There are many schools of thought about how we transition from our present economic system to one that is no longer fuelled by hydrocarbons and hence damaging to the planet. Many of these transition pathways put the emphasis on existing and developing technologies such as electric vehicles, battery storage, or the greater rollout of proven renewable energy sources such as wind or solar power.
All the above and more will undoubtably play important roles in helping humanity to transition from where we are today onto a more sustainable path, but this transition will not come without costs – to communities, natural capital and our planet. There is no silver bullet.
The adoption of electric vehicles has been nothing short of a miracle, and growth projections continue to look promising in the years and decades ahead, even as some historical governmental subsidies begin to be withdrawn.
Despite this, against the backdrop of total vehicles being used across the globe every day, electric vehicles still make up a tiny fraction of that total number. This leads to the obvious conclusion that we are going to need companies to manufacture a large quantity of electric vehicles in the coming years and decades and all of this will require mining companies to extract enormous amounts of raw materials to meet the demand.
Nickel, copper, lithium and cobalt are just some of the raw materials used in the manufacture of an electric vehicle that will need extracting on an epic scale. Lithium is a core component of batteries and will be required in huge quantities for electric vehicles and energy storage across the new economy.
Finally, the rollout of renewable energy at a greater scale will also require the extraction of more raw materials, copper is used in the cables within turbines and steel and concrete will also be needed in the construction process.
Raw material extraction
Of course, the argument of some small pain for greater gain, that “gain” being that the carbon that will not be emitted into the atmosphere during the life cycle of a wind turbine will be far greater than the carbon created in the manufacturing process or indeed the damage done to the environment during the raw material extraction process, is often put forward.
The mining sector historically has in many cases come up vastly short when it comes to ESG factors, indeed some investors would choose to exclude it altogether for the damage it has historically inflicted on the environment.
However, the sector is needed for the transition to take place. It is unavoidable that the mining sector must grow to meet this demand for the raw materials we will need. Therefore, investors can allocate capital to those mining companies that are taking steps to improve behaviours both from an environmental, social and governance perspective and take a “best in class” approach. This makes more sense than excluding a sector that will be a core component in allowing us to transition to the sustainable future we all seek.
There are a number of areas miners can and are actively trying to improve in, such as the reduction in the use of fresh water, reduced emissions from machinery and greater consent and engagement with local communities before projects take place. Investors can and should make their voices heard in improving the mining sector so that costs inflicted in obtaining these resources during this epic transition are minimised.
Another key part in the transition to a sustainable future will be the greater adoption by companies of a circular business model, meaning one which reuses waste material from old products in order to create those of the future.
Many argue we cannot realistically extract enough of the resources that will be required to meet the transitional demand, plus you have the impact of extracting the metals and minerals that you inflict on the environment. It is therefore essential companies get better at re-using material.
Large amounts of capital are already flowing to companies that can extract materials out of waste that can be put back into the manufacturing process. We are starting to see the idea of the circular economy grow as a thematic investing idea, and I’m sure more ESG fund managers will look to gain exposure to the theme as it will be essential to meeting the 2050 targets.
However even with the circular economy gaining momentum the need for the extraction of resources as we re-wire the global economy on to a more sustainable path will still exist. Investors need to be pragmatic; the inconvenient truth is we are going to have to get the materials out of the ground to build the future we want, and this will not come without costs.