The decarbonisation of the global economy is at risk unless greater amounts of capital are directed towards the mining industry, the UK’s biggest fund manager has warned.
At current levels of investment Legal & General Investment Management reckons the world will not be able to achieve the “huge increase” in supply of industrial metals needed to reach net zero emissions by 2050.
A report, drawn up by LGIM in collaboration with miner BHP, estimates that cumulative demand for copper will have to double over the next 30 years and quadruple for nickel to achieve the Paris agreement to limit global warming to 1.5C above pre-industrial levels.
“The challenge is simple: without a growing, responsibly run mining industry there will be no energy transition,” said Nick Stansbury, head of climate solutions at LGIM and co-author of the report. “Investors need to engage with the mining industry, not shut them out, if the industry is going to deliver the critical resources the world urgently needs.”
The comments mark a rare vote of confidence in the sector from a big investor and follow warnings from analysts and bodies such as the International Energy Agency that the world could run short of copper, nickel, cobalt and other metals unless investment is increased in new and existing mines.
LGIM has a small stake in BHP of 0.7 per cent. It reduced its holding after the miner ended its dual-listed share structure earlier this year.
Even though the mining industry will play a pivotal role in the energy transition through the use of metals in renewable energy and electric vehicles, many big institutional investors prefer to invest in lossmaking clean tech or electric vehicles companies.
In part this is because mining — from discovery to extraction and production — is very carbon-intensive. It also reflects the local environmental impact of its activities and incidents, such as the deadly dam disaster at a Brazilian mine in 2019, have given investors another reason to steer clear of the sector.
This is reflected in the low stock rating on the sector. The value of BHP, the world’s biggest mining company, including net debt is just 3.6 times its forecast earnings before interest, tax, depreciation and amortisation this year, according to estimates from JPMorgan. That compares with the FTSE All-Share index average of 7.75 times.
LGIM reckons there are two roles investors can play in the mining sector. One is to help mobilise the capital that will be required to ensure that metal supply does not become an obstacle to achieving the goals of the Paris agreement on climate change. In a recent report, commodities consultant Wood Mackenzie said $2tn would have to be invested in metals to achieve a 1.5C outcome.
The second is to help drive down operational emissions across the mining industry, where there is a big difference between the best and the worst performers.
The report highlights the example of nickel, a key material in the batteries that power electric vehicles, where there is an enormous gap between an Indonesian nickel operation fed by coal-fired power and one in Canada that uses hydropower.
“The new mining projects the world needs should be built and operated by those companies that will deliver them with the lowest possible environmental and carbon footprint,” said Stansbury.