Mining companies are closely linked to the energy transition, both as businesses for which new requirements apply and as suppliers of critical minerals used to produce electric vehicles batteries, solar panels and wind turbines, among other products. In this Legal Update, we discuss emerging climate change-related guidelines and requirements, give examples of how mining companies are adjusting their operations in response to the energy transition, and note new forms of financing that industry participants can pursue.
The race for decarbonization accelerated with the Paris Climate Accord in 2015 when 195 countries agreed to work toward limiting global warming to 1.5 Celsius (from pre-industrial levels). Three years later, in 2018, the Intergovernmental Panel on Climate Change suggested that global emissions would need to be carbon neutral or “net zero” by 2050 to reach this 1.5 Celsius target. This ambitious and seemingly impossible target spurred companies across the globe to begin making net zero commitments and publish their environmental, social and governance (“ESG”) plans to help map their paths to reducing their green-house gas emissions (“GHG”) and, hopefully, reaching net zero status. Being “carbon neutral” means that the operations of the business offset the amount of carbon dioxide released into the environment. Note that while the term “carbon neutrality” is also described as “net zero,” carbon neutrality only accounts for carbon dioxide emissions involved in a company’s operations while being net zero signals that the company has reduced its greenhouse gas emissions across its entire supply chain.
Initially, these plans had inaccuracies and lacked uniformity, with little predictability on what a company would deem “material” warranting disclosure.
Guidelines and Requirements
A handful of mining organizations across the globe began releasing voluntary reporting guidelines, but a universal framework was needed to encourage accuracy and consistency with emission reporting across the sector. In 2020, these organizations agreed to work together under a single set of standards, the Global Reporting Initiative (“GRI”).1 The GRI Standards are considered to be the most used and accepted sustainability reporting standards today across the mining industry.2 The GRI continues to publish mining standards and, earlier this month, presented a draft including 25 ESG reporting standards at the Alternative Mining Indaba in South Africa, with comments being requested from the public by April 30, 2023, and a goal to publish in December 2023.3 The GRI standards set forth three GHG emissions categories:
- Scope 1 emissions (direct GHG emissions from the owned mine or mill or other sources controlled by the mining company)
- Scope 2 emissions (indirect GHG emissions related to the company’s activities)
- Scope 3 (GHG emissions that occur upstream or downstream of the company’s activities)4
Additionally, the International Council on Mining and Metals (“ICMM”), an organization of companies representing one-third of the mining global industry, has set forth sustainable mining principles that its members are urged to commit to implementing. Members are encouraged to report their ESG performance based on the GRI Standards, which include disclosing their Scope 1, Scope 2 and Scope 3 emissions annually.5 Further, in March 2022, the US Securities and Exchange Commission (“SEC”) announced its plan to standardize climate-related ESG disclosures for investors. The SEC’s proposed disclosure rules would require publicly listed companies to disclose risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition” and to disclose their Scope 1, Scope 2 and Scope 3 emissions.6 These rules will likely be adopted in some form during 2023, and non-compliant companies will likely be subject to enforcement and penalties.
The International Sustainability Standards Board (“ISSB”)—which is part of the International Financial Reporting Standards Foundation (“IFRS”), the accounting body that oversees financial reporting and whose standards are followed by more than 150 counties—met in early February 2023 and agreed to rules that would require companies to report emissions from their direct operations, energy purchases and value chains (Scope 3 emissions).7 Understanding the difficulty that companies face trying to narrow down information from value chain providers, the ISSB has agreed to standards that will give companies an exemption for up to one year to report their Scope 3 emissions.8
The European Financial Reporting Advisory Group (“EFRAG”) developed the European Sustainability Reporting Standards (“ESRS”) for EU companies, and these appear to be more stringent than the GRI standards.9 So far, more than 50,000 companies are on track to report under ESRS in 2025 and 2026.10
The GRI has said it is taking into consideration standards from the ISSB, ESRS and others as it updates its standards.
Mining’s Adjustments to Strategy and Operations
Ramping up Spending and Raising Budgets for New Projects
Critical minerals are essential to decarbonization. Lithium, cobalt, nickel and manganese are all crucial for lithium batteries in electric vehicles. Critical minerals are also needed for solar panels, wind turbines and hydrogen fuel cells. The World Economic Forum estimated that with the green transition, the demand for critical minerals would increase by 500% by 2050.11
As a result of the need for these minerals, some mining companies are ramping up their spending and raising budgets for new projects, a switch from their prior focus on shareholder dividends.12 Companies are keeping money for these new projects versus paying it out to shareholders.
