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Funding critical minerals projects

Three ways mining companies can improve access to funds from London

Modern economies rely on critical minerals. They are essential to make mobile phones, laptops, robotics, fibre optics, medical devices, batteries and much more. They are also key to green energy infrastructure – lithium, nickel and cobalt for electric vehicles, rare earth elements for wind turbines or silicon for solar panels.

Transitioning economies globally to net zero by 2050 could lead to a six-fold increase in demand for critical minerals from 7.1 million tonnes (Mt) to 42.3 Mt, according to the International Energy Agency.

To meet this surge in demand, miners need to invest an unprecedented amount of capital in a short space of time. According to estimates, close to two trillion dollars is needed to supply key energy transition metals by 2035.

Miners are likely to turn to financial markets, such as London, to raise part of this sum. London has a long history of providing financing and related professional services to mining companies. Investors will require increasing assurance that critical mineral projects meet environmental, social and governance standards before they invest.

This article suggests three actions miners can take to gain better access to funding in London:

invest in the most robust disclosures and transition plans they can
improve transparency through data
collaborate with external stakeholders and professional organisations.

London will be one of the key centres for sustainable financing

London has been the leading financial and professional services centre for the mining sector for many years.

By the scale and quality of financing provided, London is ahead of other centres for mining finance. In early 2023, the London Stock Exchange (LSE) hosted the world’s top diversified mining houses with a combined market cap of over $300 billion, ahead of Sydney’s nearly $275 billion and Toronto’s less than $170 billion. London is where most globally significant mining deals were transacted and where many prominent miners go to raise capital for large projects.

The City has a large base of specialist mining professional services expertise such as lawyers, bankers, advisers and accountants to support such transactions.

London's position as the premier centre for mining finance is closely linked to the London Metal Exchange that provides liquidity in the trading of many minerals and provides the City with price discovery and sophisticated knowledge on commodity pricing and purchasing trends. The industry’s governing body – the International Council on Mining and Metals – has also chosen London as its headquarters.

London’s role started to shift more rapidly to align with the focus on sustainability after 2019, when the UK became the first major economy to commit in law to net zero by 2050.

In the Green Finance Strategy and the subsequent Greening Finance: A Roadmap to Sustainable Investing, the UK government set a target for London to become a centre for sustainable finance and channel investment into projects and technology that support the transition to net zero. This will be achieved by:

‘greening finance’ – mainstreaming climate and environmental factors into the UK financial system
‘financing green’ – mobilising private finance for clean and resilient growth
capturing the opportunity – cementing UK leadership in green finance.

While the detail and implementation arrangements for some reporting standards are still being finalised, other requirements are in place or well known, for example:

Task Force on Climate-related Financial Disclosures (TCFD) – these have been mandatory on a ‘comply or explain’ basis for all premium listed businesses since 1 January 2021, all standard listed companies since 1 January 2022 and large private businesses from 6 April 2022. These disclosures help companies and investors assess, quantify and disclose climate-related business risks and opportunities
the forthcoming UK green taxonomy – this will help companies and investors define which economic activities are environmentally sustainable.

In addition, the Greening Finance report indicates that “certain firms will be required to publish transition plans that align with the government’s net zero commitment or provide an explanation if they have not done so”.

Investors now consider climate risk and opportunity when deciding where to put their money.

What does sustainable finance mean for critical minerals?

Miners take their responsibilities to the environment, society and governance (ESG) increasingly seriously as they respond to both internal and external stakeholder concerns. However, minimising or avoiding some ESG-related risks for miners can be difficult depending on where their assets are located.

Critical minerals are often found in countries where there have been reports of child and forced labour, corruption and financial crime as well as land degradation and water stress – particularly for lithium where water requirements are high.

For these reasons, critical minerals mining is not considered a sustainable activity under the EU taxonomy.

The EU taxonomy provides a guide for investors and financial institutions to help them define sustainable activities. It was developed to support the EU’s goal to scale up investment in sustainable projects and accelerate the transition towards a low-carbon economy.

The recent publication of the EU Critical Minerals Act is an important step as it considers projects with high ESG credentials to be included as ‘Strategic projects of importance’, which should help to secure funding. However, the exclusion of critical mineral projects from the EU taxonomy raises the question of how owners of projects with robust ESG frameworks can deliver a large volume of critical minerals in short time if their access to important investor pools, such as those in the EU, is limited.

After Brexit, the UK onshored the EU Taxonomy and will continue to build on it.

Another challenge is that ESG disclosures need further development. Currently, there are over 30 ESG-related independent standards and monitoring frameworks that a mining organisation may need to implement.

The lack of ESG-wide consolidated and widely adopted standards brings additional challenges. It can lead to ambiguity over which guidelines to implement. For international businesses disclosures are even more complicated as different rules apply in different markets where the company has a presence. This makes it more difficult – from an investor perspective – to compare projects fairly and effectively. This could in turn lead to critical mineral projects failing to attract necessary financing on time.

