Mining sector gets its day in the sun

The mining sector has a critical role to play in supplying the raw materials needed for transition, as well as those that support global prosperity and growth. While it has often been overlooked in sustainable finance, work on the “green enabling” economy means the situation is changing – and Australia is at the forefront of this evolution.

Kathryn Lee Senior Staff Writer KANGANEWS

The Australian sustainable finance taxonomy is a great example of the drive to understand and incorporate the mining and minerals sector into the sustainable finance evolution. Historically, taxonomies focused on end use. They offered definitions for outcomes as diverse as green buildings, electricity and steel. What they did not do is incorporate the ingredients used to deliver green projects.

The mining, metals and minerals sector is a case in point. It has a significant environmental footprint but also produces some of the most crucial building blocks for energy transition. Solar panels, wind turbines, electric vehicles and long-term batteries rely on critical minerals, and as the energy transition gathers pace demand for these resources is only set to grow.

According to the International Energy Agency, under a “below two degrees” scenario annual demand for critical minerals will grow to 3.5 billion tonnes by 2050, a 350 per cent increase on current levels.

Delivering this output in a way that has the least possible environmental impact from extraction and processing requires vast investment. The providers of capital want certainty and rigour, which in turn requires enhanced guidance on the nature of sustainability in the sector.

Australia’s sustainable finance taxonomy set out from the start to deliver something that is “credible, usable and internationally interoperable, while reflecting the Australian economy and context”. Metals and mining is one of the central points of the local context, and the taxonomy will be the first in the world to outlay technical screening criteria to define mining and mineral processing projects as “green” or “transition” (see Australia to lead sustainable mining practice box).

Other moves are afoot, globally, to bring the metals and mining sector further into the sustainable finance tent. These include the taxonomies under development in Chile, Brazil and Kenya. Meanwhile, the European Commission has a project to develop thresholds to define what makes a mining or metals project green.

In June, the International Capital Markets Association (ICMA) released its “green enabling” project guidance to address key value chain projects that are not themselves green but are critical components of eligible green projects. This also enhances the relevance of avoided emissions (see Avoided emissions adds another tool to capital allocators’ kit box).

Australia to lead sustainable mining practice

Australia is taking the driver’s seat in setting sustainability standards for mining and minerals processing projects. The Australian sustainable finance taxonomy is the first in the world to incorporate the mining, minerals and metals sector.

The primary outcome of the taxonomy process is to determine, based on technical criteria, whether an activity is “green” – consistent with achieving net zero greenhouse gas emissions in line with the Paris Agreement – or if it is “transitioning”. The latter is defined as activities that do not have a low-carbon alternative but will be important in a net zero economy and meet sustainability performance standards.

The Australian taxonomy’s metals and mining work focuses on four metals: copper, lithium, nickel and iron ore. It therefore covers critical minerals for the transition task and the largest single revenue producer in the local economy.

Kristy Graham, Canberra-based chief executive of the Australian Sustainable Finance Institute (ASFI) – which is overseeing the taxonomy’s development – says Australia had no choice but to develop minerals and mining criteria, given the economic prominence of the industry and the fact that the sector will be a critical enabler of the wider transition.

“Mining and minerals is a huge part of the Australian economy, and it’s also an area where there are no global examples,” Graham tells KangaNews. “We could not just ‘lift and shift’ taxonomy criteria for mining from another taxonomy because other taxonomies don’t cover mining and minerals.”

ASFI saw an opportunity to improve sustainability from a nature perspective, in addition to climate alignment. The significance of the work is capturing the attention of other jurisdictions.

“We have received a lot of interest from countries like Chile, Indonesia, Canada and South Africa. They are watching what we do and are very interested in where it will land. They want to use it as the basis for the work they plan to conduct,” Graham says.

Graham adds that interoperability is an important priority in this context. ASFI has appointed the Climate Bonds Initiative (CBI) as a technical adviser, but Graham says its work to ensure the taxonomy will be broadly applicable is more far-reaching than this.

“Interoperability is about changing standards from other jurisdictions as little as possible. We are working with CBI as the technical partner. It is the voluntary standard setter in the space and has been involved in the development of every taxonomy globally. This is important to ensure technical level interoperability, but we are also working with the Australian government and partners like Indonesia to encourage harmonisation as much as possible,” Graham explains.

