Companies face ESG trade-offs in scramble to replace Russian minerals

While the ongoing conflict in Ukraine has focused the attention of markets on the European Union’s dependence on Russian oil and gas, the war has also highlighted the scale of the EU’s reliance on its strategic rivals for critical minerals.

EU sanctions against mined and refined materials are a real possibility. Taken in tandem with ongoing conflict-related disruptions and recycling rates hitting a ceiling, new sources for minerals such as potash, palladium, refined copper and refined nickel will be required urgently if the war continues (see figure below). EU importers will also need to tap alternative markets for other materials traditionally imported from Russia, including iron ore, phosphate rock, aluminium and manganese, as well as less-heralded transition metals such as selenium, a vital input to solar panel production.

Even if sanctions are not applied, companies will be eager to reduce their dependence on Russia and its ally, Belarus, due to reputational and disruption risks. European nations will also be reluctant to turn to strategic rivals such as China for replacement imports. This will force companies into lesser-known markets where the regulatory environment is not as mature, raising the potential exposure of supply chains that are critical to manufacturing, the green transition and food production to a wider set of ESG risks.

For mining, threats to natural capital are a key challenge, but labour rights and human rights could also enter the equation. As new source countries for minerals are found, companies will have to put robust ESG policies in place to ensure higher levels, or different types, of threat do not blindside them and put corporate reputations at risk.

Scramble for new sources for materials exposes unfamiliar risks

Alongside the rise of new benchmarks such as the Taskforce on Nature-related Financial Disclosures (TNFDs) and a slew of new laws around forced labour in supply chains, growing investor scrutiny on natural capital illustrates the necessity of identifying ESG risks early. Doing so will enable organisations and commodity investors to avoid muddying the clean energy transition and polluting supply chains.

Verisk Maplecroft’s forthcoming Industry Risk Analytics data, which measures 51 different risks for 198 countries across 80 sectors, reveals the different levels of risk that exist for extractive companies according to their countries of operation. The data will enable both these companies and the organisations buying refined materials from them to identify ESG risks and trends in new and existing markets.

Greater demand on undeveloped copper reserves in emerging markets

Russia provided the lion’s share of EU imports of refined copper in 2020 and boasts 7% of the world’s recoverable copper ore reserves. Hence, this Russian-sourced copper is widely incorporated into clean energy technologies developed in the EU. The fallout from Russia’s invasion of Ukraine means that new sources may now have to be found, but our Industry Risk Analytics data shows low-risk alternative producers are thin on the ground.

Copper already has a high-risk ESG profile across major producers. The mining industries in Chile, Peru and Mexico, which together account for nearly half of total global production, are all flagged as high or extreme risk on key ESG indices (see map). Moreover, the majority of recoverable reserves are also in countries where the mining industry is considered high risk for a range of ESG issues at the national level. These include countries such as DR Congo, Zambia and Indonesia, where high environmental and social risks are also compounded by high levels of corruption and poor government oversight.

Untapped potash reserves in the Middle Eastern and Southeast Asia regions

Another key input at risk is potassium-based fertiliser, which fuels the EU’s agricultural industry. There is no artificial process to manufacture potassium as it is derived solely from mineral potash salt deposits. The quantity of unrefined raw material produced places huge demands on water resources – land use intensity, water pollution and water stress are key indicators driving high ESG risks for the mining sectors in potential alternative countries.

Given over a third of the EU’s potash imports in 2020 came from Russia, and that Belarus – another key supplier in 2020 – is already sanctioned, the race to find alternative sources is critical. Canada has over a quarter of global reserves and can act as a low-risk alternative, but other countries with higher ESG risks may also be used to fill the void.

Laos, for one, has an estimated half a billion tonnes of undeveloped recoverable potash reserves. At present, Chinese firms are securing a strategic foothold there. But given the country’s high levels of species richness – as reflected by the country’s high-risk score in the industry specific Biodiversity Index for mining – and a history of land grabs and other human rights abuses linked to the extractive sector, mining in Laos is rated an extreme risk industry in our industry-specific Land, Property, and Housing Rights Index. There are also potentially large potash reserves in the Dead Sea region of Israel, a UNESCO World Heritage Site candidate with unique biodiversity and limited water resources.

Southeast Asia dominates global nickel production, presenting high ESG risks

Similarly to potash, in 2020 a third of the EU’s refined nickel supplies flowed into the bloc from Russia, fuelling industrial and electronic applications, not least in rechargeable batteries vital for electric vehicles (EVs) and other devices. Global nickel prices jumped by over 120% immediately after the invasion of Ukraine and have remained high.

Half of global nickel production occurs in Indonesia and the Philippines, both of which have significant reserves. However, as shown by the industry specific risk indices scores, mining in both these countries is highly exposed to ESG risks, including high levels of biodiversity loss, water pollution, land grabs and abuse of indigenous peoples’ rights.

In the search for alternatives, the estimated 7.1 million tonnes of nickel reserves found in the French Overseas Territory of New Caledonia will be attractive. The territory boasts a similar scale of reserves to Russia but is also home to a wealth of unique species. As a result, it has an extreme risk classification in the industry-specific Biodiversity Index.

Tesla’s long-term strategy for securing future nickel supplies focuses on New Caledonia. The company has promised to work directly with miners to minimise its environmental impact, but the sector’s performance is clouded by a small number of irresponsible operators, making it a focus for the island’s independence campaigners.

Greater pressure on African sources of palladium

A commodity that might normally go under the radar is palladium, which is widely used in catalytic converters and the production of electrodes. It is also used in hydrogen fuel cells, vital for the energy transition. Russia currently produces 40% of the world’s platinum group metals (PGMs), including palladium, most of which are imported into the EU.

The major alternative, South Africa, holds around 90% of the world’s known reserves of PGMs. The mining of these metals in South Africa, however, is linked to health and safety concerns, water pollution, habitat loss and other environmental impacts (see map above). Our commodity-specific data also flags South Africa as a high-risk sourcing location for palladium in the water stress, human trafficking and OHS Indices.

Geopolitical realignment will increase attractiveness of new sources of mined commodities

As demand for these essential materials grows, supplies of strategic commodities from domestic sources and friendly nations will only go so far in replacing those disrupted by the conflict in Ukraine. The reputational risks associated with biodiversity and other environmental and social risks in supply chains will need to be managed appropriately.

Miners will be under pressure to meet rapidly growing demand while adhering to international ESG standards. By proactively examining future ESG risks using an industry lens, decision-makers can work to ensure they avoid the damage that is inherently associated with their particular sector and operations.