How to Unearth Sustainable Investment in Mining: A Financial Professional's Guide

The global mining sector extracts and refines a wide range of materials, used in everything from construction to automotive output to electricity generation and electronics production.

Each of these produces significant carbon dioxide emissions and has contributed to environmental degradation such as deforestation. These can have negative implications for a range of local stakeholders.

In addition, control of the supply of so-called critical minerals and metals is at the forefront of rising geopolitical tensions across the globe. Trade policy tools such as export restrictions and import tariffs are increasingly being used in the current geopolitical backdrop.

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Mining will be an important facilitator

On the other hand, mining is set to be a crucial facilitator of the global energy transition from a system largely running on fossil fuels to a more resource-intensive one that integrates low-carbon technologies at scale.

Despite their significantly lower lifecycle emissions profiles, electric vehicles (EV) and renewable electricity generation capacity require an average of five times more mined materials to build than those powered by oil, natural gas or coal, according to the International Energy Agency

The clean technologies that will power the energy transition can't be scaled up without using significantly more mined resources such as copper, nickel, lithium, cobalt and rare earth elements.

As a result, the investment proposition for mining is distinctly different than it is for other natural resource extractive industries, such as oil and gas production.

With the inherent risks associated with the sector, it's crucial that responsible investors identify companies that are well-positioned to both capture the growing opportunity and mitigate the operational and geopolitical risks that come with mining.

There are three factors to consider when investing in this sector:

• Sustainability themes that drive on-the-ground change
• Mining's compatibility with responsible investment principles
• Areas of investment preference in the sector based on deep research

Three themes drive on-the-ground change

1. Energy transition spending. In 2024, global spending on clean technology hit an all-time high of over $2 trillion, according to Bloomberg News, almost twice that of fossil fuels.

The gap between the two is positioned to grow over time, with global low-carbon spending driven as much by economics, energy security and bolstering domestic manufacturing as it is by coordinated climate change action.

2. Threats to the license to operate. Mining companies around the world face increasing challenges to develop new mines and to continue to operate existing ones due to permitting issues, local opposition or concession term renegotiations.

Localized stakeholder conflict, if not adequately managed, could lead to significant value destruction.

3. Rising resource nationalism. Geopolitics has an increasingly significant bearing on several aspects of the global mining sector.

Challenges include actors influencing investment flows to diversify metal supply chains away from China, merger and acquisition (M&A) transactions attracting increasing political attention, the rising use of trade policies such as import tariffs or export bans on sensitive metals and heightening market risk premiums for companies operating in certain resource-rich jurisdictions.

Three attributes to look for in mining companies

1. Operational integrity. The long-term success of mining companies depends on their ability to maintain operations amidst increasing stakeholder scrutiny.

Investors should examine a miner's stewardship of its assets, people and environment to ensure operations take place in a manner that's considerate of all stakeholders.

Attributes include minimizing impacts to local communities and worker welfare measures that prioritize both business continuity and employee well-being. In addition, we pay close attention to how a miner manages its environmental impact.

2. Decarbonization plan. Mining's ability to cut operational emissions as it supplies more raw materials to drive the energy transition will be crucial from both a carbon-credibility and cost basis.

It is critical to scrutinize the ambition and feasibility of corporate emissions-reduction targets and evaluate how companies are keeping pace with both peers and technology development.

3. Capital allocation. Miners should strategically position themselves to align with the structural demand trends of the energy transition through their commodity production or metal processing technology choices.

This involves taking a forward-looking view to analyze what a company's portfolio of assets will look like in the next decade to assess how this compares with investors' preferred commodity exposures.

Three areas of mining investment preference

1. Copper. Copper will play a central role in the energy transition and broader digitization, which links electrified technologies from wind and solar to EVs, battery storage and electricity grid expansions, as well as the build-out of data centers and AI infrastructure.

It has a structurally tight supply picture, paired with multiple growing demand drivers. In addition, global copper supplies are less geographically concentrated compared with other materials, meaning it is relatively less exposed to geopolitical shocks.

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2. The mining equipment supply chain. The opportunity set for value chain companies that supply equipment and provide services to miners might benefit from the need for more mined materials to be both extracted and processed globally in an efficient and safe manner while generating fewer carbon emissions.

3. Corporate change as a catalyst. In a traditionally slow-moving sector, it's important to continually be on the lookout for corporate change stories that can serve as a potential performance catalyst — for example, a sizable M&A or strategy shift.

Decisions today can shape how companies will look in the future through a change in commodity or geographic exposure and seek to preempt the resulting impact on sustainability performance.

The bottom line

With the energy transition set to mobilize hundreds of billions of dollars across the globe, the opportunity for responsible investors is significant, and mining is a crucial player in the journey.

There is an increasingly intertwined relationship going forward between a mining corporation's financial performance and conduct on key sustainability themes.

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