Why is ESG so important to critical mineral supplies, and what can we do about it?

Clean energy technologies typically require much greater quantities of minerals and metals than their fossil fuel-based counterparts. As the world transitions towards net zero, the rapid shift to these technologies is expected to drive a significant increase in demand for many minerals, including lithium, nickel, cobalt, graphite, copper, aluminium and rare earth elements. The demand and use of these critical minerals will vary depending upon climate policies adopted by countries across the world.

Recent price spikes for many of these minerals have triggered a marked increase in investment in mineral exploration and production. Nevertheless, there remain significant risks that mineral supplies may not keep pace with what would be needed to meet global climate goals.

Alongside supply concerns, there are also significant risks associated with the environmental, social and governance (ESG) impacts of mining projects. These include risks associated with geopolitical tensions, armed conflict, human rights violations, bribery and corruption, emissions, water stress and loss of biodiversity. These types of impacts can erode public support for mining projects, and will face increasing scrutiny from downstream industries, investors and civil society, potentially leading to short-term production disruptions and stark local and international resistance to mining investments. This may in turn limit the supply of crucial minerals and metals, potentially derailing clean energy transitions. Failure to properly manage these risks may also expose governments and companies to ESG-related regulatory, ethical and reputational criticisms.

Failure to consider ESG may also limit the supply of the minerals that are critical to energy transitions. Without reliable supply chains for key minerals and metals, many of which come from high-risk areas, it will not be possible to scale up clean energy technologies quickly enough to meet global climate goals.

There are several ESG-related failings that can impact clean energy transitions.

First, potential liabilities associated with ESG, along with increasing scrutiny over ESG performance, can deter investment, particularly for projects in high-risk areas. Rigid de-risking, whereby companies and financial institutions fully disengage or stay away from certain regions, is widespread.

Second, inability to identify and mitigate environmental and social harms can make it difficult to obtain – and maintain – a social licence to operate, which can exacerbate community tensions and lead to community pressure, adverse publicity and regulatory issues (“social licence to operate” generally refers to whether a company or project has the ongoing acceptance or approval from the local community, beyond what is required by legal or regulatory processes). Failure to obtain community acceptance can threaten long-term investments and multiplies the risk of short-term supply disruptions. There have been numerous cases in recent years where local opposition has stopped or slowed new minerals developments, including high-profile lithium projects in Bolivia and Serbia.

Third, specific incidents may give rise to short-term supply disruptions with implications for supply chains and prices. Safety failures can harm workers and lead to long-term interruptions to operations. In addition, corruption in the mining sector and a volatile business climate appear to be associated with periodic shut-downs – and shake-downs – of mine sites producing energy transition minerals.

Fourth, mining is often itself directly exposed to climate risks. A large proportion of today’s lithium and copper production is concentrated in areas with high water stress, and competition for scarce water resources could potentially disrupt production or complicate new siting if companies do not reduce water usage intensity.

Finally, there does not appear to be broad recognition or understanding of the importance of managing risks associated with conflict-affected or high-risk areas in critical mineral supply chains. Although awareness of these impacts has historically been focused on specific geographies and minerals – namely tin, tantalum, tungsten and gold – many critical mineral supply chains have seen reports of serious governance incidents typically associated with conflict-affected and high-risk areas. These incidents include support to non-state armed groups, clashes with security forces, and serious human rights abuses. But conflicts and areas of high risk are ever changing. Even if a particular geographic area does not carry a high risk today, it might tomorrow. These issues could lead to supply challenges down the road, even for supply chains that currently appear to be insulated.

For all of these reasons, failing to embrace ESG standards may harm the environment, workers, and communities while also reducing the overall reliability and resiliency of mineral supplies needed for technology deployment. This underscores that if countries are to meet their climate goals, it is vital that they take strong action to minimise these impacts. This will include strengthened policy efforts aimed at all parts of the value chain – from mining to end-use products.

The OECD and IEA are working together to raise awareness with policy makers of the nexus between ESG and security of supply in order to ensure that policies on critical raw materials and clean energy transitions do not generate unintended consequences that may harm affected populations and limit the supply of critical minerals and metals. This collaboration will build on the IEA’s expertise on energy security, ESG, demand and supply projections for critical minerals, and the OECD’s experience in providing practical support to companies and governments on implementing standards on RBC and supply chain due diligence.

As a concrete next step, the OECD and IEA plan to explore joint activities looking at how responsible sourcing can be coupled with renewed efforts by governments to support improved governance that can contribute to building a resilient, reliable, responsible and sustainable metal supply to support clean energy transitions.