Plugging the metals gap – seeking sustainable leaders for the energy transition

Plugging the metals gap – seeking sustainable leaders for the energy transition

There are many sectors and activities where, if the world is moving towards a more sustainable future, we need to be able to allocate capital and invest in industries that are crucial to this transition. Here we focus on copper mining, and in particular, our holding in Antofagasta.

The real skill sits in the balance of probabilities and getting paid for the amount of risk you are taking.

As we look to decarbonise the global economy we can expect to see continued expansion of low carbon technologies, such as renewable energy and electric vehicles (EVs). This will result in an increase in demand for the transition metals, particularly copper, that these technologies require. For example, solar photovoltaic (PV), onshore wind, and offshore wind require roughly 2.8, 2.9 and 8 tonnes of copper per MW of new capacity, in addition to other transition metals such as silicon or zinc. If we look at transport, full battery EVs require roughly 2.5x more copper per vehicle compared to traditional combustion engines, as well as extensive charging networks.

Minerals used in clean energy technologies compared to other power generation sources
Minerals used in electric cars compared to conventional cars
Source: IEA, 2021

In fact, demand for copper in electromobility and renewables is expected to account for nearly 40% of total growth over the next 20 years1, with some estimates suggesting that global copper demand will be 50% higher in 2040 than today2. This demand for copper will inevitably increase so much that it cannot be met just by recycling existing above ground supplies. Mining for more copper will be required.

Our overall approach to sustainable investment within the CT Sustainable Universal MAP range is built upon 3 key pillars:  Avoid, Invest, Improve.

Avoid – We want to Avoid companies with socially damaging products or unsustainable business practices.

Invest – We aim to Invest around themes and in companies which are either part of a sustainable future or will assist us on our pathway to it.

Improve – We will seek to improve the companies we do own, engaging with management to drive change and share best practice. This is led by our Responsible Investment (RI) team.

The mention of any specific shares should not be taken as a recommendation to deal.  Columbia Threadneedle Investments does not give any investment advice.

Avoid – a robust approach to exclusions.

The mining sector has a range of negative environmental and social impacts and connotations that, on first glance, make it seemingly at odds with a sustainable investment approach. For example, the extraction of Earth’s finite resources; a relatively high contribution to global greenhouse gas emissions; and possible land rights issues or impacting sites of cultural or natural importance. Despite this, the sector has steadily improved its practices, even if some of this improvement has been driven by responses to controversies. We believe in supporting responsible miners as they develop the projects needed to fuel the energy transition, while making certain that management are fully aware of the need for high standards at every stage of the project lifecycle. Our Sustainable policy excludes investment in companies with revenue from tobacco, weapons, or fossil fuels, and looks to avoid companies with poor conduct elsewhere. We believe that Antofagasta exhibits better corporate conduct when compared to many of their peers in the mining sector.  They have progressive policies around environmental, social and governance (ESG) factors, are committed to transparency and continue to be open to dialogue with investors like us.

Invest – searching for sustainability leaders.

We explained earlier why copper is much needed in the energy transition. That said, to justify the inclusion of a copper miner in our portfolios we require good conduct. As stewards of capital, we want to be comfortable that there is both current action and aspiration from management for great conduct, and that evidence shows they have made good progress on that journey.

Antofagasta have demonstrated a proactive and robust approach to issues like climate change, labour and community relations, biodiversity and tailings (the residual materials after ore has been processed). Water is a significant issue for the company, given their operations are in drought-stricken areas, however Antofagasta have been actively managing this issue for many years and are constructing a desalination plant at their main Los Pelambres site in Chile. Their aim is that by 2025, 90% of water consumption will be recycled or desalinated sea water. With respect to climate change, the company have set Net Zero Scope 1 and 2 targets as well as a 2030 target and are in the process of building out their decarbonisation plan. In addition, all their mining operations have used power from 100% renewable energy contracts since April 2022, leading to a 90% reduction in Scope 2 emissions compared to 2021.4 Antofagasta leads peers on aspects such as governance and safety management, for example including contractors in health and safety policies and performance monitoring, and incentivising safety performance in its executive pay policies.5 The company complies with the Global Industry Standard on Tailings Management (GISTM) and have a record of no notable tailings-related incidents. The company also recycled 40% of non-mineral waste from their mining division and 83% from their transport division and are actively working on improving this. We acknowledge that in an ideal world one would want 100% recycling for example, however in the current state a degree of pragmatism is required.  We would prefer not to let the quest for perfection be the enemy of good.

Improve – working to drive positive change.

Improve focuses on the engagement and voting efforts led by our 40+ strong Responsible Investment team. We want to see evidence of a willingness to listen and improve practices and management around ESG issues. When we understand management and can be aligned philosophically, it is easier to drive change.

Antofagasta have shown themselves to be very receptive to engagement and demonstrate ongoing improvement. Throughout 2022 we engaged with the company multiple times, with details of one such engagement shown below.

Engagement on Water, Communities and Climate Change

We had a positive call with Antofagasta on several topics including water, community relations and climate change with their Investor Relations and Sustainability teams.

On Water and Communities:

  • They are actively managing water issues with local communities, providing them with resources and technology to manage the drought, as well as being a part of local governance efforts to manage water issues.

On Climate Change:

  • We pushed for further clarity on their 2030 and Net Zero Scope 1 and 2 targets, other interim targets, Scope 3 emissions and 1.5C scenario analysis.
  • They were very receptive to feedback and committed to improving their plan and including Scope 3 in the next two years.

Reporting on impact

Underpinning our sustainable investment approach is reporting because we want to share the sustainability outcomes of the CT Sustainable Universal MAP range.

Antofagasta is one of the most waste intensive issuers held within portfolios, owing to tailings and waste rock generation. This is to such an extent that the Funds’ waste intensity, as reported in our recently released 2022 Impact Report, has increased from the prior year in part due to the purchase of this name. It is important to highlight however, that the waste is mostly inert waste rock, and that their tailings management and circular economy approach handle the remaining substances thoroughly.

Conclusion

Antofagasta is just one example of the sort of name we look at within the Sustainable Universal MAP range, where we aim to allocate capital due to both the role it can play in the energy transition and the diversification it adds to our sector exposures.

1Antofagasta, 2022
2Wood Mackenzie, 2021
3Antofagasta Sustainability Report, 2022 MSCI ESG
4MSCI ESG
Simon Holmes
Director, Multi Strategy Investments
Eloise Robinson
Associate, Analyst, Multi Asset Solutions
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The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of Columbia Threadneedle Investments.

Past performance should not be seen as an indication of future performance.

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