MEDIA RELEASE: Mining companies will play a central role in decarbonisation as demand for certain minerals and metals grows, but managing their environment and social risks presents a precarious paradox, says Daniela Jaramillo, director – sustainable investing at Fidelity International.

Ms Jaramillo has authored a paper, The decarbonisation and mining paradox, which looks at ways investors can help mining companies manage ESG issues and use active ownership to ensure that the industry is able to meet the growing demand for minerals and metals.

The paper says: “Paradoxically, the same awareness and concern for environmental and social issues from societies that has led us to climate action is also what we see as one of the key barriers to the expansion of clean technologies. This is because the minerals and metals that are core inputs to these technologies involve extraction and production processes that can be carbon intensive, as well as highly disruptive to the environment and the communities where mines are located.”

Ms Jaramillo says environmental and social risks present a major challenge for the mining industry, at a time when demand for minerals and metals is likely to grow exponentially.

“Few sectors are as exposed as the mining industry 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, the often-held notion that companies are either ‘sustainable’ or ‘not sustainable’ needs to be challenged. A company’s ESG profile is not one-dimensional and there can also be tensions between environmental and social issues.

“We believe that mining is core to decarbonisation solutions, despite its disruptive nature to societies and ecosystems where it operates. As investors we need to understand and navigate these complexities in order to achieve investment and decarbonisation objectives,” she says.

The paper points out that the technologies being deployed to help replace the energy currently supplied by fossil fuels require large amounts of mineral and metals

“The use of fossil fuels is embedded in our societies and economies and eliminating these resources will require radical changes in how we live, how we move around, and how we produce energy for homes and industries. These are highly complex and systemic challenges that will require political will and profound transformation in personal and corporate behaviour, as well as large outlays of capital expenditure in order to develop and scale up low-carbon technologies.

“One of the main drivers of demand for minerals and metals is the decarbonisation of electricity supply and the massive build out of renewables that will be required. The scale of this is extraordinary, and often underestimated.

“For example, China currently derives 60 per cent of its grid electricity from thermal coal. It will take a huge transitionary effort, using a combination of renewables, nuclear and carbon capture, to fulfil its net zero ambitions by 2060. Other countries like Indonesia will be slower in their decarbonisation journey but are coming from a base where renewable energy use is only 10 per cent to 15 per cent."

Ms Jaramillo says that while there are many challenges, the mineral intensity of decarbonisation also presents an important thematic for investors.

“We believe that the need to provide commodities to enable the transition is the basis for a multi-decade increase in demand in commodities. We are in the very early stages of this thematic and we don’t think it is yet strong enough to override normal business cycles.

“Our role as active owners will be more important than ever, as we seek to increase supply of minerals and metals without losing sight of the core task of reducing the environmental and social footprint of the sector.

“At the company level, we plan to continue to engage with individual companies on idiosyncratic ESG risks. These engagements will follow a theory of change, and therefore will involve clear escalation processes that can include using our votes to communicate dissatisfaction to companies when they are not managing appropriately for these risks.

“However, as we have outlined in the paper, this is a complex challenge that can’t be addressed at the company or portfolio level alone and requires a systems-level mindset that seeks outcomes in the real world,” Ms Jaramillo says.