For the financial services sector, which has done a middling job since the crisis in demonstrating how it has become a better corporate citizen, sustainability is an especially arduous challenge. As intermediaries, market structure providers need to persuade that their capital facilitation has positive benefits to society – always a difficult one to explain easily. This week, the London Metal Exchange have attempted to show their chops in this area when they launched their sustainability strategy. Others in the sector should take note.
The production and trading of metals is an esoteric but critical part of the world of commodities. The transition to greener energy, of copper in phone chips, lithium in batteries and carbon neutral transport has driven world demand for metals, but their extraction and processing are carbon intensive and can have some nasty social side effects. Instead of pushing responsibility onto trading firms, miners and producers of these metals, LME has taken responsibility for these externalities.
The agenda is laid out in LME’s sustainability discussion paper. A stated aim is tackling the metals industry’s record of human rights abuses, lack of transparency, and corruption so that miners and producers meet global expectations on ethics and environmental sustainability.
But that is just the first step: LME has broken down, in detail, what concrete steps itself can take. It will provide access to and better data on new products which encourage the sustainability agenda. Three new contracts to trade lithium and aluminium and steel scrap would encourage low carbon alternatives to their current trading methods.
The rules on responsible sourcing of LME-listed metals will now be accountable and reported on in 2022, where previously they were hopeful aims. And what started out as an administrative initiative to move away from paper certification – the LME Passport, encourages producers and metal owners to input environmental criteria of their brands, certification by an industry scheme, recycled content, use of carbon offsets, or water or tailings management schemes. For low carbon aluminium, this would represent the first step towards an LME-sponsored market-wide labelling programme.
Their much bigger peers in the exchange sector continue to do well in promoting their roles in managing risk and promoting trading liquidity but are less satisfactory on the sustainability agenda at a corporate level.
ICE and LSE Group’s FTSE Russell both have broad sustainability indices and data services that provide ESG-focused fund management clients. ICE is a leader in emissions trading. CME Group’s sustainability report goes as far as saying they ‘recycle’ but ignores their huge exposure to oil futures. This may reflect the fact that despite all the talk of ESG investing, measuring its impact continues to be problematic and oil, gas and coal will still account for 73% of energy consumed in 2040.
While these trading giants continue describe well how they support the orderly, safe markets they are less successful at explaining what value they bring to wider society, particularly around ESG factors. Perhaps because they haven’t had the same pressing need to do so that the LME has faced given its exposure to cobalt, aluminium and lithium.
LME could also have worked harder to quantify their impact better – to show how much of the world’s EV use will need these metals – how much are they set to grow, and could they have quantified their own agenda in promoting more sustainable forms of financing? Could they have discussed the risks and opportunities of action or inaction?
Nevertheless, in a sector where miners and producers are firmly in the spotlight, as a trading venue LME could have taken a much more hands-off approach. Instead they’ve taken credible steps to promote a shift of their customers towards a path to sustainability.