Aperio Intelligence webinar: Critical materials experts debate impact of higher sustainability standards

On Wednesday 27^th January 2021, Aperio Intelligence hosted a webinar to debate the impact of growing regulatory, investor and reputational pressure on companies in the critical materials sector to adopt higher standards of sustainability and ensure responsible supply chains.

A recording of the webinar is available here.

EU challenges to secure raw materials

• The EU faces significant challenges to secure future supplies of rare earths and critical materials considered crucial to the EU economy and clean energy transition. Magnets for wind turbines and batteries for electric cars rely on materials like lithium and cobalt, while several rare earths are also indispensable to Europe’s defence and aerospace industries. 

• 98% of supplies consumed by the bloc come from China, which not only maintains a significant share of the world’s mined raw materials but also dominates downstream processing and value addition.

• Ludivine Wouters, Managing Partner of the advisory firm Latitude Five, said that the EU’s Critical Materials Action Plan, launched in September 2020, marked the alignment of the bloc’s imperatives to both diversify supply and promote responsible sourcing on a global scale:

“The goal is to establish or develop lasting relationships and lasting industry sectors, and it is very much acknowledged within all the EU architecture now that the sustainability and transparency of these relationships and the industries that underlie them is essential to commercial, economic and industrial success.”

Consumer Pressure

• Growing societal expectations have led to tighter regulation and disclosure requirements that are forcing companies throughout the value chain to prioritise sustainability or Environmental, Social and Governance (ESG) issues.

• Roberto Garcia Martinez, the CEO of Eurobattery Minerals which is developing mining projects exclusively in Europe, cited steps taken by car manufacturers BMW and Daimler in late 2020 that mean the firms will no longer buy uncertified minerals:

“The key driver from the consumer at the moment is full transparency. Everyone who buys an electric car wants to know where the minerals are coming from, where the batteries are made.”

• The consumer and EU-led drive for sustainability represents an opportunity to develop both mining production and much-needed processing capacity within Europe where there are untapped reserves of rare earths. The European regulatory code around mining offers opportunities to ensure transparent supply chains, in contrast to the status quo whereby materials are shipped from countries with weak governance environments in the global south to China for processing, and then onto to the EU as manufactured products.

Investment challenges

• The evolving landscape around sustainability and establishing responsible supply chains presents several challenges for investment firms and early-stage projects, particularly those looking to secure the interest of institutional investors. George Donne of the private equity firm Greenstone Resources, noted:  

“The message is very clearly there now that these big institutions will not make exceptions so if you do not embrace sustainability, embrace ESG and really put it at the front of your platform, you will not get investment,”

• For mid and junior tier mining companies this puts a significant strain on resources and presents investment managers with a conundrum between fulfilling their fiduciary duty to grow value for their clients and a separate requirement to adopt effective and potentially costly stewardship measures across the portfolio.

• Growing expectations around disclosure and ESG standards are at odds with investing in many of the small-scale rare earth and critical materials extraction projects that will be crucial to securing future mineral supplies. Fifty percent of the world’s tantalum supply comes from artisanal mining production in central Africa where it would be highly challenging to implement international standards of ESG.

A more sustainable future?

• The current ESG environment has led to a lot of “cosmetic” activity in the industry that does not necessarily constitute more responsible practices.

• However ESG concerns have seen certain mining companies pressured by investors into improving their levels of governance, in some cases with CEOs being forced to stand down. .

• The adoption of voluntary global standards such as the OECD Due Diligence Guidance for Responsible Supply Chains by actors such as the London Metal Exchange could pressure companies to act.  Wouters, Managing Partner of Latitude Five, noted:

“Increasingly restricted space for materials trading outside of these controlled and transparent value chains could be the most effective factor of change, rather than a lot of discussion or even global regulation.”

Aperio Intelligence conducts ESG analysis and assessments on behalf of financial institutions and corporates across sectors.

• Discreet ESG due diligence and supply chain risk analysis
  • Subjects include potential investees, suppliers or links in overall value chain.
  • Identify the subject’s prevalent ESG risk exposures such as child labour, employee relations, toxic emissions or biodiversity.

• Corporates’ risk assessment and ESG performance evaluation
  • On-site assessments of corporates or suppliers’ key ESG risks and mitigation performance.
  • Support clients to identify and manage their risk exposure over time.

Contact: Simon Jennings, Head of ESG – Simon.Jennings@aperio-intelligence.com