Deciding if a company can be labelled ‘sustainable’ or ‘not sustainable’ is far from simple. Consider mining companies - mining operations contribute heavily to greenhouse gas emissions, can damage local ecosystems and can have negative impacts on local communities. It’s hardly surprising they’re not front of mind when it comes to ‘sustainability’.
However, paradoxically, these companies can be core to regional economic development, and perhaps more surprising are crucial in the transition to net zero. Minerals and metals like lithium, nickel, cobalt, rare earths, among others, are key to many decarbonisation technologies such as electric vehicles and solar panels.
For investors, further issues lie beneath this paradox. If mining is necessary to transition to a low-carbon future, how will we manage the social, political, and environmental risks of decarbonisation?
Opportunities for investors arising from decarbonisation
While there are many challenges, the mineral and metal intensity of decarbonisation also presents an important opportunity for investors. We believe that the need to provide commodities to enable a net zero transition will result in a multi-decade increase in demand for minerals and metals. We are in the very early stages of this thematic and don’t think it is yet strong enough to override normal business cycles. However, our view is that the opportunities may occur across a nuanced subset of companies and commodities rather than the broad-based demand like we observed in the super-cycle of the early 2000s, where rapid and sustained industrialisation and urbanisation of the Chinese economy saw commodity prices soar above long-term price trends for over a decade.
Whilst many commodities will benefit from increased demand, the impact will vary quite considerably. Supply needs to keep pace with the demand which will be crucial in identifying the winners and the losers. In the case of decarbonisation, demand trends are expected to be far more global and are anticipated to involve companies and investors with a much stronger awareness of the ESG impacts of mining. Therefore, we believe that a company’s ESG credentials will be key when it comes to who the winners and losers of decarbonisation will be.
The challenges and opportunities for miners
Before investors can capitalise on this thematic, they need to understand the challenges the mining industry faces on its journey towards decarbonisation:
- Energy intensity: Mining operations require substantial amounts of energy, which are predominantly derived from fossil fuels. This heavy reliance on traditional energy sources leads to significant greenhouse gas emissions, contributing to climate change.
- Impacts to biodiversity: when mines occur in areas that are very biodiverse like in the case of Indonesia, that is home to much of the nickel deposits, developing those mines could cause deforestation and impact local habitats for plants and animals.
- Water use: mining activities can be very water intensive, and in areas that are particularly prone to droughts, they can exacerbate the problem and cause disruption for local community use or agriculture.
- Community: While mining can be an important source for jobs in certain regions, it can also have an important social footprint because of the disruption to water and local habitats, as well as impact to heritage sites.
Managing of these risks requires companies to have strong governance and awareness of where the risks lie as well as expertise and capabilities to deal with these risks appropriately. As investors, considering each company’s risk exposures and assessing their ability to manage and mitigate these is key.
A few ways in which companies can manage these risks are:
1. Renewable energy integration: Integrating renewable energy sources into mining operations involves transitioning from fossil fuel-based energy to cleaner alternatives like solar, wind, and hydroelectric power. By doing so, mining companies can significantly reduce their carbon footprint and lower emissions.
2. Electrification of equipment: Shifting from diesel-powered machinery to electric vehicles and equipment offers an opportunity for emissions reduction. Advances in battery technology and the availability of charging infrastructure make it increasingly feasible for the industry to embrace electric alternatives.
3. Technology innovation: Investing in research and development of innovative technologies can drive sustainable mining practices. For instance, using advanced sensors, automation, and AI can optimize mining processes, minimize waste, and reduce emissions.
4. Circular economy: Embracing circular economy principles involves reducing waste and promoting resource efficiency in mining operations. This includes practices like recycling and reusing materials, as well as minimising reliance on virgin resources. By adopting circular approaches, the industry can reduce its environmental impact and contribute to a more sustainable future.
5. Supply chain collaboration: Collaboration across the mining supply chain is essential to achieve net zero emissions. This involves working closely with suppliers and customers to adopt sustainable practices, such as reducing emissions from transportation and promoting circular economy principles.
The decarbonisation and mining paradox presents a multifaceted challenge that demands innovative solutions. By embracing opportunities, the mining industry can advance its decarbonisation goals and provide the infrastructure needed for green technologies.
Balancing economic growth with environmental responsibility is a complex task, but with the collective efforts of stakeholders and investors, the mining industry will be key to a more sustainable and climate-friendly future.
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