The Sixth Assessment Report from the Intergovernmental Panel on Climate Change (IPCC) makes clear the urgent need for a fundamental transformation of our current fossil-fuel based energy system.
The fear of supply shortages of these critical minerals due to surging demand has created significant market upheaval and policy concerns about energy security at a time of turbulence in the global energy system. Countries leading on green technologies are now overtly competing to secure market share of raw materials and build more resilient supply chains.
Increasing global competition
China is the elephant in the room when it comes to this competition, due to its dominance in processing several critical minerals, such as lithium, cobalt and rare earths. In recent years, Chinese companies have also been actively seeking a larger share of the upstream supply of raw materials around the globe.
This has triggered responses from both the US and the EU to attempt to secure greater access to these critical resources. The EU passed the European Critical Raw Materials Act in March, which follows the UK’s Critical Minerals Strategy announced last year. The US has also created a Minerals Security Partnership that includes major Western economies to ‘build robust and responsible critical mineral supply chains’.
The increasing competition over these resources should not be confined to the scale of state investment that can eventually be channelled into mining activities. There is also a question as to which players can provide more attractive solutions to the host country and local communities.
Environmental and social impacts
Many of these mineral resources are located in environmentally and socially vulnerable localities in less developed contexts. Given that, how can investments generate revenues that benefit both the host government and local communities? Also, how can they avoid, or at least minimise, negative environmental and social impacts?
In this context, the concept of ESG (Environmental, Social, and Governance) has become particularly relevant for investments in transitional minerals in the global South. For Western governments and investors, good performance on ESG is likely to be an important factor in differentiating their investments from Chinese investments.
Better performance on ESG and healthy competition in delivering more socially and environmentally sustainable projects would clearly be a good thing. But good performance on ESG in the mining sector is notoriously difficult to achieve, for a number of reasons, and is certainly not a new problem or one that is unique to Chinese investors.
Managing complex environmental and social risks and challenges in mining requires collaboration between regulators and the public to ensure effective scrutiny. Some key areas of concern are water resource depletion, toxic and polluting waste, and labour rights and community welfare. Rampant artisanal small-scale mining can also exacerbate the challenges industrial mining firms face in adopting good governance practices.
Climate risks and water stress
These issues are particularly challenging in remote settings, especially given that many critical minerals are located in areas sensitive to climate risks and water stress, in addition to chronic poverty and inequality, for example in Southern Africa and Latin America.
Lastly, many host countries are now requesting additional investments to strengthen their domestic processing capacity, as a strategy to improve their position in global value chains. Processing facilities, however, are often energy and water intensive and hence have a major environmental footprint.
Public, private and civil society cooperation
It is certainly beyond the capability of any particular investing country or group of enterprises to solve all these problems through one individual investment project. Cooperation between public, private and civil society groups at multiple levels is therefore crucial.
Key issues include setting or standardising codes of conduct for all investors, to onsite implementation or monitoring around mining sites and neighbouring communities. These processes should be ideally led by host country governments, though they require certain levels of capacity to be managed well. They should be as inclusive and transparent as possible.
Although China has often been labelled a laggard in its ESG standards for overseas investment activities, the government has been strengthening regulations in recent years. For example, the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters (CCCMC), a quasi-state industrial association for the major Chinese mining companies, has published several guidelines for ‘responsible’ mining activities since 2015. The 2022 version draws heavily on OECD guidelines, and was developed with support from a memorandum of understanding between the CCCMC and the OECD. Such cooperation indicates convergence of ESG principles and standards.
Implementation is key
The key, as always, is implementation. Contrary to conventional wisdom, most Chinese investments in critical mineral sectors are driven by private companies, with little backing from preferential state finance.
Some of these private companies have been operating in overseas mineral markets for decades and have gradually learned lessons regarding the consequences of poor ESG performance, particularly in the challenging contexts of Africa and Latin America.
For example, a 2019 lawsuit against a Chinese investor, Huayou Cobalt, for charges of human rights abuses prompted the company to completely upgrade its ESG units and practices. A number of leading Western companies, including Apple, Google, Dell, Microsoft, and Tesla, were also implicated in this landmark legal case, due to their awareness of these problems. The case illustrates again the need for an international cooperation in regulating multilateral corporations with links to the mining sector – Chinese and Western alike.
Besides the need for joint effects to address persistent problems in the mining sector, there is a potential for greater collaboration to realise greater development benefits from excavation activities.
For example, many host countries are requesting investors to develop processing capacity for raw materials. Developing such processing plants provides an unprecedented opportunity to simultaneously improve local energy access, as these energy-intensive facilities can provide baseload consumption in mining neighbourhoods that is crucial for the development of .
Yet, capturing such development potential is beyond any one investor. Integrated energy-mining solutions require close collaboration between international donors and development financiers, on top of existing private investment. This appears to be particularly crucial to achieving the SDG 7 of universal energy access by 2030, given that over 770 million people are still living without access to electricity.
To address such an urgent issue, it is clear that we need new mechanisms for private, public and civil society cooperation, and for key global players, including China to play a leading role in convening them.