Germany is reactivating its coal-fired power plants. In the US, the Biden administration has rolled back the ban on oil and gas exploration companies drilling for the coveted commodities on public lands. In Australia, the new government is balancing the economic boost of increasing global prices for its traditional carbon resources like natural gas and coal, against its recent pledge to achieve net zero emissions by 2050, and the update to its 2030 pledged reductions from 28 per cent previously, to 43 per cent. China is even about to increase coal production to the level of all EU production. And even the shutdown or non-shutdown of German nuclear power plants scheduled for this year is being hotly debated again. At the same time, all countries are pushing the expansion of renewable energies.
The entire energy sector represents an important demand force on the markets for ores and minerals. The technologies for the production of clean energy require increasing quantities of raw materials, including rare earths, making the energy industry their most important customer. Moreover, the current crisis proves the benefits of the transition to a low-carbon energy supply. This is true both in terms of energy security and its efficient generation. It is all the more gratifying that the economic viability of renewable energies has improved considerably over the past 10 years.
Rising and, above all, extremely fluctuating natural gas prices have contributed significantly to increasing the attractiveness of renewable energies. The temporary drying up of gas pipeline Nord Stream 1 had initially caused the price of gas to shoot up to 300 euros before falling back below the 200-euro mark. This is a great burden for the domestic economy.
Renewable energies are wind, sun and water, which sounds innocuous at first. But the associated electronic control elements, storage systems, transformation technology and electric motors depend on metals such as copper, lithium, nickel, and cobalt, but also on the rarely found elements like gallium, germanium, indium, tellurium and numerous platinum group elements. Many of these metals are mainly found in countries with high geopolitical risk. Four-fifths of the world’s supply of rare earth minerals is found in China alone. But without these metals, a transition to a low-carbon energy system is unlikely to be achieved.
Many view the mining industry rather critically and fear that it is harming our planet and society. Criticism comes from both environmentalists and human rights activists, linking deforestation, the use of heavy metals, pollution of rivers, child labour and inhumane working conditions to mining.
Several mining companies have a poor record in terms of ESG criteria so far. Thus, numerous accidents and scandals from the past that have harmed nature and people are present in the public perception. These incidents, which not infrequently occurred in non-concessionary or illegal mines, have led to widespread distrust of the mining industry as a whole.
The good news, however, is that recently there has been an improvement in awareness in many mining companies of their overall social responsibility. A study by the law firm White & Case, for example, found that top mining executives rate (non-)attention to ESG criteria as the biggest operational risk — far ahead of government regulation and commodity nationalism. The latest assessment by the NGO Responsible Mining Foundation, which tracks mining ESG policies and practices also reports a marked improvement in companies performance (albeit from a low base).
The mining industry needs to significantly improve its performance in the areas of environmental protection, social responsibility and corporate governance, while doing justice to as many stakeholders as possible. But policymakers also have a duty. Governments worldwide must optimise their regulatory framework. This is the only way to ensure that companies are held liable for the damage they cause and that the public regains the trust it has lost in this important industry.
Investors who value sustainability should therefore not prematurely exclude mining from their universe, but on the contrary, look for such companies and use the influence they have as investors there.
John Ploeg, co-head of ESG research, PGIM Fixed Income
