Financing Sustainability in the Mining Sector

Introduction

The green revolution and transition to a low carbon economy requires metals and other minerals. At the same time, in order for such transition to succeed, those metals and other minerals must be mined, processed and recycled in a sustainable and environmentally friendly way. This article looks at the opportunities and challenges for green and sustainable finance in the mining sector.

The challenge

Mining has been estimated to account for up to 11% of global energy use, and mining operations present other environmental challenges such as water use, land use, deforestation, and management and treatment of tailings and by-products to avoid environmental contamination and pollution.

It has been estimated that the carbon footprint of the materials in a petrol-fuelled car is roughly equivalent to the emissions that car will produce in its lifetime. A wind farm may not produce emissions once operating, but a single 3MW wind turbine may contain around 4.7 tonnes of copper, 3 tonnes of aluminium, 2 tonnes of rare earth elements and 335 tonnes of steel. Solar accounts for 7% of global silver demand. All of the metals and minerals required to produce an electric car, wind turbine, PV cell or other ingredient of the low carbon economy must be mined and processed, or recycled from other sources, and transported.

Replacing petrol and diesel cars with electric vehicles may therefore result in fewer emissions from cars on the road, and installed wind turbines and solar panels may produce clean electricity, but the challenge remains to reduce emissions and other negative externalities throughout the entire metals and minerals supply chain.

The opportunity - financing sustainability

Investors and financiers are increasingly looking to invest into green and sustainable investments. The realities of climate change and other environmental problems such as air and water pollution pose systemic risks which are increasingly being recognised by governments, regulatory authorities and central banks, as well as being recognised (and priced accordingly) by insurers. If an investment is not sustainable in the long term, it will likely be more expensive to finance.

The green bond market, although still small as a proportion of the global bond markets, is a fast-growing sector, with over $100bn of green bonds being issued in the first half of 2019. However, there is also recognition that for the sector to continue to grow, and, more importantly, to finance and encourage the transition to a lower carbon economy, traditionally 'brown' industry sectors (the mining industry being one example) need to be able to access 'green' and sustainability-linked finance. There have also been calls from some quarters for a new category of 'transition bonds' to be created for issuers that do not necessarily sit comfortably within 'green' bond parameters, such as oil and gas companies.

Universally acknowledged criteria and standards for 'green' financing do not yet exist and continue to be developed. However, given that the success of the sector depends on consistency and credibility in the labelling of financial products as 'green', even without regulation, industry bodies and market forces have combined to produce standards such as the ICMA Green Bond Principles and the Climate Bond Standards promoted by the Climate Bonds Initiative. In the UK, the BSI is working toward accreditation standards for environmental and sustainable finance. A flourishing industry of independent ESG certification and ratings agencies has also arisen, and the vast majority of green bonds are issued with a third-party opinion from one of these agencies. Our previous article gave an overview of global trends in the green bond markets. We have also been tracking the development of the European Commission’s Action Plan on Financing Sustainable Growth, and proposed framework regulation. The green securitisation market is also starting to play an increasing role.

While set-up costs (given the requirements for third party opinions) and ongoing reporting costs for a 'green' bond may be higher than for a 'traditional' bond, companies who can demonstrate that they will apply funds for green purposes, or in order to operate more sustainably, have an opportunity to take advantage of a wider and more diverse pool of investors. This includes pension funds and institutional investors, insurers, IFIs, and increasing numbers of funds raised with a mandate to invest in 'green' or other socially responsible and sustainable activities. The Global Sustainable Investment Alliance estimated in 2016 that approximately $23 trillion of assets were being managed under some sort of responsible investment strategy, with responsible investment representing 26% of professionally managed assets globally. Banks may also be given further incentives to hold a greater proportion of 'green' investments as regulations develop.

In this developing climate, there are clearly opportunities for companies involved in mining and processing of metals and minerals (other than in areas such as coal-mining) to obtain green financing for their projects and operations. For example, all of the eligible Green Project categories mentioned in the ICMA Green Bond Principles are potentially relevant to the mining sector to a greater or lesser extent, namely:

• renewable energy;
• energy efficiency;
• pollution prevention and control;
• environmentally sustainable management of living natural resources
  and land use;
• terrestrial and aquatic biodiversity conservation;
• clean transportation;
• sustainable water and wastewater management;
• climate change adaptation;
• eco-efficient and/or circular economy adapted products, production
  technologies and processes; and
• green buildings.

