Investors face increased commodity risk in ESG funds

 

The renewable energy revolution is relying on raw material mining to power the technology, but the supply chain is revealing serious human rights abuses and environmental damage

The dark side of ESG investing has the potential to undermine an entire generation of clean-tech strategies.

Adam Matthews, chief responsible investment officer of the Church of England Pensions Board, said not nearly enough attention was being paid to the risks of a renewable energy boom through the mining industry. The result, according to the 47-year-old, is that departments created with the aim of upholding environmental, social or good governance principles may be exposed to human rights abuses and environmental damage through supply chains.

It's an issue that has led Mathews and other investors to recently form a coalition aimed at shining a spotlight on the topic by making it too difficult for fund managers to plead ignorance. The Global Investors Commission on Mining 2030, which is being advised by the United Nations, plans to highlight and fight the systemic risks posed by the link between the mining and clean-energy industry.

"The auto sector is exposed in a big way, as are wind turbine manufacturers," Mathews said in an interview.

But "we should be under no illusion" about the fact that such minerals and metals often come from regions where "unstable government structures" are the norm, and where the dynamics surrounding mining "play a role in conflict," They said. He said the renewables boom that is now underway threatens to "inflame and exacerbate" such volatility.

The building blocks needed to expand wind, solar and electric-vehicle production will require significantly more minerals and metals than combustion-powered technology. The World Bank estimates that by the middle of the century, the amount of raw materials required for the green transition will increase by 500%. And with new legislation like the US Inflation Reduction Act turbo-charging demand for clean tech, that pressure is bound to increase.

"We have some companies that are good businessmen, but that doesn't represent the entire sector," Mathew said, refusing to single out individual firms.

BloombergNEF analysts estimate that 5.2 billion metric tons of metals may need to be mined by 2050, which could be worth up to $10 trillion.

Some companies are either looking for ways around raw materials, or trying to reduce their exposure to risks by having direct control over supply lines. Tesla Inc is redesigning batteries to avoid cobalt and nickel. General Motors Co. recently invested $650 million in Lithium Americas Corp., which is developing a mine in Nevada.

Manufacturers and their investors in the renewables industry already face a tighter regulatory environment in some major jurisdictions. The European Union has made it clear that it does not want to fall prey to the same dependence on suppliers of raw materials such as lithium that has happened in the case of oil and gas. In September, the bloc unveiled the Critical Raw Materials Act with the express purpose of securing "sustainable access" to the minerals and metals needed to achieve climate neutrality.