Pigs, proxies, and passives

30 Apr 2022 | Plus, what do mining investors need to know for the transition?

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🍟 In a proxy season that has been described as “one of the most significant ever for ESG shareholder proposals,” none is more high profile than Carl Icahn’s campaign against McDonald’s. Ostensibly about pig welfare, it’s also “a pointed warning” for BlackRock, Vanguard and State Street, who collectively own 21% of McDonald’s stock. In an open letter, Icahn derides “the biggest hypocrisy of our time: Wall Street firms capitalizing on ESG to drive profits without doing nearly enough to support progress.” The result of the vote will “come down to what the index funds think about it.”

☮️ And what do they think? Common Wealth warns index funds are “holders of the last resort,” having grown their fossil fuel stake to 40% of total fund ownership as active funds retreat. In an analysis of 30 asset managers (25 GFANZ signatories) Reclaim Finance finds none apply restrictions to the 46% of passive assets under their remit. Nor are they flexing via engagement: The FT reports “big asset managers” have shied away from fossil-fuel financing proposals at banks. (Or maybe they aren’t needed. As one banking analyst tells Responsible Investor, they do have recycling bins.)

🧮 If index funds are the problem, index providers are on the hook. “Just three firms dominate the index business,” says Common Wealth, and yet, despite an “unignorable position in the allocation of capital and decision-making power,” they remain “under-scrutinised and under-regulated.” While the benefits of the [ESG] index revolution are shared by providers and distributers, it’s unclear who bears responsibility for their impact. (N.B.: Asset mangers exclude passive assets from their emissions estimates, something the UN-backed Science Based Targets initiative wants to change.)

🚮 “ESG ratings make no sense,” tweeted Elon Musk about Tesla’s MSCI score (A, climate-misaligned)—incidentally, one year to the day after MSCI made the now-famous decision to upgrade McDonald’s (BBB, climate-aligned). Given 60% of all retail money in ESG is directed by MSCI, it’s a viable third target of Icahn’s campaign—though he may have as much luck here as with the “Wall Street firms.” McDonald’s’ upgrade was not in recognition of any action over its rising supply-chain emissions rivalling those of a European country, but a reward for having installed recycling bins.

Digging for gold

Each week, we dig into the 120 million peer-reviewed sources that feed into the Util database to discover the SDG performance of an industry or company dominating headlines.

What’s going on?

In one corner of the economy, recycling will play a critical role.

Green economies are made out of metal. Right now, we don’t have access to all the metal we need. And even if we did have access, metals, like fossil fuels, are a) not in unlimited supply, and b) difficult to extract without decimating environments.

This week, a study commissioned by industry body Eurometaux warned of a “metal supply crunch” that could derail decarbonisation and digitalisation. Earlier this month, LGIM warned that “without a growing, responsibly run mining industry there will be no energy transition.” Then there was McKinsey’s meticulous research into the metal requirements of the EV and renewable industries, all predicated by the IEA’s landmark report last year, in which it warned of a “looming mismatch” between the energy transition and mineral supply.

Three things have changed since the IEA went to press. First, Russia’s invasion of Ukraine forced countries to reevaluate their dependency on imported oil & gas. Second, Russia’s invasion of Ukraine exacerbated supply chain shocks and so access to materials. Third, Russia’s invasion of Ukraine made the prospect of relying on autocratic regimes—of which the world’s largest metal exporter is one—less attractive.

The silver lining of Eurometaux’s report? Up to 75% of Europe’s clean energy metal requirements could, eventually, be met through local recycling, with Deloitte echoing that “circular solutions” will help “the industry “demonstrate that it’s responsible enough to produce the vast quantity of metals required for a low-carbon future.” In the meantime, LGIM says, asset managers need to engage to improve its performance.

There are plenty of places to begin.

Util data: The SDG impact of the mining industry
The SDG impact of metal mining

It should be obvious that the metal mining industry positively contributes to SDG 9 (Industry, Innovation & Infrastructure). Our source texts find that “mining industries provide most of the materials we rely on to build infrastructures and instruments of daily use,” and “provides input to almost every product and service in the world.” It also supports SDG 8 (Decent Work & Economic Growth), fuelling “increased economic growth, employment and income outcomes.” In the regions in which they’re developed, mines can “provide employment,” “enhance infrastructure,” and “make trade favourable.” Operations are a “critical element towards sustainable growth in mineral-rich countries and the economy at large.”

The same can’t be said of every mineral-rich country, however. One source concludes that “while there’s a need for minerals in the transition to renewable energy—which means mining is a necessary activity for global sustainable development—mining operations also challenge environmental, social and economic sustainability where they take place.” In a number of countries, mining is associated with “inequality” (particularly gender inequality), “lack of infrastructure and water resources,” “fiscal instability,” and “corruption,” at a detriment to SDGs 10 (Reduced Inequalities) and 11 (Cities & Communities). And the aggregate health impact of mines—both on miners and surrounding communities—can’t be understated, with psychological and physical ramifications taking a toll on SDG 3 (Good Health & Wellbeing). But interestingly—and reinforcing LGIM’s point that mining companies vary wildly depending on regulation and region—the outcome can be dramatically different depending on the country.

One area on which there is more uniformity is the environmental SDGs, where metal mining performs poorly. Pollution of air and water, acid rain, deforestation, biodiversity loss, desertification, habitat destruction, water shortages—the list is long, and has severe consequences for SDG 15 (Life on Land) in particular.

The counterargument lies in the relative SDG performance of the fossil fuel and renewable energy industries over the long term. Getting from A to B is impossible without investment in the mining industry. While that transition is decades-long, however, the damage wreaked on local societies and environments by some mining companies doesn’t need to be.