The chief financial officer of Rio Tinto recently said, “[W]e are fully aligned with that view that the world needs more materials and we’re upping our game against that, and at the right time.”13 Rio Tinto is also leading the construction of a underground copper mine, expanding its copper operations in Utah and developing an iron ore mine in Guinea. It did not pay a special dividend in February 2023 in order to use that money to fund these projects.14
Mining companies are also reconsidering strategies as a result of the changing markets and valuations for particular minerals. BHP a few years back considered selling its Australian nickel business but, instead, recently expanded this plant to produce nickel sulfate, which is used in the production of lithium-ion batteries. Further, many of the major automakers have already made big investments in mining projects and US lithium battery factories, hoping to benefit from the tax credits offered by the Inflation Reduction Act.
While Reducing GHG Emissions and Becoming Carbon Neutral
The mining industry contributes approximately 4-7% of the global carbon footprint with its Scope 1 emissions and up to 28% when the Scope 3 emissions are included.15 Mining companies are faced with the tough challenge of producing these minerals while lowering carbon emissions for the 1.5 Celsius target to be feasible.
Incorporating New Processes
Meeting that challenge may require incorporating processes that are not yet that popular in the industry. First, coal mining operations, which are one of the largest sources of GHG emissions in the mining industry, could be terminated or spun-off. BHP, Teck Resources and Anglo American have already sold their coal production assets. The remaining Scope 1 and Scope 2 emissions from mining activities are a result of the consumption of self-generated and purchased electricity and the use of fossil fuel vehicles.16 While it may be costly, reducing Scope 1 and Scope 2 emissions might require switching to electricity procurement from renewable energy sources and energy efficiency measures (electric equipment, electric vehicles, etc.). Reducing Scope 3 emissions will be more challenging for a mining company because it realistically has little to no control over these downstream activities. To reduce their Scope 3 emissions, mining companies will need to successfully work with their vendors and customers in the value chain to ensure that they also are taking steps to reduce and eliminate emissions.17
Purchasing Carbon Offsets
Another alternative for mining companies is to purchase carbon-removal credits (also called “carbon offsets”) that are linked to an unrelated third-party company’s carbon reduction plans. While controversy exists around these credits, an offset buyer can be described as “carbon neutral” based solely on these purchases. Some mining companies, such as Hecla Mining Company (“Hecla”), combine their own sustainability measures with purchasing carbon offsets. Hecla uses 100% renewable hydropower to supply utility power to its Casa Berardi mine and 96% hydropower at its Greens Creek operations. Hecla also purchases carbon offsets. With these cumulative efforts, Hecla has already achieved net zero on its Scope 1 and Scope 2 emissions.18 One thing is clear, though: Each mine is different, and so each company will have its own challenges with decarbonization measures.
Using Renewable Electricity
Several of the big mining companies not only have taken aggressive pledges to work toward decarbonization and proactively installed sustainability plans and committees but also have already moved to renewable electricity. Codelco uses solar power in one of its copper mines in Chile, BHP has signed contracts for renewable energy at two of its copper mines (Escondida and Spence), and Fortescue Metals has invested in renewable energy at its iron ore mines in Australia. Newmont has started production at its all-electric Borden mine in Canada and entered into an agreement with Caterpillar Inc., with a $100 million initial investment to develop a “zero-carbon emitting end to end mining system… including electronic mine vehicles, infrastructure automation and data collection and analysis.”19 Vale is currently building a processing plant for nickel, copper and cobalt that will use a hydrometallurgical process that does away with the smelter and smokestacks.20
Using Mine Tailings
Companies are also looking at carbon sequestration through mine tailings to help reduce GHG emissions and reach net zero status. FPX Nickel Corp. (“FPX”) teamed up with Greg Dipple, a geology professor at the University of British Columbia who had determined that ultramafic rock in mine tailings is naturally capturing significant amounts of carbon dioxide (up to 11% of annual emissions of a major mine analyzed).21 Because rocks have been finely crushed in the mining process, this natural process can actually happen fairly quickly. FPX and Dipple are working on how to speed up this natural sequestration process, and FPX has gone as far as to changing one of its mine plans to account for this process.22 Dipple has suggested that, with the use of mine tailings, certain mines could operate at net negative in terms of C02 emissions.23
The Availability of Sustainability Linked and Green Loans
Industry investors and stakeholders also find sustainability measures important and are offering more favorable financing to companies that are taking actions to incorporate measures to lower their carbon footprint. There are two main financing trends related to these sustainability projects: sustainability linked loans (“SSLs”) and green loans.
