Mining is a crucial industry when it comes to decarbonization and the transition to a low-carbon economy. It is probably more crucial than most hard-to-abate industries since the mining industry is the first link in the value chain. The supply of raw materials will be at the center of the global decarbonization and electrification efforts of most other industries. For example, wind and solar power generation, battery cell-based electric vehicles, and hydrogen production all rely on the mining industry to deliver minerals needed to support these initiatives. According to the International Energy Agency, the mineral requirements for clean energy technologies are expected to quadruple by 2040 to align with goals proposed by the Paris agreement.1
The mining industry is a highly carbon-intensive industry and a significant emitter of greenhouse gases (GHGs). When we look at the carbon profile of the mining industry, we see that Scope 1 and 2 emissions account for 4 to 7% of total global GHG emissions and when we include Scope 3, this rises to 28%.2 The mining industry has only just begun to set emission-reduction targets and obviously more needs to be done.
Reaching Paris Agreement objectives will require a significant lift from all parties along the value chain. To align with a scenario of 2 degrees above preindustrial levels, all sectors must reduce their emissions by at least 50% by 2050, compared to 2010 levels. To align with a 1.5-degree scenario, they must reduce emissions by at least 85% in the same time frame.3 With these daunting targets on the horizon, the mining industry must focus efforts on areas that can potentially make the most progress.
What Does the Process of Decarbonization Involve?
Depending on the mine, Scope 3 emissions can account for up to 95% of a company’s total emissions.4 This means that any mining products being processed by another industry, such as steel production and automobile manufacturing, are part of the mine’s Scope 3 emissions and account for the lion’s share. Thus, the mining industry does not have direct control over a significant portion of its Scope 3 emissions and must be innovative to address this challenge.
To target Scope 3 emissions, mining companies must engage with suppliers and customers by setting supplier engagement targets, monitoring progress regularly, and creating incentives for action. Mines can invest in low-carbon technologies and collaborate with customers to reduce the carbon intensity of downstream production, such as with steelmaking. This would also facilitate the development of greener products to reduce lifecycle emissions. Focusing on less carbon intensive and more fuel-efficient methods during shipping and transportation of raw materials can also contribute to meeting Scope 3 targets.
As for Scope 1 and 2 emissions, most of these come from diesel-powered equipment and gray energy sources in mining. Switching to sustainable fuels, the electrification of mining equipment, and using greener sources of energy such as wind and solar, can help reduce mine-level emissions.
How can Decarbonization be Financed?
Mining companies have two sustainable finance options when it comes to raising capital for decarbonization efforts. The first is through issuing a use of proceeds bond like a green or transition bond. These are sustainable finance instruments where companies identify specific projects with the potential for decarbonization and allocate the proceeds of the bond to those projects exclusively. These bonds can be of significant benefit to a mining company as they decarbonize. For instance, it can use the proceeds to finance the electrification of mining equipment, switch to more sustainable fuel alternatives, procure and generate renewable energy, or implement energy efficient measures.
The second option is sustainability-linked financing. With this instrument, mining companies can set environmental and social key performance indicators (KPIs) that target a material issue related to the mining industry. They can then tie the financial characteristics of the sustainability-linked bond or loan to the achievement of relevant KPIs. In this format, they can use the proceeds for general corporate purposes rather than specific projects and benefit overall decarbonization efforts. Examples of relevant KPIs for the mining industry could include reduction in GHG emissions, improvement of water use efficiency, energy efficiency, or even social KPIs such as the percentage of women in leadership roles.
The Credibility of Sustainable Finance Transactions in Carbon Intensive Industries
The mining industry is carbon intensive, considered hard to abate, and associated with environmental, social, and corporate governance (ESG) risks, which adds to the stigma. However, it is essential to include these industries in discussions about sustainable finance because achieving climate targets without their efforts is impossible.
Having said that, if companies from so-called hard-to-abate sectors issue sustainable finance instruments, they must go the extra mile to ensure the credibility of their issuance to avoid any greenwashing concerns. Given the increased scrutiny, changing investor expectations, and regulatory landscape, carbon-intensive companies such as mining must pay extra attention when explaining their decarbonization strategy as part of their issuance and how they are working to mitigate certain environmental and social risks.
In general, mining companies are encouraged to tie their decarbonization efforts to their issuance. For these types of companies, setting credible KPIs or funding green projects is often not enough. They are also expected to prove they have a credible decarbonization plan, provide comprehensive details on how they intend to tackle downstream emissions on a broader scale, and include this information in the issuance, framework, and roadshow documents. These actions will signal to the market that a company is not only well positioned on the issuance, but also throughout its organization.
Additionally, mining companies should explain how they plan to mitigate the risks associated with their operations, like disclosing environmental and social impact assessments, and providing more detail on the measures of relevant ESG topics such as land use, biodiversity, waste management, occupational health and safety, and mine-level action plans, including disclosure and rehabilitation plans. The upfront disclosure of such information could play an important role in increasing market players’ confidence while allowing companies to prove preparedness.
Simply put, the more information disclosed and integrated into sustainable finance transactions, the more comfortable the market feels.
For more information on Sustainable Finance Instruments, visit Second-Party Opinions (sustainalytics.com).
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