A market is opening up for rating mining projects from an environmental, social and governance, or ESG, standpoint, as original equipment manufacturers and technology companies heighten scrutiny of the origins of raw materials for their “green economy” products, such as electric vehicle and energy storage batteries.
Such ratings will facilitate decisions by financiers and end-users on which projects to support and which products to buy, and help align the mining sector’s ESG indicators, which currently lack standardization.
Specialist ESG mine ratings – typically giving mine operations classifications starting from a low-risk AAA down to D – are set to add an extra dimension to market perceptions and visibility as demand for mined product grows. Awareness of governance has also risen in the aftermath of recent fatal iron ore tailings dams accidents in Brazil involving Vale and BHP, and Rio Tinto’s destruction of sacred indigenous caves in Australia.
ESG factors have affected iron ore supply, pricing
Credit ratings agencies including S&P Global Ratings, a division of S&P Global, have traditionally focused on assessing entities’ probability of default. They are now increasingly offering E, S and G, as well as sustainability assessments within a credit analysis and as standalone analysis.
Since 2019 S&P Global Ratings has been offering ESG Evaluations of company strategies, requested and paid for by the client, which can then make the evaluation publicly available if it wishes. S&P Global describes this as a “forward looking, long term opinion of readiness for disruptive ESG risks and opportunities,” reviewed and updated annually. An analysis of Scope 2 emissions mitigations strategies may also be included.
The only such evaluation on a mining company so far made publicly available is on Australia’s Fortescue Metals Group, the world’s fourth biggest iron ore producer. It gained a 66/100 ESG Evaluation (described by S&P Global as reflecting “robust” ESG management practices) and a Strong (+ 8) Preparedness Opinion, indicating it is well prepared to remain resilient to disruptions, especially the energy transition.
“The ESG Evaluations have been launched in response to growing demand for this type of analysis, answering a need in the marketplace,” said an S&P Global Ratings spokesperson. “ESG Evaluations are designed to be cross-sector, relative analysis of an entity’s capacity to operate successfully in the future.”
S&P Global, within its Sustainable1 division, also offers Corporate Sustainability Assessments, which evaluate companies’ sustainability practices. This already covers over 10,000 firms from around the world, including companies in the mining sector.
Auditors and consultants have also become active in the ESG evaluation space.
Kazakhstan-focused diversified miner Eurasian Resources Group, whose long-term credit rating was upgraded by S&P in July to B from B- with stable outlook on strong performance and robust markets, in the same month released its specialized ESG-focused Clean Cobalt & Copper Performance Report 2022.
The report, assured by independent auditor PricewaterhouseCoopers, focuses on activities at ERG’s Metalkol cobalt and copper tailings recycling facility in the Democratic Republic of Congo, reinforcing the principles of OECD due diligence guidance for responsible mineral supply chains from conflict-affected and high-risk areas.
PwC’s assurance demonstrates the greater attention now being given by the accountancy sector to sustainable mine initiatives.
Traditional mine company ratings information may still be collected by algorithms, which may not appreciate ethics and may focus too much on past performance, said Jamie Strauss, an independent specialist mine rater, founder and CEO of UK-based Digbee ESG, a pioneer among “future-facing” mine accreditation firms.
“There seems [currently] to be a lack of coverage and transparency in the methodology, a lack of granularity in ratings that needs to be addressed,” Strauss said.
“Currently ratings agencies are typically backward-looking and may not pick up what a miner plans to integrate with a local community over the life of mines and beyond. We have to lead from the top, from the G [governance], and encourage the geographic context: it’s important that we move away from penalizing certain areas, such as the [Democratic Republic of the Congo], which may need mining more.” Mining is historically considered dirty and dangerous, both in terms of its operations and carbon emissions, but the industry now has an onus to produce more in line with the green economy’s growing mineral demand.
Six out of 10 energy transition goals can’t be achieved without critical minerals such as lithium, cobalt, graphite, rare earths, copper and nickel, according to the UK Critical Minerals Association, an adviser to the country’s government on its critical minerals strategy.
