White paper Implications of metals on finance

Transcription

1 Nordea Group Sustainable Finance February 2018 White paper Implications of metals on finance 3

2 Executive Summary Energy storage markets are expanding at rapid pace. The demand for metals is increasing and a supply shortage is forecasted. New innovation and increasing use of electronics all over the world, the deployment of automation in many sectors and the expanding sharing economy help spur a digitized era, much to the benefit of the climate and the environment. Almost all major auto manufacturers now have electric vehicle targets, and some have very aggressive ambitions. Electronic devices such as cell-phones are becoming lighter and smaller thanks to many of the qualities that some metals provide. While this is positive development, it also poses a number of new risks. Companies across the entire value chain from mining to usage of metals that are not properly addressing the social and environmental issues could be inflicted with detrimental effects to the economic value coming from negative reputation, compliance risks, litigation costs and consumer awareness. These effects naturally then come to play part in financing and lending decisions of investors and banks. The solution to climate change should not come at the expense of others. Not at least because it is wrong, but also because it makes no economic sense to long-term investors and financiers. Content A New Era with Metals Challenges Ahead Key to Progress Recommendations

3 A New Era with Metals Rare earth metals and other metals are crucial to modern technology such as consumer electronics, electric vehicles, renewable energy and computers, to name a few. Part of the reason for its value lies in its ability to help technologies reduce weight and size, improve performance and efficiency. The rapid increase in electric vehicle production, electronics and renewable energy has spurred demand for metals. Sales of electric vehicles increased by 55% in 2016 and will represent more than half of all vehicle sales by In just six years, the usage of rare earth metals in vehicles alone are expected to increase by 500% compared to The increasing production of wind turbines will cause the demand for the metals to grow with another 100%1. Consumer electronics demand doubled between 2010 and 2015 with an expected continued annual growth rate above global GDP2. Supply will be in deficit for cobalt by 2021, lithium by 2024, nickel by 2025 and graphite by Hence, more mines and projects are expected to be developed Bloomberg New Energy Finance, 2017 Citibank, 2017 Bloomberg New Energy Finance, 2017

4 Challenges Ahead Local Trader The major side-effects of the increasing demand and as such, the forecasted increase in mining of metals can be narrowed into the risks of supply shortage, labour violations, worker security issues, financing of armed groups and environmental hazards. This is largely due to the quarrying and processing of these metals being concentrated to areas of cheap labour in countries with weak or non-existent regulation. Mine Internation Trader Cases supporting this observation are available in abundance. Over 50% of the global supply of cobalt specifically comes from the Democratic Republic of Congo (DRC) 4. Australia used to be a major producer of tantalum with 45% of global production in As of 2015, roughly 70% of global production of tantalum took place in DRC and Rwanda 5. Smelter Component Producer Component Manufacturer Assembly End User African Great Lakes Region Rest Of The World Simplification of the metals supply chain The smelters are mainly in Asia and are the critical link for traceability, as metals become indistinguishable once they are refined 6. There is also a lack of transparency between the mining process and smelting. The Dodd-Frank Act 1502 on conflict minerals, passed in 2010, is a disclosure requirement for U.S. listed companies sourcing metals to improve corporate responsibility. It appears as it has had positive impact on its objective regarding transparency and has reduced conflict mines 7 but has also had negative impact through unemployment spikes 8. The underlying problem continues to exist and there are further limitations to the Act. One of which is the fact that it covers the 3TG minerals (tin, tantalum, tungsten and gold), but not other metals such as cobalt. In DRC, 40,000 children are involved in the cobalt mining process making $1-$2 per day 9. More than 1 million children are estimated to be working in mines worldwide 10. Over the last two years, prices for cobalt have tripled and demand is expected to double in another two years 12. 3

5 During 2010, many companies disengaged from countries like the DRC in part because of the implementation of the Act. However, in recent years, companies are beginning to realize that responsible sourcing from high-risk countries is possible, and to a significantly lower cost than expected 13. The five-step due diligence process established by the OECD for Responsible Supply Chains of Minerals was adopted in Hundreds of companies have implemented this framework, but many have still a long way to go 14. Amnesty found that companies in the computer, communication and consumer electronics sector have in general started to commit to improving due diligence over their cobalt supply chains, although few have identified smelters in the chain 15. Auto manufactures as a group lags the aforementioned sector and do still not consider metals such as cobalt to require due diligence, despite that OECD clarified in 2016 that its guidelines applies to other metals than 3TG 16. In our analysis, Nordea could show that, for every electric vehicle produced globally, there is an estimated 6 hours of hazardous child labour on average. At current production rates, there will not be enough cobalt to meet the demand in just a few years. The scarcity problem of some metals makes battery manufacturers locking in supply agreements for many years ahead 17, which also expose companies with weak governance practices to risks of anti-competitive behaviour. Extracting rare earth metals and other critical metals also causes significant environmental impacts along the supply chain. This is why some studies suggest that the lifecycle emissions of an average electric vehicle are actually higher than its traditional combustion counterparts 18, underscoring the need for companies to properly mitigate the negative consequences. The challenges present significant exposures to investors and financiers of financial, compliance, litigation and reputational risks. Recognising, addressing and acting upon these challenges and threats to sustainability by companies in the value chain are fundamental. True success in the transition to a low carbon economy lies in making green products and renewable energy sustainable at every step of the process Amnesty, 2017 Citibank, 2017 Sustainalytics, 2010 Enough Project, 2017, Thomson Reuters, 2017 Amnesty International, 2017 International Labor Organization (ILO), 2018 The Independent, 2017 UBS, 2017 OECD, 2018 Amnesty International, 2017 Ibid, 2017 Ibid, 2017 Financial Times, 2017 Ibid,

6 Key to Progress A number of steps can be taken by companies involved in the value chain of metal mining, production or usage. There are tools, programmes, initiatives and guidelines available for companies to leverage on. Traceability is crucial to managing the supply chain risks. To understand where the metal comes from is the first step to assess what risks the company is exposed to. Second is transparency. Investors and lenders with a stake in a company, and the management of that company, have not made fully informed decisions without knowing where the metals come from and under what conditions they were mined. Third is supplier engagement. A company should actively engage with its suppliers and sub-suppliers to ensure that the conditions under which the metals are mined, processed and produced are made in a responsible way. Finally, a company should require third party verification of such criteria. Furthermore, to support a circular economy, recycling metals by most auto and electronics manufacturers could improve. Rather than importing the already scarce metals from across the globe, inflicted with significant social concerns, companies should view local electronics waste as a rich source of material. Increased investments and research into reuse and recycling possibilities will bear fruit in the long term. 5

7 Recommendations Nordea Group has significant indirect and direct financial exposure stemming from the mining activities of rare earth metals and other critical metals. Investors and financiers have an ability, through its stake in various companies, to engage with companies to pursue solutions to the issues at hand. This is why we, at Nordea, have initiated a two-year engagement with the major auto manufacturers to address these concerns. We are also developing a benchmark on companies that are particularly exposed to the risks of negative community impact. It will include companies in the mining sector. Traceability, transparency, supplier engagement and third party verification, which are in line with OECD guidelines for Responsible Supply Chains of Minerals, are key elements to ensure that the transition to a low carbon economy is truly sustainable in every step of the process, which is also economically viable for long term stakeholders. 6

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