How can critical minerals miners improve access to funding?

The good news is that global sustainability standards are coming. The International Sustainability Standards Board (ISSB) is developing global baseline standards for sustainability, building on the work of the TCFD and other voluntary standards schemes. The UK will adopt the ISSB-issued standards when published.

Miners can act now to comply with the existing standards and meet the new requirements promptly and fully when they come into force. Below we outline three areas to focus on.

Investors want to know that companies are embedding climate change in their strategic planning and risk management process.

The TCFD currently provides the main framework to report on the impact of a company’s climate-related activities in the UK. Mining companies that want to raise funds in London will need to prepare disclosures that follow its 11 recommendations.

As TCFD-aligned disclosures are adopted by businesses across the wider UK economy, it becomes clearer what good quality disclosures are and the value they bring to an organisation.

We recommend organisations invest as much effort as possible when they prepare a set of disclosures for the first time and then continue to improve it in future years. Although its preparation is complex, the process of collecting and analysing data, and building scenarios can yield invaluable insight about a company’s exposure to climate risk and potential opportunities. Embedding climate-related financing considerations into business governance and strategy will increase resilience.

An increasing number of companies are also publishing net zero transition plans in the UK and internationally. These are forward-looking, multi-year accounts of how an organisation plans to align its strategy, assets and actions to the global transition to a low carbon economy.

Published transition plans vary in quality and detail, which means that investors cannot always determine fully their credibility. Recognising the demand for standardised, high-quality plans to better inform capital allocation decisions, the UK government established the Transition Plan Taskforce (TPT), which has a two-year mandate to develop the ‘gold standard’ for high quality, standardised and investable transition plans.

In November 2022, the TPT consulted on its sector-neutral disclosure framework and implementation guidance. In it the TPT recommends that “entities publish standalone transition plans at least every three years and sooner when there are significant changes to the plan”. It also recommends that “progress against the plan and material updates should be reported annually as part of TCFD or ISSB-aligned disclosures”.

The TPT is not mandated yet, but the Financial Conduct Authority encourages listed companies to consider its disclosure framework and implementation guidance as they were published for consultation.

The development of sustainability reporting standards will hopefully lead to more robust transition plans that help explain to financiers with more clarity what the company’s short- and long-term plans are to achieve strategic objectives, how the plan will be financed, how periodic reporting reinforces accountability and how risks are managed to avoid missing stated targets.

Disclosures put a spotlight on ESG performance. Given that more investors make decisions based on disclosures and more metrics are incorporated into areas such as remuneration and finance, companies need their data to be as robust and reliable as their financial reporting. As a result, many want independent third-party assurance of their data. Being able to demonstrate the provenance and sustainability of critical mineral supply chains is an important factor in building investor interest and confidence.

Getting as much data as possible – on greenhouse gas emissions for example – assured by a third party will help improve an organisation’s confidence in its own data as well as its credibility and reputation in the market. However, gathering such data might not be simple for miners given some of the challenging countries where some critical minerals projects are located. Data covering supply chains is particularly hard to get.

Visibility and traceability of supply chains is critical to improve their transparency. Digital technologies can be particularly helpful to reduce cost and complexity, and improve the accuracy and completeness of data gathering. Such technologies include:

supply chain mapping – intelligence platforms such as Illuminate can increase visibility of the complex multi-tier supply networks which support the extractive industry
traceability – after a mineral is extracted, it moves through a complex supply chain of further processing and refining before ending up in production lines, far removed from initial extraction. Tracing the mineral’s geographic production path can help mitigate the risks of unsustainable practices and demonstrate compliance. Circulor can track the flow of raw materials from extraction to processing, production and recycling.

Data collected through digital technologies also helps better demonstrate how miners work with their suppliers and third-party networks in challenging environments, which in turn help improve a company’s supply chain sustainability and resilience.

Ultimately, all stakeholders want a mining company to provide robust disclosures and transition plans that provide an accurate picture of its activities and a well-defined roadmap of how it will reach net zero. These should be underpinned by accurate, consistent and complete data and the leadership’s commitment to mitigating ESG risks.

Cooperating with governments and regulators will help keep mining companies informed of regulatory change and ensure they are prepared to provide clear and focused disclosures in line with current and future requirements.

Engagement with local communities is essential for a mining company’s social licence to operate.

Collaborating with financiers will ensure miners understand the evaluation criteria for funding in London and provide high quality financial and non-financial data to give them the best chance to secure the funding. Financiers may also positively influence the quality of some critical mineral projects by raising the sustainability criteria and advising miners on how to meet these.

Working closely with external advisers, industry bodies, trade associations and academia, miners can get external validation as well as new ideas and valuable feedback in a ‘safe environment’ on the approach they are taking to reporting on and managing ESG-related actions and plans.