External voice: The LME and Responsible Sourcing
The London Metal Exchange (LME) is the world centre for industrial metals trading.
The global focus on responsible sourcing has gained increasing momentum over recent years, with an escalation of interest driving both public awareness and consumer demand for assurances as to the provenance of resources and materials. Corporate initiatives to address environmental, social, and governance (‘ESG’) concerns in supply chains are a central feature of financial reports and business planning, and responsible investing generates growing attention. The global and physical nature of the mining industry positions it at the forefront of this debate, and given the LME’s role at the centre of the metals value chain, we felt it useful to outline below why we believe responsible sourcing has become more in focus, a brief overview of our journey in responsible sourcing and what we believe lies ahead for the metals and mining industry in this area.
The responsible sourcing agenda is not new – think of fair trade coffee which has been around since the 1980s – and many metals miners and refiners have been working for years to ensure that the metal they produce is sourced responsibly. Credit too goes to downstream industries (in the LME world, this can include anyone in the value chain after the smelting process, from packaging plants or car manufacturers to end-consumers) where the ongoing demand for responsibility has ensured that progress from the production industry does not stand still. Our downstream customers have spoken of the increasing engagement from end-consumers when choosing which products to purchase; for example, looking for a responsible sourcing symbol on an aluminium can or enquiring as to the source of cobalt in a new electric car. This increased awareness has heightened the commercial incentive for those in the metals value chains to understand and conduct due diligence across their supply chains effectively.
Regulation has not been far behind. Section 1502 of the Dodd Frank Act was passed by U.S. Congress in 2010, and although we note that there is uncertainty about its future, it required publicly listed companies to check and report on their supply chains for tin, tungsten, tantalum and gold for the first time. In Europe, the Conflict Minerals Regulation is due to go live in January 2021. Legislation has increased the pressure on metals market actors and encouraged further care when sourcing metal. Commercial drivers and legislative and regulatory pressures have therefore combined with the ethical imperative felt by numerous individuals in our industry who recognise the need to ensure safe and fair working conditions for those who are most vulnerable.
For over 140 years, the LME has set requirements for metallurgical standards and shapes (e.g. cathode or ingot) when approving brands that can be used to deliver against LME contracts (and consequently, the brands that make up the LME price). It is only more recently that the market demand for responsibly sourced metal has meant that we have the remit to extend those requirements to include conditions for how that metal is sourced. We believe we have a key role in facilitating the adoption of responsible sourcing principles, and that we can no longer accept the possibility that our users be placed in a position where they can take delivery of metal from one of our listed warehouses that does not meet those principles. Furthermore, we need to ensure that the LME price reflects the value of responsibly sourced metal, and is not artificially depressed by metal which is not sourced in the same way.
To achieve this, we have grounded our approach in the OECD’s Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (“OECD Guidance”) as we believe this is the most globally-accepted approach to responsible sourcing. Our responsible sourcing requirements will leverage the OECD-aligned metals standards already available (or in development) to conduct due diligence on brands that operate in conflict affected and high-risk areas (“CAHRAs”). It is our aim that in the not-too-distant future we will be in the position where all our LME registered brands will have undertaken appropriate responsible sourcing work corresponding to the OECD framework for risk based due diligence.
On the environmental side, we are also introducing requirements for all LME-listed brands to hold a valid certificate for ISO 14001 (or equivalent), to ensure that environmental management systems are firmly embedded in the operations of all brand-producing companies. As the sustainability agenda continues to develop we will keep working with the industry to see how the LME can best reflect evolving market demands, including possibilities for low carbon aluminium, or sustainability concerns to be incorporated within the LME’s broader responsible sourcing requirements.
We are also spending some time thinking about ways the LME can help with the difficulties in supply chain traceability for companies. A number of exciting and innovative companies have been trialling distributed ledger technology (“DLT”) and Internet of Things (“IoT”) approaches to help overcome some of the issues. We believe it likely the solutions they could yield could present excellent opportunities to contribute to the tracking and assurance of metals and are excited about the possibilities here.
The projects mentioned above represent only a fraction of the areas of interest, and these are only likely to increase and develop as large institutional investors with long-term investment outlooks maintain and increase demands on mining companies to prove the sustainability of their projects.
When this is combined with the added pressure from metal purchasers, it is clear that responsible sourcing will not simply be a passing trend. At the LME, we have worked hard with our market to leverage existing industry practices and expertise to develop robust processes that will ensure an enduring responsible sourcing framework for the metals industry. We remain hugely grateful to all those who have contributed so generously of their time and experience to achieve this.
Finally, we firmly believe our industry should contribute to development challenges in a proactive manner. As such, the LME Board has allocated USD2 million, funded by market enforcement proceeds, to charitable initiatives in the responsible sourcing sector. We are taking action because the value of our market is based on providing metal which meets globally accepted standards for responsible sourcing, and because the metals sector looks to us to provide leadership on these important topics; mostly, however, we are taking action because we believe it is the right thing to do, and we are proud to serve a market that demands nothing less.
The role of the trading industry
Unsurprisingly, whatever direction the mining industry takes will affect the commodities trading industry. This is, in part, due to the growth of fully integrated mining companies which incorporate trading units, as well as the increasing numbers of merchants owning (and operating) mine sites. As a result, any company dealing with physical metal in any form will likely be subject to conflict minerals legislation to ensure that the whole supply chain is compliant.
Further, given the role of traders and merchants as the ‘intermediaries’ between different points of the value chain, they will play an absolutely vital role in the collection and transmission of supply chain information; many smelters and consumers will not be able to complete supply chain mapping without their input.
The combination of these factors will mean that trading firms’ engagement with existing standards and initiatives (whether they be legislative, regulatory or industry-led) should provide a helpful foundation to comply with all requirements.
For more information
A more detailed outline, including the LME’s final proposal, is available on their website; https://www.lme.com/en-GB/About/Responsibility/Responsible-sourcing.
CEO of the London Metal Exchange and a member of the Management Committee of HKEX Group