ESG Mining – Turning a brown industry greener

Published Date: May 9th, 2024 | Author: Jake Coulson

The ESG mining opportunity

Mining is a cornerstone of human civilisation. For millennia, we have delved increasingly deeper below the Earth’s surface to source metals and minerals that are unavailable above ground. Today, the average US-born individual will use around 3.07 million pounds of materials in their lifetime.

To break that down further – around 40,209 pounds of new materials must be provided for every person in the US each year. This includes the materials needed for energy generation – including around 3,000 pounds of coal, which currently supplies just over a third of global electricity generation.

Source: Ember, 2024; Energy Institute, 2023; Our World in Data, 2024. For illustrative purposes only.

It would appear, however, that coal’s dominance may come to an end in the coming decades. Countries around the globe are increasingly committing to net-zero targets, designed to curtail greenhouse gas emissions and ultimately mitigate the effects of climate change.

Most of these targets pledge to reach net-zero by 2050 – if this is to be achieved, coal’s contribution to the global energy mix would have to decrease substantially, in favour of cleaner energy sources.

But mining itself cannot be phased out in the same way. While coal mining should subside, we will need to double down on mining the critical materials required to realise the clean energy transition.

Decarbonisation means electrification – whereas oil and natural gas can be transported via pipelines, clean energy relies on wires, and that relies on copper. Similarly, coal can be piled up and stored for later use, but cleanly generated electricity must be stored in batteries, requiring vast quantities of lithium, nickel, manganese, cobalt, and graphite.

Accordingly, by 2050, the World Bank forecasts that demand for metals and minerals required to produce clean energy will rise by 500%.

Source: Sprott Asset Management. For illustrative purposes only.

So, while we can look to decarbonise using clean energy, mining is not going anywhere. Mining materials used for decarbonisation is a positive step, but how can we address the emissions associated with mining itself? After all, it’s a typically “brown” industry, with a significant impact on the environment. As Forbes puts it, we have a “fruit of the poisonous tree” issue, whereby if the “tree” is tainted, it does not matter how fresh the “fruit” is.

Miners themselves are making progress. There has been a significant increase in environmental, social, and governance (ESG) reporting requirements – over the last four years, there has been a 74% rise in ESG requirements globally. This involves closer inspection of the full supply chain, and ensuring that miners are promoting responsible sourcing practices.

From site inspections, to working with local governments around mines, and pushing for diversity in the workforce – strides are being made. But how do you separate the “good eggs” from the “bad eggs”? For investors looking to minimise the carbon intensity of their portfolios, there are solutions.

For example, the Nasdaq Sprott Energy Transition Materials Ex Uranium Index (SETMU) tracks the performance of a selection of global securities in the energy transition materials industry. The index employs an ESG screen, excluding companies that do not comply with the United Nations Global Compact, companies with a Sustainalytics Controversy Rating of five, or companies involved to certain degrees with oil and gas, oil sands, thermal coal, or pesticides.

Another example is the Nasdaq Sprott Copper Miners ESG Screened™ Index (NSCOPE), which tracks the performance of ESG copper miners. Beyond the ESG screen, the methodology requires constituents to have a maximum 7 tCO₂e /t CU. That means for every ton of copper produced, the associated carbon emissions should not exceed 7 metric tons of carbon dioxide equivalent.

Beyond critical materials, ESG values are also being adopted for the mining of precious metals, such as gold. The Solactive AuAg ESG Gold Mining Index NTR (SOLESGON) tracks the performance of the 25 best-in-class ESG gold mining companies. The index ranks securities by their ESG Risk Score in ascending order, and are then equal weighted.

Investors can access lower carbon mining solutions via ESG screened ETFs, and ETFs classified as Article 8 under the Sustainable Finance Disclosure Regulation. While the past couple of years have seen significant downgrades in this space, with notable mining ETFs dropping to Article 6, there remain ETFs with ESG screens and SFDR Article 8 classification.

HANetf has 3 mining ETFs classified as SFDR Article 8. The first is Sprott Energy Transition Materials UCITS ETF (SETM), which provides exposure to the critical materials required for the clean energy transition.

Sprott Copper Miners ESG Screened UCITS ETF (CPPR) is Europe’s first ESG-screened copper mining ETF, and is also classified as SFDR Article 8. The ETF was designed in association with Skarn Associates, and constituents must have a maximum 7 tCO2e /t CU.

AuAg ESG Gold Mining UCITS ETF (ESGO) provides exposure to the 25 best-in-class ESG gold miners. The fund uses Sustainalytics to screen out companies that fail to meet the ESG criteria. It is classified as SFDR Article 8.

In total, HANetf has 10 SFDR Article 8 ETFs and one Article 9.

RISKS

Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility. Investors’ capital is fully at risk and may not get back the amount originally invested.

Exchange rates can have a positive or negative effect on returns. The value of equities and equity-related securities can be affected by daily stock and currency market movements.

When you invest in ETFs, your capital is at risk.

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