Explore how the Net Zero Standard for Diversified Mining can support the investment and engagement needed for an orderly net zero transition. This piece helps investors understand how a disaggregated approach to mining commodities can be helpful in understanding their transition risks and opportunities.
Tool assessing miners’ transition plans
The Net Zero Standard for Diversified Mining is a new tool to help investors assess mining companies’ net zero transition plans. This framework can help investors committed to net zero to understand the risks and opportunities that come with investing in mining companies, and inform productive engagement efforts.
This is crucial, as aside from potential exposure to coal, diversified mining companies can play an important role in enabling the net zero transition by providing essential materials for clean energy technologies.
A disaggregated approach to mining
Diversified mining is a complicated sector: some materials can help to bring about a net zero future, while others will have little-to-no place in one. The Net Zero Standard for Diversified Mining assesses individual commodities separately, to help investors to understand a company’s overall exposure to transition risks and opportunities.
To help investors understand how mining companies are seeking to capitalise on the opportunities created by the net zero transition, the Standard distinguishes between “key transition materials” and “other transition materials”.
Key transition materials are mostly commodities going into batteries, where a particularly high share of output is destined for transition activities, and that have high growth. These include lithium, copper, and nickel. Other transition materials include aluminium, silicon, and titanium.
The Standard treats all transition materials as climate solutions, which is helpful for investors who have set an allocation to climate solutions target using the Net Zero Investment Framework.
To help investors balance the need for growth here with the potential impact on local communities, the Standard then screens key transition materials to assess whether their production is consistent with social and environmental criteria.
An example which shows the importance of disaggregation of similar commodities is metallurgical coal and thermal coal.
Metallurgical coal is higher-grade and is used in the production of steel, whereas thermal coal is burned for power generation. Reducing the consumption of coal, as the most emissions-intensive fossil fuel, is a high priority for decarbonisation in all climate scenarios. However, thermal coal is much easier to replace in electricity production, whereas the adoption of low-carbon steel production methods is likely to take longer.
This means these two types of coal have different paths to net zero and this is reflected in the approach taken by the Standard.
The International Energy Agency’s (IEA) Net Zero Emissions scenario models thermal coal consumption falling 50% by 2030 from a 2021 base. In contrast, metallurgical coal consumption has a much shallower decarbonisation trajectory with consumption falling 30% by 2030 from a 2021 base. By assessing these commodities separately, the Standard is able to reflect these nuances.
Reducing real world emissions
The Net Zero Standard for Diversified Mining will support the work of Climate Action 100+ signatories – a group of investors engaging with the world’s largest corporate emitters on climate change. These efforts are underpinned by the Climate Action 100+ Net Zero Company Benchmark which provides a sector-neutral assessment of companies’ net zero transition plans. The Net Zero Standard for Diversified Mining supplements this with additional sector-specific nuance and comparable information on mining companies.
Building on the process established by the Net Zero Standards for banks and oil and gas, it is envisaged that there will be a pilot using the Net Zero Standard for Diversified Mining with a select group of companies, and that it will eventually be used to assess all the world’s heaviest-emitting miners as part of Climate Action 100+.
This will help investors understand where progress is being made, including recognising the companies making leading-edge commitments. It will help them to understand which mining companies are on track for net zero, forming the basis for their engagement efforts.
Investors are in a key position to support mining companies to navigate the transition successfully.
An example: the iron ore value chain often dominates the scope 3 emissions of a diversified miner because iron ore is used in steel production, and metallurgical coal is burned during that process. While the world will still need steel and thus iron ore in a net-zero future, steel-making must decarbonise. Therefore iron ore sales to steelmakers without credible net-zero strategies presents a transition risk to miners and their investors.
Investors are well-placed to help miners navigate this particular transition risk’ and support both miners and steelmakers to secure the resilience of the overall value chain.
Investors recognise that companies need the support of local communities and workers to transition rapidly. The Standard includes dedicated just transition metrics so that investors can understand how miners are integrating social and environmental considerations into their operations.
An example of why just transition metrics are important is minimising the impact of new mines for transition materials on communities, and ensuring that new work opportunities are harnessed in a way that maximises local economic development. This can include factoring in issues like disruptions to the traditional livelihoods of Indigenous Peoples.
Climate standards enhance portfolio resilience
The mining sector is pivotal to the net zero transition, and has a huge influence on other sectors of the economy, including autos, property, steel and manufacturing, which rely on the commodities it produces.
Using this Standard will help investors understand the credibility of company transition strategies, enabling them to improve their ability to assess their individual portfolio risks and opportunities.
If the world is going to meet the Paris Agreement goals, capital must support the pursuit of sectoral decarbonisation pathways. Mining needs to undergo its own decarbonisation journey but also plays an important role in the decarbonisation of other sectors through the provision of transition materials.
The Net Zero Standard for Diversified Mining helps investors to understand both aspects necessary for the mining industry to support a net zero future.
Source: IIGCC News