Few details have emerged of Tesla’s recently reported US$5 billion agreement to buy nickel from Indonesia. But that such a deal has happened at all tells us something important.
Among a number of environmental problems, Indonesia’s nickel production at worst creates almost three times as much carbon dioxide per tonne as the global average. It is likely that Tesla is buying the country’s lower carbon nickel but the footprint remains significant for a company that prides itself on its green credentials. However, as a major electric vehicle producer, it also needs to secure a long-term supply of the metal for its batteries, and there are only so many sources to choose from.
Demand for materials like nickel, lithium and cobalt will mushroom over the next 30 years as the world shifts towards electricity and renewables. Even the production of already heavily used metals like steel will increase. In the case of nickel, a large proportion of the extra tonnes needed will come from Indonesia.
Tesla’s dilemma is the world’s dilemma. As the transition starts to put pressure on supplies of critical raw materials, mining is only becoming a more complex industry to run and expand, with the communities around the industry increasingly concerned about its social and environmental costs.
As investors, we need to recognise that the cleanest mining companies with the best records on sustainability will not necessarily be able to supply everything we need and that we must also invest in companies we believe can be pushed to improve. Many miners appreciate that these higher standards apply, but most still need to do more as the challenges they face increase year by year. Fail to keep the faith of local communities and other stakeholders, and everyone from electric car producers to local power providers will be in danger of running short of the metals needed to electrify the future.
Whose backyard?
Local opposition to new mines is a growing challenge. Take Rio Tinto’s recent attempt to build a lithium mine in Serbia’s Jadar valley, an area of significant agricultural and archaeological value near the Bosnian border.
The project had the support of central government and would have produced thousands of tonnes of much-needed lithium carbonate for the next 40 years. However, escalating protests by NGOs and parts of the local community, which were concerned about pollution risks and the potential need to resettle local inhabitants, led the Serbian government to withdraw Rio’s exploration permits in January 2022.
Jadar is far from an isolated case. In the US, major new copper projects in Arizona, Alaska and Minnesota have also been halted by legal challenges since 2019.
Merely abiding by the letter of the law is often not enough to ensure a project goes ahead. To maintain their social license to operate, miners need to uphold higher standards that respond to stakeholder interests, win the confidence of communities and reflect a society’s expectations.
New supplies can be in challenging geographies
The other big challenge is of course environmental. Indonesia is likely to be the source of the vast majority of new tonnes of nickel brought to market in the years ahead.
The country, however, remains reliant on thermal coal for much of its power generation and the carbon intensity of new Indonesian nickel tonnes is often high. Mining also has an impact on deforestation and biodiversity.
As investors, we are already engaging with some of the companies involved and we are seeing improvement in disclosure and in practices, both in terms of installing renewable energy and in managing the gigantic amounts of waste the industry generates. This task is by no means finished and there may be hard choices ahead for us as managers of capital.
The power of collaboration
For new mines, investors can advocate for public and corporate policies that balance the economic and decarbonisation benefits of projects with the impact on a wider set of stakeholders. They may also need to advocate for government assistance, whether financial or legal, as not all aspects of decarbonisation are going to make near-term economic sense. In some of the harder-to-abate areas, it's hard to see how we get where we need to without a global carbon price.
Improving mining’s image, to help ensure more of the right projects go ahead, may also require some unintuitive behaviour. Big miners who have developed best practice may benefit from sharing it with smaller competitors, because an environmental or safety scandal for one miner affects everyone. What is vital here is not just miners’ social licence to operate within a given community, but also the industry’s licence to operate globally. Without this, the world won’t reach its net zero goals.
Daniela Jaramillo, director, Sustainable Investing, Fidelity International
