The Ethical Investor: ESG moves this week and how to spot 'green washing'

The Ethical Investor is Stockhead’s weekly look at ESG moves. This week’s special guest is Simon O’Connor, the chief executive officer at Responsible Investment Association Australasia (RIAA).

Increased electric vehicle (EV) sales means great opportunities for the lithium-supply chain as well as an increase in cobalt demand, with Benchmark Mineral Intelligence forecasting a 13% compound annual growth rate in demand for cobalt over the next 10 years.

Cobalt prices are trading at their highest levels in three years but in parallel to that growth in demand for cobalt is a greater need for transparent and verifiable ESG reporting.

The Democratic Republic of Congo (DRC) is among the world’s top cobalt producing countries, accounting for around 70% of global production – but this comes associated with child labour and inhumane working conditions.

Carmakers, battery manufacturers, and even metal exchanges are taking steps to weed out unethical cobalt supply from their supply chains.

Benchmark Mineral Intelligence says while Amnesty International’s 2016 report on child labour in the cobalt mining industry in the DRC “altered the strategy of stakeholders, namely that of automotive companies,” an understanding of ongoing ESG issues such as water contamination, wider impacts on human health, and the impact of mining on critically endangered flora and fauna are pertinent.

It is also important when assessing ESG that we avoid the mistake of seeing the cobalt industry as a single entity.

“There are differences in ESG materiality concerns when it comes to operating regions and operators such as large-scale and artisanal miners,” the reporting agency says.

“As cobalt prices rise, so too does the rate of artisanal mined cobalt.

“The need to better regulate and safeguard those in the artisanal sector has led to the Entreprise Générale du Cobalt (EGC), establishing the responsible sourcing standard.”

The EGC was formed in 2019 to support the establishment and maintenance of safe and strictly controlled artisanal mining zones in the DRC.

However, Benchmark Mineral Intelligence says it is yet to be seen what impact this will have on the ground.

ESG related news in Australia

Suddenly there’s some $40 million in Federal funding up for grabs as the government backs solar R&D as part of the Morrison Prime Ministry’s net-zero Emissions Mission.

The Australian Renewable Energy Agency (ARENA) says the funding round will build on its previous R&D investment into solar PV and will seek to support projects that align with ARENA’s memorably named “Solar 30 30 30,”, targeting 30 per cent module efficiency and 30 cents per installed watt at utility scale by 2030.

Ultra-low cost solar was recently added as a priority technology in the Australian Government’s latest Low Emissions Technology Statement (LETS), which set a stretch goal of $15 per megawatt hour, roughly a third of today’s cost.

Turning to clean hydrogen exports now, Australia has announced its multimillion-dollar plan to grow the renewable energy industry with exports to Japan on the horizon.

Under a new agreement, Japan will take part in the first round of Australia’s $150m clean hydrogen trade program (ACHTP), which aims to attract overseas investment into hydrogen supplying chains originating in Australia.

Prime Minister Scott Morrison said the $150 million program would help deliver on Australia’s commitment to reducing emissions by working with other countries to get the cost of clean energy technologies down.

ASX ESG-related news during the week

Vulcan Energy Resources (ASX:VUL) signed a term sheet and memorandum of understanding (MOU) with top chemical producer, Nobian to assess the feasibility of a joint project for the development, construction, and operation of the Central Lithium Plant (CLP).

This includes the electrochemical conversion process of lithium chloride to battery quality lithium hydroxide.

Oil and gas company Woodside (ASX:WPL) has revealed its plans to develop a solar facility in the Maitland Strategic Industrial Area, about 15km south-west of Karratha in Western Australia’s Pilbara region.

In its submission to the W.A. Environmental Protection Authority earlier this week, the company revealed the proposal would generate electricity up to 500MW from a large solar photovoltaic (PV) farm and includes battery storage infrastructure up to 400MWH.

Power from the solar facility would be delivered via the Northwest Interconnected System (NWIS), through existing, upgraded, or new infrastructure constructed, owned and operated by Horizon Power for all users of the NWIS.

This includes its own Pluto LNG facility, which processes gas from its Pluto and Xena gas fields off the coast of Western Australia.

Rio Tinto (ASX:RIO) announced this week its plans to purchase four battery-electric trains for use in the Pilbara region as part of its strategy to reduce carbon emissions by 50% by 2030.

Rio Tinto purchased the four 7MWh FLXdrive battery-electric locomotives from Wabtec Corporation with production due to commence in the United States in 2023 ahead of initial trials in the Pilbara in early 2024.

The locomotives, used to carry ore from the company’s mines to its ports, will be recharged at purpose-built charging stations at the port or mine.

ESG interview with Simon O’Connor, chief executive officer at RIAA

The RIAA is a network of more that 400 members who manage around $9 trillion in assets globally. Today we hear from RIAA CEO Simon O’Connor on the topic of green washing.

He says the first tell-tale sign of green washing is when the reasoning, method, and approach of a particular fund manager isn’t clearly communicated.

“You should be able to find very clear disclosure and explanation as to what that fund manager is doing,” he said.

“They should then provide the evidence to substantiate how they have progressed that on that promise whether it has to do with sustainability, ethics, or climate change actions.”

Where the real problem lies with green washing is the disjunct between the promise and what investors see in the portfolio – this is what really needs to be solved, he said.

“Around 80% of investment products that come to the organisation for certification as being ‘true to label’ go away with substantive suggestions on how to improve their disclosures and investment processes so that they are more aligned with what they are promising.”

Investors less patient with ‘the talk’

“Transparency is key and when companies make claims around responsible investment then that really needs to be supported by very clear articulation and regular reporting,” O’Connor said.

The Australian Securities and Investments Commission (ASIC) is currently conducting a review to establish whether the practices of funds that offer these products align with their promotion or in other words, whether the financial product or investment strategy is as “green” or ESG-focused as claimed.

“We would expect that ASIC will come out with some form of commentary or guidance around that because ultimately this comes down to a consumer protection issue and Australia unfortunately has very poor disclosure requirements for fund managers and investment products,” he said.

“This is why we push very strongly for disclosure, for voting records, and engagement activities from fund managers so we can really see the full story of how a product or investment manager is implementing that responsible commitment.”

With more and more companies announcing their transition to a low carbon economy by 2050, O’Connor said investors will become less patient with ‘the talk’.

“For example, BHP over the last year has been reducing its exposure to fossil fuels and strategically moving towards metals and minerals that will be important in a low carbon world such as copper and potash,” O’Connor said.

“But with companies such as Woodside – who just made a major capex investment in new greenfield gas extraction, it is harder to see how that fits within a net zero transition plan over the next decade or two.

“Investors want to see capital being deployed to support that net zero strategy.”