their green credentials although, as with aluminium, the jury has yet to deliver its verdict as regards consumer uptake – at least, initially.

Whether one believes in climate change or not, ESG has now moved from being a matter of philanthropy to one of practicality.
 

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