Environmental, Social and Governance (ESG) isn’t new to Australia, but it’s expected to become a more important aspect of business in the coming years. With shareholders and institutional investors paying close attention to business activities with an ESG lens we can expect more focus on this area. A recent example is the HESTA superannuation fund choosing to very publicly vote against the AGL demerger proposal on ESG grounds.

As in the example of AGL, pressure from investors on ESG issues can not only influence corporate strategy but actually change it completely. Internationally for example, investors have used their influence to require companies to commit to waste reduction and link achievement of reduction targets to executive compensation. 

In Australia, investors can exert their influence by having discussions with management, voting on specific issues at an AGM or even calling a general meeting and instigating resolutions to remove directors of the company. Under the Corporations Act 2001 (Cth), the power to call a general meeting is possible at the request of members who hold at least 5% of the votes. 

Investors are increasingly aware of their potential power and some are actively using it to ensure ESG agendas are paid more than lip service. Companies need to not only be aware of this risk, but actively manage it to ensure that their corporate strategy meets the expectations or requirements of significant shareholders. 

Traditionally an ESG rating system has been used to rank business performance in ESG matters, but there are shortfalls to this method that are increasingly being questioned.  For example, there is no standard international method to calculate ratings that means they can be inconsistent. The ratings often also focus on the financial impact on the individual business rather than the impact on society and the environment as a whole. The International Sustainability Standards Board is currently reviewing standards with a view to establishing general requirements for sustainability and climate-related disclosures. This will build on the Taskforce on Climate-related Financial Disclosures. 

Currently in Australia, the Taskforce on Climate-related Financial Disclosures is voluntary but several countries are introducing mandatory disclosures and it’s expected that this may be considered here as well. While the International Sustainability Standards Board can’t mandate their requirements, the government may very well choose to. This would add to the existing ESG disclosure requirements that currently exist in Australia. 

The current ESG disclosure requirements focus on high profile or high risk issues, such as slavery and gender equality. The ESG Reporting Guide for Australian Companies provides some useful guidance for companies on what information investment analysts require and what indicators may be used to assess business performance against ESG issues. This is a helpful starting point for organisations looking to get ahead of potential changes to ESG reporting and to ensure investors have the information they need to make sound decisions.  

The impact of the Russia/Ukraine conflict on the sector

On February 24, Russia invaded Ukraine. Alongside the destruction and terror that’s been inflicted on the Ukrainian people, the conflict has also created great uncertainty in the global economy with flow on effects expected to be felt for years to come. Most western countries have imposed significant sanctions on trade with Russia, which includes a US ban on importing Russian oil. In addition, many Russian banks have been removed from the SWIFT global payment system which will impact the ability to make financial payments both within and out of Russia. This has a significant impact on the resources sector that is likely to continue in the short to medium term.  

The economic sanctions mean that supplies of Russian originated resources are now in doubt. Even if the shipments do arrive, buyers may not be able to purchase them due to financial restrictions. Purchasers need to check their force majeure clauses to ensure they’re covered or scramble to find alternative sources to purchase their materials.  

Some resources have seen prices increase along with demand. For example, the price of gold has risen as investors and central banks turn to the valuable commodity to diversify in the face of economic uncertainty. Russia’s central bank has also been purchasing gold to overcome financial instability. 

Other resources that are experiencing an increase in demand include nickel, iron ore, copper and coal that have reached record highs since the invasion. For example, Russian coal accounts for about 30% of European metallurgical coal imports and 70% of their thermal coal imports. Asian buyers are also exposed to Russian coal, contributing to the uncertainty in those markets. 

Uranium prices are also on the increase as Ukraine has the sixth largest reserve in the world, raising concerns about supply pressures in the near future. If Russia is successful in taking control of Ukrainian uranium reserves the potential impact on the global market could be significant, particularly as sanctions on Russian trade are tightened. 

The alumina and aluminium market are also at risk with UC Rusal halting shipments from its refinery near the port of Mykolaiv in Ukraine. The supply has since been transported to Rusal’s smelters in Russia. Rusal also owns refineries in Ireland that supply European smelters but these also could be redirected causing supply shortages in Europe. Even if they aren’t redirected, purchasers may be prevented from purchasing from Rusal due to trade sanctions. 