ASFI’s hope is that the Australian taxonomy will become the blueprint for the mining, metals and minerals sector worldwide, just as the EU’s taxonomy was transformational for sustainable finance more generally. “This would be a huge value and representative of the time and effort Australia has invested to draw on the expertise we have,” Graham concludes.

Mining and minerals is a huge part of the Australian economy, and it’s also an area where there are no global examples. We could not just ‘lift and shift’ taxonomy criteria for mining from another taxonomy because other taxonomies don’t cover mining and minerals.

KRISTY GRAHAM AUSTRALIAN SUSTAINABLE FINANCE INSTITUTE
ENABLING PROGRESS

These are exciting developments, says Robert White, Natixis CIB’s New York-based managing director and head of green and sustainable hub, Americas. In fact, he argues, they represent the next major step in the sustainable finance market’s evolution.

It is about more than one sector, too. White says ICMA’s green enabling guidance will contribute to directing as much capital as possible to climate-aligned opportunities. “It’s not just about minerals and metal – it is anything that enables transition,” he continues. “I don’t think we have even scratched the surface of how entities will use this.”

White gives two examples of where green enabling guidance could expand the reach of sustainable finance: the chemicals industry’s development of compounds that become key components in new forms of window glazing technology that can contribute to building net zero homes, and AI-focused IT solutions for decarbonising vehicle fleets.

“Understanding green enabling is absolutely essential to do what we are trying to do – which is to reprogramme the entire economy in an incredibly short space of time,” White notes. “We need to make sure as much capital as possible is available and finding opportunities, and this requires a real understanding of what green enabling means.”

“Understanding green enabling is absolutely essential to do what we are trying to do – which is to reprogramme the entire economy in an incredibly short space of time. We need to make sure as much capital as possible is available and finding opportunities, and this requires a real understanding of what green enabling means.”

It also gives banks a method to think about the areas beyond pure green project financing, explains Aaron Fleming, Natixis CIB’s Sydney-based co-head of energy transition and natural resources, Asia Pacific. “Banks are at the centre of the economy, facilitating capital flows. The economy needs to decarbonise and, in this context, we are being asked what we are doing to reduce funding to fossil fuels and how we are managing transition. All this is important but it misses the other side of the coin. Transition is about so much more, green enabling guidance helps unlock it,” he comments.

In Australia, there can be little doubt that the metals and mining sector is where the biggest impact of these developments will be felt. At 14.3 per cent of national output according to the Reserve Bank of Australia, the sector is the largest in the local economy – narrowly ahead of health and education in second place but generating nearly twice the output of the third-placed sector, finance.

Understanding and measuring the green enabling role of the metals and mining sector is not a simple task, however. There are numerous reasons why it has taken so long to draw out the connection between mining and sustainability goals.

Environmental impact is the low-hanging fruit, and traditionally it has been easier to focus on activities that directly drive down emissions. The further upstream the process – for instance, mining the resources needed to create a windfarm – the more difficult it is to quantify a contributing role and the more ambiguity about labelling it green.

Likewise, supply chains can be difficult to track. They are not vertically integrated, and it is hard to draw a direct line of sight between extraction and final use. The EU taxonomy – the global benchmark and the basis of sustainable finance taxonomies in many other jurisdictions – ignored mining because of its relatively minor role in the region’s economy.

The sector is inherently complex. It comes with environmental and social considerations often without clear answers. The industry has some obvious leaders on sustainability, but the playing field is not always level (see High standards for best performers box). “There is general awareness that mining can contribute to the transition. We have a great ingredient, but it has come with a lot of decisions, trade-offs and compromises about how to use it and where it is necessary,” White explains.

Another slowing factor has been the mining industry’s direct impact on emissions. “Upstream of the process, at the mine itself, or mid- to downstream at metals production, the processes are society’s polluters. But they are also, in many aspects, the solution,” Fleming says.

Avoided emissions adds another tool to capital allocators’ kit

In parallel with the International Capital Market Association (ICMA)’s green enabling criteria is a new focus for the market: avoided emissions. This could help drive capital toward solution providers.

“It is a measurement metric and a really key one, because it allows financiers to quantify and differentiate the value between green or green enabling projects,” explains Robert White, Natixis CIB managing director and head of green and sustainable hub, Americas. “Even within a taxonomy, a green project could have different avoided emissions depending on where it is deployed. Avoided emissions is different for a windfarm in Australia, where there is still a high prominence of brown coal in the grid, and one in New Zealand, where the grid is already very green.”

