ESG Sector Review: Metals and Mining

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ESG Sector Review: Metals and Mining

In the world of Environmental, Social and Governance (ESG), the Metals and Mining sector is a sector that is increasingly facing scrutiny from investors and regulators. This is because the business activities of Metals and Mining companies inherently bring about disruptions to the natural environment. Whilst this may be true, it does not necessarily mean the ESG outlook for the sector is bound to go downhill.

In fact, the continuous development of green technologies, such as electric vehicles (EV) and hydrogen fuel cells, will create new demand for various metals. Therefore, we expect the sector to encounter both risks and opportunities under the prevailing trend of ESG.

In this article we discuss ESG considerations that come at play for the Metals and Mining sector now and in the future.

The ESG Context

Inherent environmental externalities but enablers of decarbonisation

Mining, by nature, has negative impacts on the environment due to its extraction of natural resources. For example, steel is made from iron that is extracted from rocks and minerals, then produced in basic oxygen furnaces or electric arc furnaces. 1 Copper is extracted from its ore underground or by open pits, and refined using electrolysis. 2

Significant amounts of greenhouse gas emissions as well as sulphur dioxide is generated through power generation for mining operations, and as a product of refining metals. Bulk metals such as steel and thermal coal generate a lot of carbon emissions for production whereas precious metals such as gold and platinum generate relatively lower carbon emissions to produce. 3 Notwithstanding such inherent environmental externalities, metals are crucial raw materials for technologies that facilitate the transition to a ‘green’ economy. We discuss in more detail how metals are key enablers of decarbonisation in later sections.

As mining companies expand their business operations, their operational emissions also increase inevitably. As such, mining companies actively explore avenues to innovate and reduce emissions in tandem to growing their business. For instance, despite Hindalco’s energy consumption needs are mostly met by fossil fuels, renewable energy consumption increased by 2200% over the past 3 years. Hindalco installed and commissioned solar and hydro power plants at its mines as well as entered third-party purchase agreements since 2018. 4 Hindalco’s subsidiary Novelis also undertook a pilot project to collect used beverage cans for recycling using state-of-the-art technology at their plant in Korea to produce aluminium sheets.5

“Metals and Mining sector leaders are heading for long-term ESG targets. We expect them to continuously strive in environment protection, bear social responsibilities and improve on corporate governance to achieve business sustainability.”

-Bingyao Chen, Investment Analyst (Mirae Asset)

Pioneering technologies and regulations also play a part in the decarbonisation of the Metals and Mining sector. For example, the use of hydrogen as energy fuels as well as the use of carbon capture technologies in steel production are advanced ways to reduce emissions in the mining and refining process. Policies such as Mainland China’s steel capacity swap and production curbs are also ways to control the environmental performance of the sector. 6

Safety considerations within and outside of mining companies

Metals and Mining is labour-intensive and is susceptible to fatalities and injuries due to hazards like powered haulage and machinery. Poor safety records may result in regulatory compliance costs, reputational risks, and even operational downtime.

In order to support the implementation of safe steel mills, POSCO recently promoted a ‘Smart Safety’ initiative that introduces cutting-edge technologies such as artificial intelligence, smart wearable devices, and automated robots to build a disaster-free working environment. For example, robots are utilised to replace high risk manual work like those at high temperatures or heights. Another example is the Smart Safety Ball, the word’s first technology developed by POSCO, which detects the presence of harmful gas when thrown into an enclosed workspace prior to workers’ entry.7

Mining facilities are often active over long periods of time; the rights and accessibility of surrounding communities may be affected through the environmental and social impacts of mining operations. In light of these considerations, mining companies rely on good relations with local communities for their social license to operate. Mining companies generate indirect economic value through creating local employment opportunities. For example, Tata Steels employed more than 31,000 permanent employees in 2020 and placed local sourcing of labour as an emphasis area for the company.8 Outside of its core business activities, Tata Steel also held various other initiatives to create economic opportunities, such as collaborations with Zomato and Swiggy for online vegetable selling which disbursed ₹7.32 lakh income to date, supporting 203 farmers.9

The ESG Road Ahead

It goes without saying that thermal coal hinders sustainable development and is receiving negative sentiments from governments and investors alike. Projections of global power output indicate that coal will fall by 11% by 2040 – a rate of decline that is far from satisfactory in the world’s trajectory to net zero (a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere). 10 Nonetheless the global phase out of coal will likely have negative implications on the Metals and Mining sector; companies will need to re-adjust their business strategies to reduce or remove thermal coal exposure.

