The importance of ESG in the Rare Earth Industry

The importance of ESG in the Rare Earth Industry

ESG (environment, social and governance) is a way of evaluating the sustainability of a company/ industry. If the company is considerate of the environment, contributes socially and is governed by ethical principles and people, the company is more likely to be sustainable compared to one that does not have good ESG. A whole supply chain of companies with good ESG ensures a sustainable, healthy industry. For many years China has dominated the rare earth processing industry and historically, much activity has been carried out with poor regard to ESG requirements. Although standards within China are improving, it is vitally important to diversify the industry towards a more balanced supply chain. Acceptable ESG standards can only be successful if every part of the supply chain works towards sustainability, and for this, every company must have the best ESG possible.

The mining industry is constantly under fire from the media and public attention for bad ESG practices. Many people see the obvious solution as stopping mining completely, especially when considering its negative environmental impact. In some cases, there is lowering demand for mined materials. For example, coal is steadily being replaced by renewable energy sources, or oil for petrol is being displaced by electric vehicles. This change, however, is only increasing the need for rare earths. These specific metals make up vital components of not just phones, laptops, and other important technologies, but are heavily used in new “green technology” such as electric cars and wind turbines. As demand for rare earths increases, so will the industry, so it is more important now than ever to ensure that the industry follows good ESG practices. As described by EITI, there is no checklist or single code of conduct for companies to follow to have “correct” ESG instead there is a movement to “ensure that companies are actively addressing the right issues and evolving practices to create positive impact.”

It’s easy to see how mining and processing rare earths is bad for the environment. Deforestation and habitation destruction can endanger species, risking extinction and reducing biodiversity in areas beyond the point of easy return. The heavy machinery used in mines and to process the metals can release toxic and greenhouse gases. Badly disposed waste can pollute water sources, affecting both people and animals in the area. As the planet continues to warm up, it’s only ever becoming more important to be working against having a negative environmental impact.

So, what is being done? Standards like the ISO14001 can be upheld, that provide frameworks for environmental management. With proper care, it is possible for sites (like LCMs in Ellesmere Port) to be zero emissions. Projects like SUSMAGPRO are working to create circular economies in the industry by discovering and setting up means of recycling rare earths, lowering the environmental impact of mining for them, and reducing the waste of valuable materials. There are economic advantages of investing in strong, positive environmental practices, from newer green technology usually being more efficient and better designed, to being more appealing to work with. Mining companies with histories of harmful waste disposal practices often find themselves on the receiving end of protests and boycotts, making them less likely to be able to work with other companies.

Good social practices can also make companies look more appealing to work with. Companies that use child labour or underpay staff are clearly more focused on profit than creating good products and contributing to the sustainability of the industry. Like companies known to cause damage to the environment, those with bad social practices are received badly by the media and the public. The destruction of a site of indigenous importance by Rio Tinto in 2020 was so badly received socially that the top executives of the company had to step down.

Social issues for companies tend to be the hardest to track and control, as both environmental and governance issues can be managed by set standards. Aside from laws directly against some negative social practices, such as child labour and paying below minimum wage, good social practice tends to be an active choice made by the company. These choices include donations to schools and hospitals in developing areas, the building of roads and wells around mines and hiring locally, all of which are not necessarily required by law. These practices are so important to a company’s sustainability. By improving the lives of those working for the company, or those generally affected by the company’s work, the company will be more favourable to investors and the public.

There is one large factor of great importance underlying these issues: progress on environmental and social standards can only happen with good governance. Companies with messy internal governance will experience disputes, delays, and find themselves struggling to pass and keep positive ESG standards. This will make the company significantly less appealing to work with compared to those with strong governance, affecting the capabilities and profits of the company. Strong governance comes hand in hand with transparency, as companies with good ESG practices should have nothing to hide.

As well as transparency, good governance shows itself in many forms. A diverse, experienced board of directors/ management team will strengthen a company with its wide variety of expertise and experience. Showing positive change after protests or complaints will allow a company with a bad history of ESG practice to prove that it can and will improve. Evidence of corruption and bribery can bring down companies, either through mistrust from investors or legal action in countries with strong anti-corruption laws. Good governance will insure policies against corruption and bribery are in place, as they are vital to sustainability.

The importance of ESG is undeniable. In the modern world, with everyone watching, there is no room for companies to make errors or cut corners. Nor is there the need to. Good ESG practice clearly makes companies more attractive to work with, so not only does it improve the sustainability of the company but can create profit for it. Developing countries are, as the name suggests, developing, and growing in strength. Those with valuable resources are becoming warier in exploitation. They will turn to transparent companies that do not have histories of corruption, protests, or environmental damage. The rare earths industry is growing in importance and size, so companies must work to be as ethical and sustainable as possible.

  • Written by A-Level student Rachel Higgins.