IEA (2022), Why is ESG so important to critical mineral supplies, and what can we do about it?, IEA, Paris https://www.iea.org/commentaries/why-is-esg-so-important-to-critical-mineral-supplies-and-what-can-we-do-about-it
Clean energy technologies typically require much greater quantities of minerals and metals than their fossil fuel-based counterparts. As the world transitions towards net zero, the rapid shift to these technologies is expected to drive a significant increase in demand for many minerals, including lithium, nickel, cobalt, graphite, copper, aluminium and rare earth elements. The demand and use of these critical minerals will vary depending upon climate policies adopted by countries across the world.
Recent price spikes for many of these minerals have triggered a marked increase in investment in mineral exploration and production. Nevertheless, there remain significant risks that mineral supplies may not keep pace with what would be needed to meet global climate goals.
Alongside supply concerns, there are also significant risks associated with the environmental, social and governance (ESG) impacts of mining projects. These include risks associated with geopolitical tensions, armed conflict, human rights violations, bribery and corruption, emissions, water stress and loss of biodiversity. These types of impacts can erode public support for mining projects, and will face increasing scrutiny from downstream industries, investors and civil society, potentially leading to short-term production disruptions and stark local and international resistance to mining investments. This may in turn limit the supply of crucial minerals and metals, potentially derailing clean energy transitions. Failure to properly manage these risks may also expose governments and companies to ESG-related regulatory, ethical and reputational criticisms.
The first and most important reason to pay close attention to ESG risks is that it is the right thing to do. As the world makes progress towards global climate goals, there is growing recognition that energy transitions must also be people-centred and inclusive. Businesses, especially those engaged in supporting the transition, can make a positive contribution to sustainable development, but not without addressing potential adverse impacts linked to their activities or supply chains.
The IEA Global Commission on People-Centred Clean Energy Transitions echoed these considerations in its recommendations from October 2021. Recognising that energy transitions will bring increased demand for critical minerals, the Global Commission called for climate solutions not to come at the expense of injustices along mineral supply chains, and for policy makers to promote responsible mineral production and trade.
The demand growth needed to support clean energy transitions also holds great promise to support economic development and to lift some of the world’s poorest people out of poverty. Mineral wealth can, if properly managed, contribute to public revenue and provide decent economic livelihoods, particularly if paired with strong ESG standards that ensure that workers and communities are protected from environmental and social harms.
Failure to consider ESG may also limit the supply of the minerals that are critical to energy transitions. Without reliable supply chains for key minerals and metals, many of which come from high-risk areas, it will not be possible to scale up clean energy technologies quickly enough to meet global climate goals.
There are several ESG-related failings that can impact clean energy transitions.
First, potential liabilities associated with ESG, along with increasing scrutiny over ESG performance, can deter investment, particularly for projects in high-risk areas. Rigid de-risking, whereby companies and financial institutions fully disengage or stay away from certain regions, is widespread.
Second, inability to identify and mitigate environmental and social harms can make it difficult to obtain – and maintain – a social licence to operate, which can exacerbate community tensions and lead to community pressure, adverse publicity and regulatory issues (“social licence to operate” generally refers to whether a company or project has the ongoing acceptance or approval from the local community, beyond what is required by legal or regulatory processes). Failure to obtain community acceptance can threaten long-term investments and multiplies the risk of short-term supply disruptions. There have been numerous cases in recent years where local opposition has stopped or slowed new minerals developments, including high-profile lithium projects in Bolivia and Serbia.
Third, specific incidents may give rise to short-term supply disruptions with implications for supply chains and prices. Safety failures can harm workers and lead to long-term interruptions to operations. In addition, corruption in the mining sector and a volatile business climate appear to be associated with periodic shut-downs – and shake-downs – of mine sites producing energy transition minerals.
Fourth, mining is often itself directly exposed to climate risks. A large proportion of today’s lithium and copper production is concentrated in areas with high water stress, and competition for scarce water resources could potentially disrupt production or complicate new siting if companies do not reduce water usage intensity.
Finally, there does not appear to be broad recognition or understanding of the importance of managing risks associated with conflict-affected or high-risk areas in critical mineral supply chains. Although awareness of these impacts has historically been focused on specific geographies and minerals – namely tin, tantalum, tungsten and gold – many critical mineral supply chains have seen reports of serious governance incidents typically associated with conflict-affected and high-risk areas. These incidents include support to non-state armed groups, clashes with security forces, and serious human rights abuses. But conflicts and areas of high risk are ever changing. Even if a particular geographic area does not carry a high risk today, it might tomorrow. These issues could lead to supply challenges down the road, even for supply chains that currently appear to be insulated.
Many of the above challenges stem from underlying governance issues that can limit the positive impacts that responsible investing could theoretically yield. Therefore, governments and international organisations should ensure that future mining projects are developed in accordance to the highest possible ESG standards and establish clear incentives to reward producers that meet these standards. OECD standards on responsible business conduct (RBC) provide a proactive framework that can help businesses anticipate risks accordingly. In addition, all stakeholders should support efforts to improve governance, transparency and accountability of the extractive sector globally.
This may take a number of forms, but should include at a minimum:
- Technical assistance and capacity building for government agencies and administrations responsible for the oversight of mineral production, environmental protection and trade;
- Support for broader uptake of transparency principles such as those set forth in the Extractives Industries Transparency Initiative;
- A targeted and consistent effort to combat bribery and corruption throughout mineral supply chains;
- Legal support and advice to enable development, holistic integration, implementation and enforcement of robust ESG standards and reporting frameworks at all levels, including robust legal frameworks to require companies to undertake supply chain due diligence to identify and mitigate salient risks in mineral supply chains.
For all of these reasons, failing to embrace ESG standards may harm the environment, workers, and communities while also reducing the overall reliability and resiliency of mineral supplies needed for technology deployment. This underscores that if countries are to meet their climate goals, it is vital that they take strong action to minimise these impacts. This will include strengthened policy efforts aimed at all parts of the value chain – from mining to end-use products.
The OECD and IEA are working together to raise awareness with policy makers of the nexus between ESG and security of supply in order to ensure that policies on critical raw materials and clean energy transitions do not generate unintended consequences that may harm affected populations and limit the supply of critical minerals and metals. This collaboration will build on the IEA’s expertise on energy security, ESG, demand and supply projections for critical minerals, and the OECD’s experience in providing practical support to companies and governments on implementing standards on RBC and supply chain due diligence.
As a concrete next step, the OECD and IEA plan to explore joint activities looking at how responsible sourcing can be coupled with renewed efforts by governments to support improved governance that can contribute to building a resilient, reliable, responsible and sustainable metal supply to support clean energy transitions.