How Sustainability-Linked Finance in the Mining Sector Can Enable a Just Energy Transition
Did you know that a typical electric car requires six times the mineral inputs of a conventional car??Or that an onshore wind farm needs nine times more mineral resources than a gas-fired plant?
Clean energy technologies are inherently mineral-intensive. And this creates an interesting dilemma. On the one hand, as the clean energy transition gains traction and the world strives to meet the Paris Agreement commitment to limit global warming to 1.5?C, demand for minerals such as copper and nickel will grow exponentially. In fact, IFC’s recently published Net Zero Roadmap for Copper and Nickel Value Chains noted that production of copper will need to increase by 230 percent and production of nickel must triple by 2050 to meet global climate goals.?
On the other hand, mineral and metal production is responsible for 10 percent of global greenhouse gas (GHG) emissions—more than 50 gigatons of carbon dioxide equivalent each year. Without transformative change in the mining and downstream metals processing?industry, the increase in mineral production needed for the clean energy transition will significantly increase sector emissions by 2050. In the absence of such a transformation, emissions from copper and nickel production could double by 2050.
Leveraging sustainability-linked finance
Mining companies are looking to prevent and mitigate other environmental issues, including pollution, biodiversity risks, and land-use change, and that’s where sustainability-linked finance (SLF) comes in. SLF ties pricing benefits with meeting key performance indicators (KPIs) and targets that directly benefit climate and local communities. Lenders can deploy SLF as a way to incentivize mining companies to reduce emissions, address water and waste management issues, and pursue ambitious social strategies. SLF can be particularly useful for companies with operations in developing countries, which are among the largest mineral producers in the world. In these nations, mining—if done with respect to environmental and social safeguards —can become a powerful engine of inclusive economic growth and sustainable development, particularly as mineral production spikes to meet the needs of the clean energy transition.
Metals and mining companies have started to embrace SLF, with global transactions totaling $43 billion to date, the vast majority of which—87 percent—were sustainability-linked loans. Of this, however, only $5.3 billion went toward emerging markets, primarily Russia (before 2022), China, Indonesia, and India, among others. There is clearly room for growth: the mining sector currently represents only 3 percent of the overall global SLF issuance in infrastructure to date.
Environmental and social KPIs
While KPIs vary from transaction to transaction, 93 percent of SLF issuances secured by mining companies have included environmental indicators, typically with targets on greenhouse gas emissions reduction, waste management, and energy efficiency. The industry’s reliance on emissions reductions targets is likely influenced by the International Council on Mining and Metals’ 2021 net zero carbon commitments, with signatories that include leading miners such as Anglo American, BHP, and Rio Tinto.
As climate goals have increased in importance, social issues are coming to the forefront as well. Mining companies face increased pressure from their stakeholders to share the wealth extracted from natural resources and increase their development impact within surrounding communities, regions, and host countries.
Here, too, SLF can help, with KPIs that focus on social benefits. As with environmental KPIs, specifics can vary, ranging from strategic community investments, local supply chain development, and gender and youth programs to benefit-sharing schemes and company-community relations. In a recent paper, IFC highlighted the value of social KPIs and shared ways to tackle challenges such as the lack of standard metrics and methodologies for measuring social impact.
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Social and climate issues are often intertwined, particularly in developing countries with vulnerable populations. Through SLF, mining companies can play a vital role in reducing the impacts of climate change with innovative targets to boost operational and community resilience. Incorporating nature-based and nature-climate solutions such as constructed wetlands for wastewater treatment, watershed and dune restoration, and eco-roads into mining companies’ climate mitigation and adaptation strategies offers a scalable KPI option that combines social, climate, and biodiversity co-benefits.
IFC’s experience in SLF and mineral development for emerging markets
As global demand for critical minerals increases and pressures on mining companies mount, IFC is leveraging intersectional expertise to help companies navigate the waters.
IFC works with mining clients at all stages of mineral development to build innovative, tailored SLF solutions. For example, in June 2022, IFC and Anglo American signed a $100 million sustainability-linked loan agreement. It’s a first for the mining sector globally, with an exclusive focus on social metrics. Among the priorities: improving educational quality and outcomes for more than 73,000 local students and promoting job creation in rural communities near the company’s operations in South Africa.
IFC’s role included conducting a materiality assessment, helping to select sustainability performance targets, and aiding in the design of?the sustainability-linked financing framework for the loan. Through an advisory engagement on community development and gender inclusion, IFC also provided additional guidance in support of?the delivery of the company’s sustainability strategy.
Today, the mining industry stands at a unique inflection point—with the global push for greater industry accountability, climate responsiveness, and just benefit-sharing, juxtaposed with the need for ramped-up mineral production to serve the clean energy transition. SLF can be a valuable tool to incentivize and enable the industry to step up and capitalize on its potential as a driver for sustainable and inclusive development.
IFC stands ready as a trusted partner—leveraging expertise in Sustainable Finance, Sustainable Infrastructure Advisory, and the Metals & Mining sector—to provide an integrated approach encompassing strategy, financing, and implementation support.
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