White says this type of impact measurement could be helpful to asset managers when aggregated on a large scale. “Investors need to be driving down financed emissions and increasing avoided emissions. They both need to be measured and are an important component of how banks and investors should be assessed,” he explains.

A lot of the focus within financial institutions has been on financed emissions, White continues. But this misses the key role the financial community has in the economy, which is to drive capital toward solutions – not just to cut funding. If capital needs to be reallocated, White says it is most useful to focus on the opportunity side of the ledger.

The challenge is that there is not a clear metric for how avoided emissions should be measured. “It is not being done consistently,” White acknowledges. “A company cannot say it is emitting in one place but avoiding elsewhere, therefore it is carbon-neutral. Avoided emissions is a separate measurement, of a company or activity’s contribution to decarbonisation no matter where it sits in the value chain. It is not an offset.”

SUPPORTING TRANSITION

Natixis CIB believes it has an important role to play in directing capital where it needs to go. It also has to understand its own exposures. Frank Pluta, Paris-based global head of energy transition and natural resources, explains that Natixis CIB began to think about its heavy exposure to oil and gas half a decade ago. Ever since, he says, it has been working to revolutionise its balance sheet.

This includes reducing investment in fossil fuels while increasing exposure to metals, mining and renewables. Natixis CIB has also been investing in new energies including hydrogen, small modular nuclear reactors, biofuels and sustainable aviation fuels. Pluta says the process is more cumbersome than Natixis CIB expected at the outset. “We thought it would be quick to develop opportunities in metals and mining, and in all new energies. But it hasn’t been – and there is good reason why. This is what we are talking about when we refer to a transition. It can’t happen overnight, it will take years,” he adds.

“We thought it would be quick to develop opportunities in metals and mining, and in all new energies. But it hasn’t been – and there is good reason why. This is what we are talking about when we refer to a transition. It can’t happen overnight, it will take years.”

This work is part of Natixis CIB’s strategic plan – a project called “scale up” that makes up part of its parent company, Groupe BPCE’s, Vision 2030 strategy.

Janie Wittey, senior country manager and Australia chief executive at Natixis CIB in Sydney, says: “We have a clear ambition for 2030, which is to become a key global player committed to more sustainable economic models. We will position ourselves at the heart of transition by developing ESG [environmental, social and governance]-related strategic advisory, adopting technological advances, and supporting our clients in their transitions and allocations to sustainable investment solutions.”

Vulcan makes net zero lithium a reality

Vulcan Energy Resources’ project in Germany is unique because it harnesses geothermal power to make lithium extraction a carbon-neutral process. Vulcan’s Perth-based founder and executive chair, Francis Wedin, discusses the company’s financing journey.

Vulcan has raised more than A$500 million (US$329.9 million) of equity to date, and is in the process of securing project level debt and equity financing to build its phase-one project.

Its new project aims to decarbonise the lithium supply chain. Lithium can be found from two main sources: in spodumene – a type of hard rock – or from lithium-rich brine. The Upper Rhine Valley project has the latter, but the site also doubles as a geothermal renewable energy source. This allows Vulcan to use the hot brine to create geothermal energy that it can partly use to extract lithium.

Any energy left over is exported to the electricity grid. This is an addition to the lithium to be produced, for which Vulcan has several offtake agreements with major auto and battery manufacturers.

Particularly at the end of 2021, there was a lot of noise and jargon thrown around about ESG [environmental, social and governance]. The more specific criteria that need to be addressed to be classified as green, and the more scrutiny placed on this, the better. We certainly welcome it.

FRANCIS WEDIN VULCAN ENERGY RESOURCES

Since 2019, Natixis CIB has assessed financing prospects with an internal framework called the “green weighting factor”. This places all financing on a spectrum from dark green to dark brown. Natixis CIB effectively penalises itself for holding non-green assets by requiring more intensive capitalisation for this type of lending.

The methodology applies across the whole business. Fleming says it has been a good way to gradually change the profile of the balance sheet without a sharp withdrawal of financing, especially for existing clients. “It forces us to engage with clients and ask how we can help them transition – how we can move their profile,” he explains.

