Resources companies must balance costs, benefits of reducing environmental impact

12th January 2022 By: Schalk Burger - Creamer Media Senior Contributing Editor

Natural resources and commodities producers and traders will have to balance the increase in costs to reduce the environmental impact of their operations and supply chains with the beneficial impact these measures have on the environment and communities in which they operate, three natural resources and environmental strategy specialists said this week.

Commodity traders and producers have historically been able to model or forecast demand and supply, but there have been disruptions on both sides owing to the impact of the global pandemic on supply chains and the global tightening of foreign investment, multinational law firm Baker Mckenzie partner Greg McNab said during a webinar hosted by Reuters Events on the implications of COP 26 on the commodities sector.

He added that the global focus on the energy transition would also increase the costs of transporting commodities, as well as the cost of the energy required to extract and produce commodities.

"The trick seems to be how a trader or producer can market the increase in costs of delivery so that they are connected with a more responsible way of doing business. Commodities companies need to be pragmatic and smart about what they transition, when and where," he said.

However, different regions of the world are transitioning to low-carbon energy systems at different rates, and commodity companies are allocating low-carbon products to regions that are transitioning fastest and where there are risks of carbon borders being raised, so that the companies can manage their tax positions proactively, noted emissions tracking and management services company Carbonchain CEO Adam Hearne.

Some commodities sectors already have price separation for green products and are differentiating their supply, and are attracting a premium for these products.

"It is important for [commodities] companies to have a strategy in place and to be tangible with their ambitions. Carbon offsets are expensive and companies have to take direct action, including managing supply chains to distribute the costs and efforts to mitigate environmental impacts as best possible.

"Good carbon accounting makes this possible and enables executives to ensure everyone in the organisation and partner organisations are rowing in the same direction. If companies are not doing this, then they are not allocating capital efficiently and are reducing shareholder value," he said.

Businesses that fail to embrace the energy transition or net-zero goals are likely to fall behind competitors and face an uphill battle in years to come.

"Supply chains include a significant proportion of small and medium-sized enterprises, and commodities companies and traders will need to collaborate within their supply chains to achieve net-zero goals, said natural resources and commodities finance consultancy KruegerVally Consulting CEO Tasneem Krueger-Vally.

"For early-movers to net-zero goals, it is important to maintain a competitive edge, which will only happen if a company has a robust plan in place. Businesses need to identify and address the needs and consequences of adopting an early-mover position and ensure their ability to trade competitively, while ensuring sufficient cash reserves to prevent opportunities from being lost and to manage pressures likely to come from the rest of the supply chain," she commented.

To remain profitable while pursuing net-zero goals, companies must understand their future footprint, align their ambitions with science-based targets and embed net zero into their wider strategy and then focus on their supply chains as a key element and provide support to suppliers and the guidance they need to fulfil a company's ambitions, she added.

"Further, while it is insufficient for companies to include a sustainability chapter produced by a consultancy in their reports, getting a specialist team to verify net-zero actions helps to future-proof headline, especially for companies that are establishing environmental, social and governance and carbon emissions teams," noted Hearne.

A global energy transition takes time, money and work, and is taking place at different rates in different parts of the world. It is an iterative process and climate challenges will not be fixed overnight, therefore it is important to use technology to advance ambitions that will take time, said McNab.

Additionally, the definition of stakeholder has also changed from including only statutory and legal stakeholders, to currently including not only customers and suppliers, but the broader public and communities as well. Companies must adapt to these changes and determine which stakeholders they will focus on and make them part of the discussions, he says.

However, the mining industry has a good record of deploying technology and conducting research and development to remove sulphur oxides and nitrous oxide from the emissions of smelting and processing plants, following the Kyoto protocol, said Krueger-Vally.

"Much of these climate actions, retrofits and adaptations were not required in the State in which the mines operated, and mines invest in technology development and adopt technologies as they become available. For mines to meet net-zero goals will require not only carbon offset, reductions and renewal of process technology, but also research and development of greenhouse-gas removal," she says.

Accurate carbon accounting will be necessary to meet net-zero targets and investors will be more comfortable investing in companies that they know primary emissions data of, said Hearne.

Further, accurate carbon accounting tools can also help companies to assess the carbon intensity of single transactions. This information can enable traders to make informed decisions to reduce carbon intensity, such as by selecting a greener shipping vessel to transport a commodity.

"Accurate carbon accounting is a good step forward for the carbon market, and is one of the reasons why banks are able to take action and reward companies that are taking net-zero actions or even, in future, to put in place punitive charges for companies that are not taking sufficient actions," he said.

Additionally, carbon markets are fundamentally important to carbon offset discussions and is the most efficient way to have the greatest impact on climate change and reduce the impact of people on the planet by allowing easy gains to be made rapidly, said McNab.