In areas such as battery metals there are also additional opportunities, given the key importance of these metals in the supply chain of the low carbon economy. For example, the World Bank recently launched a $50m 'Climate-Smart Mining Facility' to help with the sustainable extraction and processing in resource-rich developing countries of minerals and metals used in clean energy technologies.

Sustainability - linked financing

Mining investors and financiers have come to expect engagement and compliance with Equator Principles, IFC Performance Standards and similar standards regardless of local legal requirements. Rather than seeing increased transparency and disclosure as a burden, with increased ESG reporting requirements also comes an opportunity to obtain ‘sustainability-linked’ financing. This includes loan facilities where the interest margin is linked to performance against certain ESG key performance indicators (KPIs), as verified by an independent third party. Examples of this in use in the mining sector include Rusal’s recent USD1bn sustainability-linked syndicated pre-export finance facility, and Polymetal’s sustainability-linked loans signed in 2018 with ING and 2019 with Société Générale. As part of such financing, third party reviewers and sustainability ratings agencies require transparency and disclosure in order to work effectively. Sustainability-linked lending is estimated by Bloomberg to be one of the fastest-growing debt asset classes in 2019.

Other sustainability developments in the mining industry

There are also straightforward economic incentives for energy intensive industries such as mining and metals processing to become more energy efficient and use renewable energy sources to power their operations. Renewable power is becoming ever cheaper - last year the EBRD noted that renewables are now the cheapest energy source, a view echoed by the World Bank, and borne out by ever-decreasing costs for utility scale renewable power. Long term corporate PPAs for renewable power therefore make economic sense as well as helping to develop the renewable power sector. In the energy-intensive aluminium smelting industry, Norsk Hydro’s corporate PPA with the Markbygden onshore wind project in Sweden, and recent PPAs with other projects, are examples of this trend. In Chile, the country’s rapid development of renewable power means that major mining companies are increasingly signing renewable power PPAs to power their operations in the country.

Furthermore, aluminium produced using renewable energy can be marketed as 'green aluminium' to meet manufacturer and consumer demand. Examples of this include Rio Tinto’s 'RenewAl' and Rusal’s 'ALLOW' Aluminium brands. Rio Tinto and Alcoa’s ELYSIS joint venture, with which Apple is also involved, aims to eliminate all direct greenhouse gas emissions from the aluminium smelting process. The Aluminium Stewardship Initiative has developed an ASI Performance Standard and an ASI Chain of Custody Standard for aluminium. Other industry stakeholder bodies are developing standards for steel (such as ResponsibleSteel). BMW’s 'Responsible Copper Initiative' with Codelco is evidence of manufacturer and consumer demand for 'green copper'.

With the increased market demand for such products and the publicity that they bring, any claim that a metal is 'green' or 'sustainable' will inevitably be subject to scrutiny, so the development of robust and credible standards is key. However, enabled by increased reporting demands on mining producers, the development of frameworks to track emissions such as the Climate Smart Mining Emissions Widget and other developments in supply chain tracking such as the use of blockchain technologies, we may come to see a similar trend with a range of metals and minerals in addition to aluminium and copper. How long until we see 'green' cobalt, lithium and other commodities?

What does the future hold?

While standards continue to be developed for measuring and reporting of climate emissions and impact from mining and metals and minerals processing, and regulations may come to be introduced in relation to green financing, the direction of travel is very much one way. Investor, manufacturer, consumer and government demands for greater transparency, lower emissions and more sustainable operations mean that this is an area that will only continue to develop. The climate of transparency and disclosure will reward those who are able to evidence their ESG performance and track their sustainable supply chains (for example using blockchain or other digital technologies), and penalise those who cannot do so. This will manifest in the availability and cost of financing, the growth of 'green' and sustainability-linked financing in the mining sector, and in the increased demand for metals and minerals which have been mined and processed in as 'green' and sustainable a way as possible.