Commodities risk in ESG funds is now too big to ignore, says alliance of investors
THE dark side of investing in environmental, social and governance (ESG) funds has the potential to undermine a whole generation of clean-tech strategies.
The risks posed to the renewables boom via the mining industry are not getting enough attention, said Adam Matthews, chief responsible investment officer at the Church of England Pensions Board. The upshot, the 47-year-old added, is that portfolios intended to uphold ESG principles may end up being exposed to human-rights abuses and environmental damage through supply chains.
This issue led Matthews and other investors to recently form an alliance, with the aim of shining a spotlight on the topic to make it much harder for fund managers to plead ignorance. The Global Investor Commission on Mining 2030, which is being advised by the United Nations, plans to expose and fight what it calls the systemic risks that stem from the link between mining and the clean-energy industry.
“The auto sector is massively exposed, as are wind-turbine manufacturers,” Matthews said, adding that there is also “huge demand” for minerals such as copper and lithium, which are “enormously important to low-carbon technology”.
But “we should be under no illusion” about the fact that such minerals and metals often come from areas in which “unstable government structures” are the norm, and where the dynamics around mining “play a role in conflict”, he said. The renewables boom that is now under way risks “inflaming and exacerbating” such instability.
The building blocks needed to expand wind, solar and electric-vehicle production will require considerably more minerals and metals than combustion-powered technology. The World Bank estimates that by mid-century, the amount of raw materials necessary for the green transition will soar 500 per cent. And with new legislation – such as the US Inflation Reduction Act – turbocharging demand for clean tech, that pressure is set to soar.
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“We have some companies that are good practitioners, but that’s not representative of the whole sector,” Matthews said, declining to identify the firms.
Analysts at BloombergNEF estimate that the path to net-zero may require digging up 5.2 billion tonnes of metals until 2050, which may be worth as much as US$10 trillion.
Some companies are trying to reduce their exposure to risks by either looking for ways around raw materials, or taking direct control of supply lines. Tesla is redesigning batteries to avoid cobalt and nickel. General Motors recently invested US$650 million in Lithium Americas, which is developing a mine in Nevada.
Manufacturers in the renewables industry and their investors already face a stricter regulatory environment in some key jurisdictions. The European Union (EU) has made it clear that it does not want to fall victim to the same dependency on the suppliers of raw materials, such as lithium, as it suffered with oil and gas.
In September, the bloc unveiled the Critical Raw Materials Act, which aims to secure “sustainable access” to the minerals and metals needed to achieve climate neutrality.
The EU’s Corporate Sustainability Due Diligence Directive is another avenue through which the bloc plans to ensure that companies screen their supply chains for ESG risks.
Such initiatives follow shocking evidence of human suffering as a result of mining. Last year, testimony gathered by non-profit Human Rights Watch described the prevalence of child labour in the mining industry of the Democratic Republic of Congo, which sits on about 70 per cent of the world’s cobalt. Most of that is produced at industrial projects controlled by multinational companies, including Glencore and CMOC Group.
Indonesia, which produces roughly half the world’s nickel, recently claimed it had overtaken Russia and Australia to become the planet’s second-biggest source of cobalt.
In South America, meanwhile, mining has had a devastating impact on local populations. In 2019, a mining-waste dam at a Vale iron-ore mine in the Brazilian town of Brumadinho collapsed, killing 270 people. Vale subsequently agreed to pay US$7 billion to the state of Minas Gerais, which will use the funds for socioeconomic and environmental programmes to repair the damage caused by the collapse.
China, which is the world’s biggest refiner of minerals and metals needed in batteries, relies on coal to power the plants doing that work. And coal companies, such as Thungela Resources, have even tried to frame the dirtiest fossil fuel as an essential ingredient in the renewables boom.
Matthews said miners clearly play an essential role in the transition to a more sustainable economy, so excluding them from portfolios is not tenable for ESG investors. Sometimes, however, there is no choice.
The Church of England Pensions Board exited its entire Vale stake as the full horror of the 2019 dam collapse became clear, and spearheaded a campaign to improve mine safety.
The goal is to expose and isolate the bad actors, and apply much higher standards of accountability as mining’s vital role in the green transition grows.
While “we need mining”, the process of extracting raw materials for the renewables revolution cannot be “a mad scramble to meet the demands where there’s no consultation with the community”, Matthews said. Otherwise, the industry will “lose the social licence” to continue its work. BLOOMBERG
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