Projection of global power output by 2050

Source: Bernstein Research, May 2021

Carbon pricing is a key approach that facilitates the global transition to a low carbon economy, through using market mechanisms to pass the cost of emitting greenhouse gas emissions on to emitters. China, having launched pilot carbon trading schemes has launched a national one for the power industry. The scheme will cover cement and aluminium by 2022, and steel, paper and petrochemicals and other industries by 2025.11 Chinese Metals and Mining companies will therefore need to prepare accordingly for carbon pricing in the coming years.

Looking ahead and as discussed in earlier sections, there are certainly opportunities for the Metals and Mining sector in a “green” economy, driven by demand for “green” applications. Metals are key enablers for the development of a hydrogen economy, especially platinum in the manufacturing of fuel cells and production of green hydrogen, and the widespread of EV adoption. Furthermore, aluminium and copper are also crucial raw materials for building out green electricity generating infrastructure like on- and off- shore wind power systems. Aluminium is also an ideal substitute for steel in vehicles because of its light weight hence reducing energy required to push the vehicle.12

 

 

 

 

1 ThermoFisher Scientific, Accessed July 2021

2 European Copper Institute’s Copper Alliance, Accessed July 2021

3 Bernstein Research, May 2021

4 Hindalco Sustainability Report FY 2019-20, August 2020

5 Hindalco Sustainability Report FY 2019-20, August 2020

6 Macquarie Research, April 2021

7 POSCO Corporate Citizenship Report 2020

8 Tata Steel Integrated Report & Annual Accounts 2020-21

9 Tata Steel Integrated Report & Annual Accounts 2020-21

10 Bernstein Research, May 2021

11 Macquarie Research, April 2021

12 Bernstein Research, May 2021

AUTHORED BY
Holly So, CFA
ESG Specialist

Date: August 31, 2021
Category: Metals and Mining

ESG Sector Review: Metals and Mining

In the world of Environmental, Social and Governance (ESG), the Metals and Mining sector is a sector that is increasingly facing scrutiny from investors and regulators. This is because the business activities of Metals and Mining companies inherently bring about disruptions to the natural environment. Whilst this may be true, it does not necessarily mean the ESG outlook for the sector is bound to go downhill.

In fact, the continuous development of green technologies, such as electric vehicles (EV) and hydrogen fuel cells, will create new demand for various metals. Therefore, we expect the sector to encounter both risks and opportunities under the prevailing trend of ESG.

In this article we discuss ESG considerations that come at play for the Metals and Mining sector now and in the future.

The ESG Context

Inherent environmental externalities but enablers of decarbonisation

Mining, by nature, has negative impacts on the environment due to its extraction of natural resources. For example, steel is made from iron that is extracted from rocks and minerals, then produced in basic oxygen furnaces or electric arc furnaces. 1 Copper is extracted from its ore underground or by open pits, and refined using electrolysis. 2

Significant amounts of greenhouse gas emissions as well as sulphur dioxide is generated through power generation for mining operations, and as a product of refining metals. Bulk metals such as steel and thermal coal generate a lot of carbon emissions for production whereas precious metals such as gold and platinum generate relatively lower carbon emissions to produce. 3 Notwithstanding such inherent environmental externalities, metals are crucial raw materials for technologies that facilitate the transition to a ‘green’ economy. We discuss in more detail how metals are key enablers of decarbonisation in later sections.

As mining companies expand their business operations, their operational emissions also increase inevitably. As such, mining companies actively explore avenues to innovate and reduce emissions in tandem to growing their business. For instance, despite Hindalco’s energy consumption needs are mostly met by fossil fuels, renewable energy consumption increased by 2200% over the past 3 years. Hindalco installed and commissioned solar and hydro power plants at its mines as well as entered third-party purchase agreements since 2018. 4 Hindalco’s subsidiary Novelis also undertook a pilot project to collect used beverage cans for recycling using state-of-the-art technology at their plant in Korea to produce aluminium sheets.5

“Metals and Mining sector leaders are heading for long-term ESG targets. We expect them to continuously strive in environment protection, bear social responsibilities and improve on corporate governance to achieve business sustainability.”

