European companies face big ESG risks as they scramble to replace Russian minerals, warns Verisk

European companies in the mining sector and their wider supply chain will be exposed to a raft of ESG risks as they seek to replace Russian mineral sources that could be hit by sanctions, or will need replacing because of reputational risks to corporates, warns Verisk Maplecroft. Risk managers will therefore need to keep a firm eye on the transition to developing markets for new sources of metals and fertiliser, and put in place robust ESG policies, added the risk intelligence firm. While the ongoing conflict in Ukraine has brought the EU’s dependence on Russian oil and gas into sharp focus, the war has also highlighted the scale of Europe’s reliance on its strategic rivals, including Russia, for critical minerals. Verisk Maplecroft says that EU sanctions against mined and refined materials from Russia are a “real possibility”. This threat, along with ongoing conflict-related disruptions, means new sources for minerals such as potash, palladium, refined copper and refined nickel will be urgently required if the war in Ukraine continues. EU importers will need to tap alternative markets for other materials traditionally imported from Russia, including iron ore, phosphate rock, aluminium and manganese, as well as less-heralded transition metals such as selenium, a vital input to solar panel production, the company says. And even if sanctions are not applied, Verisk Maplecroft notes that companies will be eager to reduce their dependence on Russia and its ally, Belarus, because of reputational and disruption risks. European nations will also be reluctant to turn to strategic rivals such as China for replacement imports, it adds. "As demand for these essential materials grows, supplies of strategic commodities from domestic sources and friendly nations will only go so far in replacing those disrupted by the conflict in Ukraine," said Rory Clisby, senior environmental analyst at Verisk Maplecroft. “This will force companies into lesser-known markets where the regulatory environment is not as mature, raising the potential exposure of supply chains that are critical to manufacturing, the green transition and food production to a wider set of ESG risks,” his firm warns. Clisby said threats to natural capital will be a key challenge for the mining sector, but labour rights and human rights could also enter the equation for these companies and those in their supply chain. "As new source countries for minerals are found, companies will have to put robust ESG policies in place to ensure higher levels, or different types, of threat do not blindside them and put corporate reputations at risk,” he said. "The reputational risks associated with biodiversity and other environmental and social risks in supply chains will need to be managed appropriately." Verisk Maplecroft goes into detail on some of the metals and fertilisers produced by Russia that risk managers will need track carefully. It explains that the EU imported the “lion’s share” of its refined copper from Russia, which has 7% of the world’s recoverable copper ore reserves, in 2020. Russian-sourced copper is widely incorporated into clean energy technologies developed in the EU. The fallout from Russia’s invasion of Ukraine means that new sources of copper may now have to be found, but Verisk Maplecroft's Industry Risk Analytics data shows low-risk alternative producers are thin on the ground. “Copper already has a high-risk ESG profile across major producers. The mining industries in Chile, Peru and Mexico, which together account for nearly half of total global production, are all flagged as high or extreme risk on key ESG indices. Moreover, the majority of recoverable reserves are also in countries where the mining industry is considered high risk for a range of ESG issues at the national level. These include countries such as DR Congo, Zambia and Indonesia, where high environmental and social risks are also compounded by high levels of corruption and poor government oversight,” it warns. A third of the EU’s refined nickel supplies flowed from Russia in 2020. Nickel is used in industrial and electronic applications, not least rechargeable batteries vital for electric vehicles and other devices. Global nickel prices jumped by over 120% immediately after the invasion of Ukraine and have remained elevated. Alternative sources tend to be in southeast Asia, where ESG risks are high for multinationals. Half of global nickel production occurs in Indonesia and the Philippines. But Verisk Maplecroft says that both these countries are highly exposed to ESG risks, including high levels of biodiversity loss, water pollution, land grabs and abuse of indigenous peoples’ rights. Another alternative source of nickel is the French Overseas Territory of New Caledonia that has similar amount of reserves to Russia. But it is also home to a wealth of unique species and rated extreme risk in Verisk Maplecroft’s Biodiversity Index. This again leaves companies exposed to ESG and resultant reputational risk. Verisk Maplecroft says that Tesla’s long-term strategy for securing future nickel supplies focuses on New Caledonia and the company has promised to work directly with miners to minimise its environmental impact. But Verisk Maplecroft explains that New Caledonia’s mining sector is “clouded by a small number of irresponsible operators, making it a focus for the island’s independence campaigners”. The war in Ukraine is also threatening Russia’s supply of another metal palladium, which is used in catalytic converters and electrodes production. It is also used in hydrogen fuel cells, vital for the energy transition. Russia currently produces 40% of the world’s platinum group metals (PGMs), including palladium, most of which are imported into the EU. South Africa holds 90% of the world’s known reserves of PGMs but mining there is linked to health and safety concerns, water pollution, habitat loss and other environmental impacts, says Verisk Maplecroft. The company’s commodity-specific data also flags South Africa as a high-risk sourcing location for palladium in its water stress, human trafficking and OHS indices. Another key product at risk is potassium-based fertiliser, which fuels the EU’s agricultural industry. There is no artificial process to manufacture potassium as it is derived solely from mineral potash salt deposits. Over a third of the EU’s potash imports came from Russia in 2020 and with Belarus, another key supplier in 2020, already sanctioned, the race to find alternative sources is critical, says Verisk Maplecroft. Canada has over a quarter of global potassium reserves and can act as a low-risk alternative, but other countries with higher ESG risks may also be used to fill the void, it adds. Laos is one such country but risk managers need to think carefully about the ESG risk involved. “Given the country’s high levels of species richness – as reflected by the country’s high-risk score in the industry-specific Biodiversity Index for mining – and a history of land grabs and other human rights abuses linked to the extractive sector, mining in Laos is rated an extreme risk industry in our industry-specific Land, Property, and Housing Rights Index,” says Verisk Maplecroft. It adds that alongside the rise of new benchmarks such as the Taskforce on Nature-related Financial Disclosures and a slew of new laws around forced labour in supply chains, growing investor scrutiny on natural capital illustrates the necessity of identifying ESG risks early. Verisk Maplecroft’s forthcoming Industry Risk Analytics data, which measures 51 different risks for 198 countries across 80 sectors, will reveal the different levels of risk that exist for extractive companies in various countries.

European companies face big ESG risks as they scramble to replace Russian minerals, warns Verisk

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