Reed Smith Client Alerts

An increasing number of sustainability-linked initiatives, driven primarily by international environmental, social and governance (ESG) policies and undertaken by a wide range of stakeholders, will have an impact on the commodities sector. The effects of these initiatives are likely to manifest through increases in (i) demand from investors and businesses for supply chain transparency, and (ii) the development of sustainable commodity products. Commodity market participants should be aware of these initiatives and adopt a position commensurate to the opportunities that these changes will bring. 

Authors: Peter Zaman Matthew R. Yeo

Introduction

The London Metal Exchange (LME) has announced various initiatives in the past year. The most recent is its plan to establish a low-carbon aluminium platform1. Before that, the LME announced the application of the OECD2 Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Guidance), as part of its responsible sourcing requirements, to all brands listed for “good delivery” on the LME. The LME is following in the footsteps of the London Bullion Market Association (LBMA), which also adopted the OECD Guidance on 15 December 20103 in respect of ‘London Good Delivery’ of precious metals.Is there a sustained trend towards sustainable commodities? Will the COVID-19 pandemic derail such progress, or accelerate it? We explore these themes in this note.

For a more detailed version of this note, please see the attachment below. 

What is driving the trend towards sustainable commodities?

Society needs commodities. This is irrespective of whether the economy is green or not. There are many reasons for such need, for example, nickel for the production of electric vehicle batteries, or LNG to transition away from other fossil fuels. The question is whether it is possible to source, supply or use commodities in a more sustainable manner. Our discussion on ‘sustainable commodities’ is centred on this question.

The commodities sector has many existing initiatives towards some form of sustainable sourcing or production, often led by industry bodies made up of key producers. For example, in respect of sustainable palm oil, there are standards such as the Roundtable on Sustainable Palm Oil and Rainforest Alliance Sustainable Agricultural Standard, among others.

There will be many drivers that are specific to a sector, company or individual business in explaining the variable progress in adopting ESG principles across the different commodities. However, at the international level, the push towards the adoption of greater ESG practices is likely to be driven by three main developments:

(a) the Paris Agreement, which obliges its 195 signatories to reduce the risk and impacts of climate change with an objective of the overall amount of global emissions peaking by 2030 at the latest;

(b) the United Nations Principles for Responsible Investment (UN PRI), which has led to an increase in asset owners and professional investors adopting ESG objectives and policy commitments; and

(c) the United Nations Sustainable Development Goals (SDGs), a set of aspirational sustainable objectives, many with targets that have to be achieved by 2030, agreed to by all member states of the United Nations.