The need for the responsible sourcing of metals and minerals is clear. What is less clear is whether current efforts are generating positive change, where it matters most. Is there sufficient awareness of the complexity of the responsible sourcing challenge? Is interest and concern on the topic translating into truly effective actions, or is there a risk of prioritising style over substance; of ‘greenwashing’ in the pursuit of easy answers to complex questions?
We have each worked in the responsible sourcing field for nearly two decades a-piece and it’s clear to us that a lot has changed – for the better – in terms of the awareness of the importance of responsible sourcing and the willingness to take action to build more responsible supply chains. The LME has played a major part in this.
From Trafigura’s perspective, five years ago, hardly any commercial buyers or financiers asked about responsible sourcing issues; now, the majority do (to some degree). This has been invaluable when building the business case amongst executives and traders for our own responsible sourcing programme and, more importantly, further investing and extending its reach into new jurisdictions and new products.
In metals supply chains, the term “responsible sourcing” is no longer synonymous with a narrow focus on so-called “conflict minerals”, or only on supply chains of metals from central Africa. Instead, it is now widely understood to apply to all metals, across all geographies and, increasingly, to relate to a wide range of environmental, social and governance (ESG) issues.
But significant challenges remain.
Buyers’ expectations often do not consider supply chain realities
It is notable when you attend responsible sourcing-focused conferences how few producers are in the room. As a result, there is often a gulf between the ESG expectations of downstream buyers and the capacity of metals producers to understand and respond to these expectations.
Many downstream buyers will proudly relay how they “demand” high standards from their raw material suppliers, and will then specify these demands in lengthy ESG questionnaires that get passed down the supply chain.
However, the majority of metals traded and consumed across the world are not produced by international corporations with sophisticated ESG management capabilities, but by producers and processors operating in national contexts far removed from “international norms” who often have a limited understanding of and capacity to address downstream concerns. Many of these producers and processors are small or medium-sized businesses. And make no mistake, it is these entities that will increasingly fuel the energy transition which is driving demand across many critical metals.
There needs to be a much greater recognition of the significant presence of these smaller producers in global metals supply chains. Downstream buyers setting unachievable expectations against complex certification standards can lead to a “fake it until you make it” mindset of box-ticking compliance.
Seeking black and white answers when the only option is shades of grey
It is important to recognise that the lens through which responsible sourcing is evaluated – following the principles defined in the OECD guidelines – is not the same lens through which many people evaluate risk. This disjuncture is sharpening ever more as regulatory compliance requirements for supply chain due diligence, such as the German Supply Chain Act and the forthcoming EU Corporate Sustainability Due Diligence Directive, becoming increasingly important.
Companies are asking “is this supplier ‘clean’ - yes or no? What is the ‘stamp’ that certifies it as ‘clean’?". This approach flies in the face of the progressive, risk-based due diligence approach set out in the OECD Guidelines – which, ironically, most market compliance or regulatory standards for responsible sourcing are built on. Something important has been lost in translation.
We see a clear trend towards supplier risk scores, ratings and certification – this is what companies, particularly downstream buyers of metals and investors, clearly want. But is it what society expects or needs? Does it really drive change on the ground? Or is this primarily an exercise in de-risking?
Time to collectively “roll up our sleeves”
Whilst the fast-evolving compliance agenda for responsible sourcing undoubtedly presents challenges and adds costs for companies, it also presents great opportunities. Businesses really can be a force for good; responsible sourcing practices really can make a positive difference to peoples’ lives in producing countries.
But realising this potential requires businesses to be willing to take some risks. We should not expect perfection. We need to recognise that many producers need help in understanding and applying responsible sourcing standards, and there is a journey to go on from where they are now to the expectations of global standards. We need to be prepared to work, as commercial partners, with such producers and not simply walk away at the first sign of difficulty.
For example, Trafigura, with support from Kumi, is implementing a programme of awareness raising and capacity building with lead and zinc producers in Bolivia, to help put in place the fundamentals of due diligence. To be frank, progress is slower than we would like. The local context is difficult; most other buyers are not making the same requests of producers which limits our leverage in the market. But, step by step, we do see progress, and we are committed to making our best efforts to do the right thing.
We also need to see better use of commercial incentives for responsible sourcing: more “carrots” instead of just compliance “sticks”. One important area is the use of Sustainability Linked Loans (SLLs) by banks and other capital providers. SLLs enable banks to influence and drive change as a condition of financing. In March 2022, Trafigura refinanced its multi-currency syndicated revolving credit facilities totalling US$5.3 billion. The renewed SLL structure includes four key performance indicators (KPIs) to be tested annually and verified by a third-party expert, including the responsible sourcing of metals and the implementation of the Voluntary Principles on Security and Human Rights at Trafigura’s operations. The facility agent will apply a penalty or discount on the margin, depending on the number of KPIs met each year. Trafigura is actively looking at other opportunities where the use of SLLs, or tools like them, could be a powerful motivator for mining companies, traders and others seeking access to finance to adopt and implement responsible sourcing practices.
Responsible sourcing practices, properly implemented through global supply chains, really can be a catalyst for meaningful and sustainable socio-economic development. We all need to play our part in making that happen. And a healthy dose of pragmatism, twinned with an appetite for making progressive and practical interventions, is going to be key.
This article was an original contribution to the LME July’s edition of the Sustainability Spotlight 2023.