-Bingyao Chen, Investment Analyst (Mirae Asset)

Pioneering technologies and regulations also play a part in the decarbonisation of the Metals and Mining sector. For example, the use of hydrogen as energy fuels as well as the use of carbon capture technologies in steel production are advanced ways to reduce emissions in the mining and refining process. Policies such as Mainland China’s steel capacity swap and production curbs are also ways to control the environmental performance of the sector. 6

Safety considerations within and outside of mining companies

Metals and Mining is labour-intensive and is susceptible to fatalities and injuries due to hazards like powered haulage and machinery. Poor safety records may result in regulatory compliance costs, reputational risks, and even operational downtime.

In order to support the implementation of safe steel mills, POSCO recently promoted a ‘Smart Safety’ initiative that introduces cutting-edge technologies such as artificial intelligence, smart wearable devices, and automated robots to build a disaster-free working environment. For example, robots are utilised to replace high risk manual work like those at high temperatures or heights. Another example is the Smart Safety Ball, the word’s first technology developed by POSCO, which detects the presence of harmful gas when thrown into an enclosed workspace prior to workers’ entry.7

Mining facilities are often active over long periods of time; the rights and accessibility of surrounding communities may be affected through the environmental and social impacts of mining operations. In light of these considerations, mining companies rely on good relations with local communities for their social license to operate. Mining companies generate indirect economic value through creating local employment opportunities. For example, Tata Steels employed more than 31,000 permanent employees in 2020 and placed local sourcing of labour as an emphasis area for the company.8 Outside of its core business activities, Tata Steel also held various other initiatives to create economic opportunities, such as collaborations with Zomato and Swiggy for online vegetable selling which disbursed ₹7.32 lakh income to date, supporting 203 farmers.9

The ESG Road Ahead

It goes without saying that thermal coal hinders sustainable development and is receiving negative sentiments from governments and investors alike. Projections of global power output indicate that coal will fall by 11% by 2040 – a rate of decline that is far from satisfactory in the world’s trajectory to net zero (a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere). 10 Nonetheless the global phase out of coal will likely have negative implications on the Metals and Mining sector; companies will need to re-adjust their business strategies to reduce or remove thermal coal exposure.

Projection of global power output by 2050

Source: Bernstein Research, May 2021

Carbon pricing is a key approach that facilitates the global transition to a low carbon economy, through using market mechanisms to pass the cost of emitting greenhouse gas emissions on to emitters. China, having launched pilot carbon trading schemes has launched a national one for the power industry. The scheme will cover cement and aluminium by 2022, and steel, paper and petrochemicals and other industries by 2025.11 Chinese Metals and Mining companies will therefore need to prepare accordingly for carbon pricing in the coming years.

Looking ahead and as discussed in earlier sections, there are certainly opportunities for the Metals and Mining sector in a “green” economy, driven by demand for “green” applications. Metals are key enablers for the development of a hydrogen economy, especially platinum in the manufacturing of fuel cells and production of green hydrogen, and the widespread of EV adoption. Furthermore, aluminium and copper are also crucial raw materials for building out green electricity generating infrastructure like on- and off- shore wind power systems. Aluminium is also an ideal substitute for steel in vehicles because of its light weight hence reducing energy required to push the vehicle.12

 

 

 

 

1 ThermoFisher Scientific, Accessed July 2021

2 European Copper Institute’s Copper Alliance, Accessed July 2021

3 Bernstein Research, May 2021

4 Hindalco Sustainability Report FY 2019-20, August 2020

5 Hindalco Sustainability Report FY 2019-20, August 2020

6 Macquarie Research, April 2021

7 POSCO Corporate Citizenship Report 2020

8 Tata Steel Integrated Report & Annual Accounts 2020-21

9 Tata Steel Integrated Report & Annual Accounts 2020-21

10 Bernstein Research, May 2021

11 Macquarie Research, April 2021

12 Bernstein Research, May 2021

AUTHORED BY
Holly So, CFA
ESG Specialist

Date: August 31, 2021
Category:

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