Sustainability – it’s a minefield

Investing in mining companies is not an easy choice for people following ethical investing principles.

Past controversies have been widely publicised and such events may compel some investors to stay well clear. However, mining has reached a pivotal point in its history with governments showing a greater interest in critical minerals.

We rely on minerals in almost every aspect of our daily lives

Our roads, cars, houses and appliances all contain minerals that have been mined by companies.

Critical minerals are generally defined as minerals that are vitally important in the modern day, but risks to their supply are significant.

These include key enablers of the transition towards a cleaner world with fewer carbon emissions.

Over the last decade, countries have been developing strategies to ensure they can access these critical minerals.

Many governments plan to support a selection of critical minerals in their own jurisdictions, through fiscal spending and removing barriers. By locally sourcing, processing and recycling as many minerals as possible, the reliance on imported supply will be reduced.

Policy development is stepping up

To secure access to critical minerals, governments have started to form alliances, implement new policies and assemble funding.

According to the International Energy Agency (IEA), half of nearly 200 mineral policies and regulations were enacted by its member countries in the last few years.

Government policies are growing in number

The IEA has identified a common theme in these policies and regulations – the need for sustainable and responsible practices across supply chains.

The European Union has recently adopted a new regulation for batteries, which strengthens sustainability rules and is considered a leading global example.

There are many global standards for responsible mining that companies can follow, but most are self-enforced and voluntary.

Through the Initiative for Responsible Mining Assurance (IRMA), it’s possible for miners to obtain independent certification of their environmental, social and governance (ESG) performance.

Alternatively, members of the International Council for Mining and Metals (ICMM) are required to have certain mining activities verified by a third party.

IRMA and ICMM provide more robust assurances of responsible practice than anything self-enforced by the mining companies.

However, there is not yet an international gold standard for mining companies to adhere to. It can only be a matter of time before one is established.

Whilst there is little evidence the mining industry has made substantial progress towards more sustainable and responsible practices in recent years, we expect to see positive change over the next decade.

A flurry of government legislation that provides financial incentives and imposes penalties should move all mining companies in the right direction.

For example, the Carbon Border Adjustment Mechanism (CBAM) was introduced by the European Union as a tariff on imports of carbon-intensive products like cement, iron and steel.

Investing in mining companies can be approached in various ways.

Some investors choose to only buy mining companies that provide critical minerals for meeting the internationally agreed Sustainable Development Goals.

Others recognise the materials sector has a place in their investment portfolios. Excluding mining companies may contribute to lower diversification and a level of active risk that isn’t wanted.

Below are some considerations for investors, bearing in mind that no one company is perfect.

• What is the company mining and is it moving towards critical minerals?
• What country are the mining operations located in? Does the county have a stable government and is it likely to have better human rights and environmental protection standards?
• Has the company been involved in any major environmental or social disasters, and has it learned from these?
• Is the company transparent in its reporting and does it follow an international reporting standard?
• Does the company clearly outline its risks and how it is addressing them?
• Does remuneration of the executive team include non-financial metrics?

The need for materials is not going away and mining companies provide the critical minerals required for
low-carbon technologies such as wind turbines, solar panels and electric vehicles.

Many mining companies also find themselves in an excellent financial situation, with strong cash flows and robust balance sheets.

To learn more about the work our sustainability team undertakes and how we can help to incorporate your values into investment decisions, contact your investment adviser or visit a nearby branch.

This is an excerpt of an article published in the latest edition of our flagship publication for clients only, News & Views. Craigs Investment Partners clients can view News & Views, including the full version of this article by logging in to the client portal.

Market Insights enewsletter

Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.

Subscribe Now