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Minerals and the green energy transition: the reputational challenges for businesses

December 2023
 by Heather Grace

Minerals and the green energy transition: the reputational challenges for businesses

December 2023
 By Heather Grace

The development of clean energy infrastructure is heavily reliant on the availability of critical minerals including lithium, nickel, cobalt, copper, and rare earth elements. Demand for these minerals is increasing rapidly as the transition gathers pace, and large players in the mining and processing of these minerals are key to the success of the energy transition. Due to the global scale of the demand, there are multiple complex challenges facing mining and processing companies in providing the volume of critical minerals needed. Significant reputational risk arises, both for the companies requiring the minerals, and those mining and purchasing them, if the challenges of sustainable and ethical extraction are not properly addressed.

Supply chain vulnerability and reputational risk

One of the largest challenges facing mineral procurement is the geographical concentration of the minerals, leading to a lack of diversification in supply. While there is an abundance of minerals to be mined, they are concentrated in a small number of countries. Overreliance on these countries carries the risk of lax regulation and compliance leading to negative events and news stories, affecting the reputation of the companies that operate in or source minerals from the regions.

There are significant mineral deposits in the Democratic Republic of Congo (cobalt), South Africa (platinum and iridium), and Chile (copper and lithium). China possesses 100% of the refined supply of natural graphite and dysprosium, as well as 70% of cobalt, and almost 60% of lithium and manganese, and is dominant in the processing of these minerals globally. The geographical concentration of these mineral deposits leaves supply chains vulnerable to political, social, or natural factors, which can impact a company’s reputation and investor confidence if it is unable to deliver extraction, processing or the volume of minerals agreed.

Some governments in locations where mineral deposits exist are subject to allegations of corruption, or are within areas of conflict. Companies operating or sourcing from these areas may be perceived as benefiting from these situations and operating immorally, which can result in media scrutiny and a negative impact on a company’s reputation. Companies need to mitigate these risks as much as possible, taking measures such as formulating contingency plans for sourcing to strengthen their supply chains, proactively engaging with those abiding by international standards, and conducting due diligence checks on suppliers to prevent unknowingly engaging in business that could harm their reputation.

Risks posed by the environmental impact of mining

The very nature of mining means that it is often contrary to the protection of the environment, with numerous negative environmental impacts. Companies involved in the extraction and processing of minerals, as well as companies purchasing them, must ensure they are procured a way that prevents the degradation of the environment. Failure to do so can lead to significant reputational damage.

The most obvious environmental challenge associated with mining is the loss of habitats and biodiversity in areas where land is cleared to develop mines, but there are also additional, more insidious, problems. The contamination of soil due to heavy machinery, extractive processes, and disposal of mining waste can impact the local vegetation and agriculture and affect the long-term health and productivity of the soil. Significant water and air pollution also occurs as a result of mining, with harmful chemicals used in the extraction process infiltrating air and water sources around the mine, resulting in the contamination of water, air pollution, and increased respiratory health issues in nearby communities. The environmental impacts, such as groundwater contamination and ecosystem changes, can have long-term and sometimes irreversible effects, challenging future rehabilitation efforts.

For companies operating in this sector, being found to have directly or indirectly contributed to environmental damage to the areas in which they operate can carry significant reputational risk. Customers may hesitate to engage with them in the future, and a company’s ability to be included in certain funds may also be impacted due to the ever-increasing focus on environmental, social and governance credentials. To combat these risks, a holistic and joint-up approach is needed between governments and private companies, to implement plans and invest in practices that cause the least amount of environmental degradation, protect water sources and soil in the area, and include off-ramp plans to ensure the continued protection and eventual regeneration of the environment occurs once the mine is closed.

Mining and the protection of human rights

The challenge of protecting human rights during the procurement of minerals is significant, and there can be substantial reputational consequences for companies that are found to be directly or indirectly involved with human rights abuses and inhumane or unsafe labour practices. Child labour and exploitation, health and safety risks caused by dangerous working conditions and improper safety equipment, and unfair labour practices are all issues reported in mineral extraction regions. The displacement of indigenous communities, the loss of cultural heritage, and the impacts on communities of environmental degradation are further significant challenges.

For companies, being associated with any of these issues can lead to negative public perception and media attention, along with consumer boycotts and degradation of brand value. Effective supply chain due diligence and thorough compliance programmes are necessary to mitigate these risks, along with ensuring international health and safety standards are met, and local communities are effectively engaged in mining areas.

Serious reputational risks are associated with the increasing demand for critical minerals to enable the green transition, and the challenges for businesses are complex. But with a holistic and considered approach, companies involved in the mining industry and those that use minerals for the creation of products and services can find the balance between effectively managing their reputation, and providing the critical minerals we need. Being proactive in ensuring suppliers and partners abide by international standards, engage with local communities, and conduct thorough supply chain due diligence, while entering partnerships to ensure the minimal degradation of the environment and sustainable mining, are key for companies looking to manage their risk in this area.

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