Global demand for critical minerals required for net-zero technologies is expected to increase six-fold from 7.1 million mt in 2020 to 42.3 million mt by 2050, the association said.
New mine projects must be brought on stream to meet demand, with certified green production that could in the future command ESG-related price premiums.
A system of specialist ratings could also speed up mine development.
International Energy Agency data shows that it takes an average of 16 years to take a mining project from discovery into production, given many factors including geopolitics, the need for new infrastructure and overall falling mineral qualities, now that many of the world’s richest deposits have already been mined.
In comparison, a gigafactory for production of electric vehicle or energy storage batteries can be up and running in two years.
“This leaves a problematic time lag,” the UK CMA said.
Financiers request ESG ratings
Digbee started rating mine operations following a March 2020 request by financiers, including major investment and risk management companies BlackRock and Orion Resource Partners, Strauss told S&P Global Commodity Insights in an interview.
“Private equity groups including Tembo Capital, Appian Capital and Arch have also endorsed this,” he said. These groups are key influencers in an industry where financing now derives increasingly from private equity sources, while traditional financiers including major banks baulk at the sector’s growing ESG-related risks.
Thirty-six global standards for the mining sector, including those from the World Bank, International Finance Corporation, United Nations and Extractive Industries Transparency Initiative are mapped in the Digbee ratings process, Strauss said.
The specialist agency has already rated over 25 companies at exploration, development and production stages, along with a royalties company.
It expects to complete assessments – to be repeated annually – on around 50 companies by Q2 2023. Scores will be published 12 months after the initial assessment.
So far, much of the demand for many of the independent ratings has come from graphite projects.
In a market hungry for new capacity, demand for some types of graphite is growing as much as 30% annually. As soon as 2030, overall demand for graphite used in anodes for electric vehicle batteries as well as in the construction sector is expected to be triple the current global production of 1.4 million mt/year.
Lithium and rare earths – also used in transport electrification – are also expected to be frontrunners in the ratings stakes.
ASX-listed BlackEarth Minerals, which is developing a graphite mine in Madagascar and a processing plant in India, has been one of Digbee’s early customers, gaining a BB rating.
“I don’t think mine ratings will become mandatory, but self-assessment will become more important and may be a prerequisite in financing. In country terms, 95% of the world’s graphite is from riskier countries,” BlackEarth CEO Tom Revy told S&P Global.
“Having a rating will be an enormous plus – it will just make life easier.”
Battery passport scores
Mineral product ratings in the future will come not only from agencies. A score relating to ESG performance across the battery value chain is to be included in the Global Battery Passport, currently in a pilot phase and set to be launched at the World Economic Forum at Davos in January 2023 by the Global Battery Alliance.
The digital passport is designed to help align the transport and power industries with the goals of the Paris Agreement by 2030. With just a barcode or a QR code, it will show stakeholders in the EV battery production chain and the end-users data – including where the minerals used in a specific battery originate; how they were produced, for instance in terms of human rights considerations; and carbon footprint – while at the same time validating battery performance and setting relevant benchmarks.
“It’s a data consolidator to boost transparency and we expect it to become a global industry standard for batteries, which could also determine price differentiation in end-products,” said Benedikt Sobotka, co-chair of GBA, the largest multistakeholder coalition in this space. GBA now groups together 120 members, including miners, carmakers, government departments, industry associations, civil society and academia.
GBA in December launched a Human Rights Index and a Child Labour Index for the Battery Passport, said to be the first-ever frameworks to measure and score the efforts of companies or products specific to the battery value chain towards supporting the elimination of child labor and respecting human rights.
Sobotka, also CEO of miner ERG, sees that specialist ESG ratings will from now on be “increasingly important” if the mining industry is to meet energy transition-related demand in the “dramatic” timescale that climate targets require, because the mine development climate, including licensing, is increasingly complex and regulation-driven.
Larger miners may already adhere to accepted ESG principles. “But a very large part of this industry is made up of small-to-mid size companies, sometimes in complicated geographies,” Sobotka said. “We will need to see a lot more transparency-creating and a lot more single-asset ESG rating. Stakeholders will demand this.”
