The decarbonisation and mining paradox: Challenges and long-term opportunities for investors

Mining will play a centre-stage role in decarbonisation as projections show how demand for certain minerals and metals is likely to grow exponentially with the expansion of renewable energy technologies and electric vehicles. This paper argues that the management of ESG issues and active ownership are key to ensure that the industry is able to meet the growing demand for minerals and metals.

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Watch: Dealing with net zero's mining dilemma

We explore how, paradoxically, it is environmental and social risks that potentially present the biggest challenge for the industry in delivering the raw materials necessary to support the transition. Indeed, few sectors are exposed to the breadth and depth of environmental and social issues and historic controversies. This, paired with evolving societal expectations, puts the sector at real risk of losing its collective social license to operate as its footprint expands.

However, we challenge the often-held notion that companies are either ‘sustainable’ or ‘not sustainable’, by illustrating how mining is core to decarbonisation solutions, despite its disruptive nature to societies and ecosystems where it operates. A company’s ESG profile is not one-dimensional and there can also be tensions between environmental and social issues.

As investors we need to understand and navigate these complexities in order to achieve investment and decarbonisation objectives.

Therefore, the opportunities that might arise from a transition to a low carbon world will potentially favour those active investors that have a deep understanding of sustainability and can identify those companies that already are managing ESG risks or have strong potential for doing it following engagement.

The paper concludes by proposing that an Active Ownership 2.01 approach is required by investment managers when investing sustainably and responsibly in commodities in a decarbonising world. This involves having a more holistic view of companies, understanding the role of economic activities like mining in solving systemic issues like climate change, and helping the industry overcome hurdles in the real world. Stewardship and engagement is a core part of this approach, but a focus on ‘engaging the problem’ and not just the mining companies is key. This involves engagement at the value chain level, supporting companies in green turnarounds, being more active in public policy advocacy and facilitating collaboration in the industry.

This piece is focused on long-term thematics and doesn’t consider near-term cyclical factors, amongst other relevant factors to an investment decision.