Sanctions on UC Rusal could also significantly impact the Queensland alumina refinery in Gladstone which is 20% owned by the Russian company.  The refinery is one of the largest in Australia and it’s  unclear whether it will be adversely affected by the sanctions. 

In addition, some countries have already  halted significant projects. One of the most notable is Germany’s decision to halt certification of the new Nord Stream 2 natural gas pipeline which would’ve doubled their gas supply from Russia. Many businesses have also halted or started exiting operations in Russia including BP, Shell, major consulting firms and banks. 

While tragic, the conflict does create a potential opportunity for Australian producers. Vimy Resources has already completed a $17 million placement to complete the Mulga Rock bankable feasibility study and commence a drilling program at Alligator River, for example. 

For the global economy these price increases are likely to have an inflationary impact and adversely impact growth rates. We’ve already seen the pressure on global oil prices, but this is likely only the beginning of broader inflationary pressures. For many businesses, managing costs will come to the forefront while they continue to grapple with other issues putting pressure on expenses like decarbonisation. 

Finding new markets and suppliers is only part of the mitigation solution for businesses. The conflict also highlights the need to diversify energy supplies. However, it will take a much longer time to diversify and create clean energy sources, leaving industry to find ways to continue to power their businesses in the short-term. 

Despite an unpredictable two years, the energy and resources sector has weathered tumultuous conditions and come through stronger. All signs indicate that 2022 and beyond will see strong growth in demand and exciting new developments. 

Resources and Energy Quarterly has predicted that Australia’s resource and energy exports will increase from $310 billion to a new record of $379 billion in the financial year to June 2022. This will be driven by volume growth, a weak Australian dollar and high commodity prices. However, not all minerals will benefit equally.

While iron ore prices are expected to decline, coal prices continue to surge as new markets are uncovered across Asia. Copper prices had a stellar year in 2021 reaching record highs of $14,979 per tonne driven by demand for clean energy technologies. But copper isn’t expected to reach record highs in the coming year, with prices impacted by increased production in China and easing of supply issues in Latin America. Growth in demand for copper is anticipated to continue as it’s an important metal in the development of electric vehicles.    

Another mineral expected to see increased prices is nickel but these may take five years to reach their peak. Over 2022 prices are expected to weaken as the market for nickel tightens. A key issue in the demand for nickel is the need to convert Class 2 nickel ore into Class 1 so that it can be used in the battery industry. Without this car producers will continue to search for alternative resources to produce components. 

One option to nickel is lithium which is expected to significantly increase production in the coming years. Exports are also expected to rise for lithium thanks to increased demand from the electric vehicle market. There is however still expected to be considerable change ahead that will continue to impact the growth and pricing in the industry. New extraction techniques could change the supply market for lithium, while demand will continue to accelerate as green industries accelerate.  

While gold experienced significant lows in 2021, with its first calendar year price decline since 2018, it’s expected to bounce back in the coming year. Some factors that are believed to have contributed to gold’s price in 2021 include a rising US dollar and the increase in cryptocurrencies. While it was a rocky year for the gold price, the trend was positive in the final few months and is expected to continue to rise as investors look for safe options amidst continued market volatility. 

We can expect to see demand for rare earth minerals to continue to grow throughout the next decade boosted by the demand for electric vehicles and decarbonisation technology. It’s anticipated demand for electric vehicles could grow by up to 40 times in the next 20 years which translates into an increase in demand for rare earth elements of up to 15 times. Australia is the third-largest rare earth oxide resource in the world and can expect to benefit from the impending boom. New projects like the Arafura Resources’ Nolans rare earth project are expected to be developed. Key to growth will be our ability to not just extract rare earth minerals but also to process them, with our largest competitor, China, currently seeking to dominate the market. 

According to the Australian Energy Market Operator (AEMO) the outlook for gas in Western Australia also looks solid with supply estimated to meet demand until the end of 2024. To ensure the market can continue to meet supply there is the opportunity to develop additional gas reserves in the state. This is based on gas demand increasing as the reliance on coal declines.

Overall the signs look positive for the industry in 2022 and beyond. Challenges with decarbonisation and improving clean energy resources continue, and bring with them exciting opportunities to transform the sector.