He adds: “There is a very specific list of questions and criteria that has complexity, particularly at the corporate level. There is a huge volume of work involved and it is not always as simple as looking at a particular project. Businesses have activities in a range of areas.”

“We have a clear ambition for 2030, which is to become a key global player committed to more sustainable economic models. We will position ourselves at the heart of transition by developing ESG related strategic advisory, adopting technological advances and supporting our clients in their transitions.”

It is effectively an internal taxonomy that operationalises Natixis CIB’s work in supporting the transition, White explains. He says it sets up Natixis CIB and its clients for a discussion where the bank can talk through the client’s current position on the rating scale, what adjustments can be made to get a better score, and whether these improvements are feasible and something Natixis CIB can assist with.

This includes whether the client needs capital to invest or to explore diversification, or if it needs to explore acquisition or divestment. “It is technical advice and a much more nuanced discussion than we ever had previously,” White adds.

Though Natixis CIB is clear on the direction it wants to take with its balance sheet, projects that are aligned to a net zero future are not always immediately investable. Pluta says there is a huge opportunity for equity investment but finding chances to deploy bank financing can be tough.

“We are here to finance the transition. But there are not going to be lots of opportunities to support new mining operations that will do so, for instance – because developing a new mine takes on average 10-15 years from discovery to operation. Even so, it is the plan and ambition we have for the long term,” he tells KangaNews.

One project in which Natixis CIB has been able to insert itself on the ground floor is for Perth-headquartered company Vulcan Energy Resources’ net zero lithium project in Germany’s Rhine Valley (see Vulcan makes net zero lithium a reality box). Natixis is the green structurer for the company’s financing. Natixis CIB also advises InfraVia Capital Partners – a European private equity firm – on its critical metals fund. The purpose of this fund is to invest in resources that support the energy transition and secure supply chains for French and European industries.

High standards for the best performers

The mining, metals and minerals sector is not unprepared for a greater role to be played by sustainable finance. Those close to the sector argue that it already features a lot of sustainability expertise and they expect the industry will adapt once the Australian sustainable finance taxonomy comes online.

If a hospital has a bad doctor the right move is not to shut down the hospital, it is to get rid of the doctor. Aaron Fleming, co-head of industry group, energy and natural resources, Asia Pacific at Natixis CIB, argues the same is true for the mining sector.

While he acknowledges there are some bad actors, he says in many ways the industry already operates sustainably. Reducing carbon emissions is challenging, but in areas such as waste management and community engagement the industry is prepared, he adds.

“A mining operation is often best understood as something that is focused on managing and dealing with different forms of waste – whether it is actual waste mined to get to the ore, tailings from processing the ore, or various aspects of water management around the site,” Fleming notes.

Users don’t pay for things like carbon emissions in a normal world environment. Something has to come in to capture the externality and force it into the price. The same is true for social and other factors.

AARON FLEMING NATIXIS CIB
MOVING BENCHMARK

Sector leaders are lighting the path for mining and metals operators, but the reality is that much of the rigour sustainable finance is developing remains voluntary. White says: “Businesses are always going to ask what the cost is to get into the ‘green zone’. They need to be rewarded for doing so. Even if it is not in the form of direct monetary compensation, there are important outcomes like social license or stakeholder engagement where taking a leadership position will help secure other parts of the operations or lock in a higher quality offtaker.”

White also believes capital providers can further drive change. “The bar is going to keep going up,” he says. “There are ESG red lines where access to capital vanishes. It becomes difficult to get permits and no international banks that are signed up to various initiatives are going to lend. This means cost of capital either skyrockets or vanishes.”

Initiatives include the Net Zero Banking Alliance, the UN-convened Net-Zero Asset Owner Alliance and the Net Zero Asset Managers initiative. Like sustainable finance itself, the agreements banks are signing up to are expanding their scope of focus.

“There is increasing scrutiny not just on traditional ESG risk factors but on the carbon intensity of operations,” White continues. “When banks and investors look at the sectors they finance, items like a taxonomy allow them to benchmark certain intensity thresholds. All being equal, they want to make sure they are picking the leaders. It is becoming a more collective effort.”

Market standards like Australia’s taxonomy and ICMA’s green enabling guidance will have dramatic influences on this movement, White suggests, by helping investors identify what they want to be associated with. “The green line is shifting. The focus on green enabling and taxonomy will provide the framework for investors to come in.”