Industry

Investors Urged to Recognise Duality of Mining

A nuanced approach is required to strike the right balance between evaluating the environmental effects of mining and meeting demand for critical minerals.

Investors must differentiate between mining activities that are vital for the energy transition and those that are harmful, Energy Transitions Commission (ETC) Chair Lord Jonathan Adair Turner told ESG Investor. 

According to a new report by the ETC, there are sufficient natural resources and minerals to meet the needs of a zero-carbon energy system that will impose far fewer environmental impacts compared to the current fossil fuel-based one.  

“When examining the large-scale direct and indirect deforestation impacts of the mining sector, the majority, approximately 70%, is attributed to coal mining and gold mining,” Turner said. 

“Neither coal nor gold is necessary for the energy transition, and coal mining is projected to disappear altogether in the transition.” 

Turner noted that many generalise mining as having a significant negative environmental impact without considering that the majority impacts come from segments of the market that are not relevant to meeting the energy transition.  

Therefore, a more nuanced approach is necessary when evaluating the environmental consequences of various mining activities,” he said. “It is essential to strike the right balance when considering the potential negative environmental effects of mining.” 

According to the ETC report, the energy transition will require the production of 6.5 billion tonnes of end-use materials, 95% of which would be steel, copper and aluminium, with much smaller quantities of critical minerals/materials such as lithium, cobalt, graphite or rare earths between 2022-50. This cumulative material extraction compares with the over 8 billion tonnes of coal currently extracted annually, with global unabated coal use in the energy system forecast to fall by around 55% under the International Energy Agency’s Net Zero Emissions by 2050 scenario.  

Leonardo Buizza, Lead Supply Chains and Materials Analyst at the ETC, told ESG Investor that a “shift in perception” required by investors in navigating the nuances between mining for fossil fuels and essential energy transition materials. 

“Investors are beginning to recognise this distinction and understanding how mining for different materials should be viewed differently,” said Buizza, noting that the Institutional Investor Group on Climate Change (IIGCC) is actively has developed tools and guidance to accelerate the energy transition.  

In April last year, the IIGCC published a ‘Climate Investment Roadmap’ to support investors in identifying the US$126 trillion of investment in climate solutions required to meet the goals of the Paris Agreement.  

“The mining sector will play a crucial role in enabling the development and expansion of clean energy technologies, so understanding these nuances is essential for making informed investment decisions and recognising the significance of this industry in building a sustainable future,” said Buizza.  

Meeting demand 

While there are sufficient raw materials for the energy transition, the ETC report said the key challenge lies in scaling up the supply of these critical minerals and metals – particularly lithium and copper – quickly and sustainably in response to rising demand over the next decade.  

However, there are distinctions between developed and developing countries in addressing the supply challenge, according to Turner. 

In developed countries, unleashing investment in critical minerals and materials involves setting clear targets for phasing out internal combustion engines, establishing planning and permitting rules that allow new mining, and the construction of lithium refineries, he said, noting that tight regulations on environmental standards and lifecycle carbon emissions, along with carbon taxes, are also essential. 

Developing countries, however, require a combination of finance to support the development of new mines, he said.  

“Major mining companies like Vale, Glencore, Rio Tinto, and others play a significant role in financing some projects,” he said. “However, development banks like the African Development Bank and the World Bank also have an important role, as they help de-risk projects and address political risks while imposing high environmental standards.” 

Multilateral development banks (MDBs) play a key role in providing capital across a variety of projects globally to incentivise investment from the private sector, with blended finance vehicles considered a vital way to raise the capital flows needed to meetthe goals of the Paris Agreement and the UN Sustainable Development Goals.    

Development banks enable projects that may be deemed too high-risk for the private sector, and they act as guardians of environmental considerations – this is true for mining developments that are required in these regions,” said Turner.  

Diversifying supply  

The report also noted that mining for certain key materials is heavily concentrated, with 70% of cobalt production coming from the Democratic Republic of the Congo (DRC) and China dominating the refining of almost all key materials required for the energy transition.  

While it would be beneficial to rebalance away from such high concentration, complete decoupling from China should not be the primary objective, the ETC said, with rapid decoupling potentially leading to increased costs for essential materials required for the energy transition. 

For example, the world’s reliance on cobalt from the DRC raises issues like environmental impact, child labour, and political stability. In response to these concerns, the automotive industry has been designing batteries used for electric vehicles that don’t require cobalt.  

Last year, carmaker Tesla announced that almost half of its EVs manufactured in Q1 2022 were equipped with nickel and cobalt-free lithium iron phosphate, or LFP, batteries.  

Regarding China, the report recommends that the US, UK, Europe, and other jurisdictions should create more local refining capacity to diversify their supply chains. 

“Concrete policies may be needed to achieve this goal, but it is not an insurmountable task,” said Turner. “Developing new lithium refining capacity, for instance, can be accomplished relatively quickly compared to establishing new copper or nickel mines.” 

The US has ambitious targets for domestically sourced minerals in batteries, while the EU aims to have 40% of refined minerals produced domestically by 2030 under its Critical Raw Materials Act.  

“To achieve such levels of domestic refining, however, adequate planning and permitting systems must be in place,” said Turner. “Encouraging the construction of lithium refineries and other refining facilities will require supportive planning and permitting policies.” 

The ETC is comprised of a coalition of leaders from across the energy sector working to accelerate the net zero transition. It develops transition roadmaps and tools across energy-intensive value chains. In harder-to-abate sectors, it works under the umbrella of the Mission Possible Platform, an initiative established by the ETC and the World Economic Forum.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2024 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

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