- An SSL is a loan in which the borrower and lenders select ESG key performance indicators (“KPIs”) and set sustainability performance targets (“SPTs”) tied to those sustainability factors. Upon a borrower meeting or exceeding the SPTs, it can be rewarded with a lower interest rate and lower fees on the loan. But upon failing to meet its SPTs, the borrower can be penalized with higher interest and fees. The proceeds of an SSL can be used for general corporate purposes (which could also include an ESG project).
- A green loan is one whose proceeds are to be exclusively used to finance an ESG project.
Across all sectors, global annual sustainable debt issuances (sustainability linked bonds and loans and green and social bonds and loans) have doubled in recent years, from approximately $769.1 million in 2020 to approximately $1.689 billion in 2021.24
As our Mayer Brown colleagues have noted, because the mining sector is “a key producer of a swathe or strategic materials which are essential for the development of low carbon technologies…mining companies that are looking to carry out these activities in a more sustainable way are likely to be well placed to tap into Green Loans and SLLs.”25
- As the world moves to green energy, the need for critical minerals will grow significantly, and the mining industry will likely have a pivotal role in the transition.
- While the timing of the adoption and enforcement of ESG disclosure requirements for the mining industry is somewhat uncertain, there is little doubt that required disclosures will become stricter and will play a larger role going forward.
- Mining companies that adjust their operations for the energy transition, as discussed above, may expand their opportunities for favorable financing.
1 See What Net-Zero Commitments Mean for Mining Company Operations, 680Nat. Resources & Energy L. Inst 21-1 (2022), Emilie Bundock and Ana Luci Grizzi.
3 See GRI Presents Sustainability Reporting Standard for Mining Companies - MINING.COM, February 15, 2023, Amanda Stuttt, Mining [Dot].Com.
4 See GRI Mining_Sector_Standard_Exposure_Draft.pdf (globalreporting.org).
6 See Upcoming SEC Climate Disclosure Rules Bring Urgency to ESG Data Strategy Planning, Reuters, January 20, 2020, Zach Warran.
7 See Global Sustainability Disclosure Standards for Companies to Take Effect in 2025, Wall Street Journal, Dieter Holder, February 17, 2023.
11 See Is the Mining Sector Ready and Able to Deliver Net Zero? Cecilia Keating, August 1, 2022.
12 See Global Miners Gear Up for Energy Transition With Deals and Investments, Wall Street Journal, February 27, 2023, Rhiannon Hoyle.
15 See The Mining Industry: Challenges and Opportunities of Decarbonization (sustainalytics.com).
16 See GRI Mining_Sector_Standard_Exposure_Draft.pdf (globalreporting.org).
17 See The Mining Industry: Challenges and Opportunities of Decarbonization (sustainalytics.com).
18 See hecla.com/sustainability.
19 See At the turning point, CIM Magazine Vol. 17, No. 7, 2022, Kelsey Rolfe.
20 See https://www.stantec.com/en/projects/canada-projects/v/vale-long-harbour-processing-plant.
23 See https://www.canadianminingjournal.com/featured-article/using-tailings-to-get-to-net-zero/, Using Tailings to Get to Net Zero, June 8, 2021, Alisha Hiyate.
24 See ESG in the Credit Agreement: A Closer Look at Sustainability-Linked Loan Mechanics, Benjamin Stango, Elizabeth Goldberg and Andrew T. Budreika, 6/10/2022, Reuters, https://www.reuters.com/legal/legalindustry/esg-credit-agreement-closer-look-sustainability-linked-loan-mechanics-2022-06-14/.
25 See the Mayer Brown Legal Update, Green and Sustainability Linked Loans in a Mining Context, November 30, 2020, Rachel Speight, Tim Baines, Emma Sturt, https://www.mayerbrown.com/en/perspectives-events/publications/2020/11/green-and-sustainability-linked-loans-in-a-mining-context.