At a glance
- A secure and consistent supply of critical minerals is fundamental to the energy transition and to achieving net-zero, but demand is putting pressure on supply chains and costs, and risks polarising sentiment around the energy transition
- Supply concentration in countries such as China and Indonesia is a key concern in understanding how the price dynamics and responsible attributes of mining will develop, with tariff tensions rising between countries
- The race for critical minerals presents both opportunities and risk for investors, with the sector at a crossroads: will we see transparent and responsibly sourced supply chains adhering to rigorous ESG criteria, or a fixation on securing critical mineral supplies at any cost?
- We look at the likely outcomes from the situation and the role investors have in facilitating responsible supply chains
The energy transition is a material transition
Decarbonising the economy requires a significant scaling up of green technologies such as electric vehicles (EVs), solar photovoltaics, wind turbines and grid-scale battery storage. All of which require significant mineral inputs. A deficit of these “critical minerals” – such as cobalt, copper, lithium, rare earth elements, graphite and nickel – raises supply risks that could constrain the pace and scale of the energy transition.
This mismatch in timelines and market sentiment could result in a race towards critical metals supply at all costs – by, for example, redirecting more supply to regions with poor human rights and labour policies, leading to heightening social and environmental risk.
The new geopolitics of critical minerals
Though commodity dependency has always been at the heart of trade dynamics, what is new is the focus on metals and minerals that have not previously driven trade relationships. Ensuring reliable, diversified supplies of critical metals has emerged as a strategic priority for the US and EU over recent years.
Supply concentration is a key concern in understanding how price dynamics and responsible attributes of mining will develop. Today, China controls approximately 60% of lithium refining, 40% of copper refining, and 90% of rare earth element processing capacity globally. The country also accounted for 44% of global lithium M&A investment (by value) over the past three years. Meanwhile, Indonesia’s share of nickel production and refining increased from 34% to 52% and 23% to 37% respectively between 2020 and 2023. This trend towards supply consolidation has catalysed a renewed geopolitical focus on “mineral security” and resource nationalisation6.
The responsible investor’s dilemma
The race for critical minerals presents both new opportunities and risk for investors. Higher demand for “transition minerals” coupled with constrained supply could have meaningful earnings impacts for miners as prices rise. Furthermore, what has previously been a sector seen as problematic to ESG-conscious investors could see a perception shift to being seen as responsible transition enablers, widening the investor base.
While we recognise the key role metals play in the energy transition we are mindful that the need for supply cannot override other social and environmental factors. More systemically, the negative externalities of intensified extraction, such as human rights violations, biodiversity loss, water contamination and greenhouse gas emissions, also pose risks that could undermine the energy transition’s core objectives of respecting human rights and avoiding undue costs to biodiversity and nature.
For responsible investors this presents a core dilemma: if we want to support investments into the energy transition, is it reasonable to not invest in mining? Here we argue that investors have agency in seeking best outcomes not by excluding companies, but rather by engaging with held companies on avoiding negative externalities and risks, as well as allocating capital to those miners that drive towards best outcomes.
The mining sector is at a crossroads
We think this period represents a crucial crossing point for the mining industry, which could define the role of miners in the energy transition. As a simple thought experiment, we imagine two scenarios as a starting point to how the sector could develop.
This scenario involves transparent and responsibly sourced supply chains adhering to rigorous ESG criteria. It could also see increased trust in the mining sector, allowing for more community buy-in for the development of new mines, which could reduce permitting and licencing time.
In this scenario we imagine a circular chain of events that eventually leads to smoother permitting and licencing, which can reduce risks of energy transition supply bottlenecks. For it to manifest the sector needs to build trust by, for example, investing in rigorous third-party auditing, such as via the Initiative for Responsible Mining Assurance (IRMA) standard; adhering to global principles, such as those set out by the International Council on Mining and Metals (ICMM); and ensuring community support and buy-in from the outset. With this in place, investors could become more confident that miners can be transition enablers.
The alternative is a “race to the bottom” – a fixation on securing critical mineral supplies at any cost, with bifurcated governance regimes, lax oversight, and consumers unwilling to pay sustainability premiums. This scenario could, at worst, tarnish the social license of the energy transition while perpetuating human rights abuses and environmental degradation. It could also see an increasing price differential between materials mined in different geographies, as the EU and US move towards onshoring or “friendshoring” of supply chains.
Which scenario is the sector heading for?
What role can investors have in facilitating responsible supply chains?
If investors want to enable Scenario 1, whereby transparent and responsibly sourced supply chains adhere to rigorous ESG criteria, then thorough due diligence and engagement should be the cornerstones of investment strategies and capital allocation frameworks. An exclusionary stance fails to acknowledge that mining is essential to the energy transition, and exclude those investors who want to incentivise best practice.
Regardless of investor intent, the increasingly geopolitical nature of the critical metals trade, coupled with new regulatory frameworks, is driving an increasingly complex outlook for the sector. As such, regardless of which scenario the sector takes, we see careful due diligence and purposeful engagement as core to minimising risk when investing in the mining sector.
Can the demand for critical minerals be met responsibly?