ESG AT THE LME
In August 2020, the London Metal Exchange (LME) issued a discussion paper on "LME Sustainability"1, a new and wide-ranging initiative proposing, among other things, new contracts and a new spot trading platform. According to the exchange, LME Sustainability builds upon the success of its responsible sourcing policy2 (LME Responsible Sourcing), which was rolled out in October 2019.
In this briefing, we consider both LME Responsible Sourcing and LME Sustainability and explain: what do these initiatives mean for LME participants and metals producers, and what should they be doing about them now?
Environmental, social and governance (ESG) has become an area of focus for many industries and the metals and mining industry is no different.
However, "ESG" is a rather nebulous term. There are no widely accepted industry standards as to what makes a project "green" or "sustainable", for example. Indeed, amid the wave of recent ESG announcements, it can be difficult to distinguish between initiatives that merely enable ESG-friendly behaviour and those that require it.
It was against this backdrop that the LME rolled out LME Responsible Sourcing and announced LME Sustainability in the past twelve months. We consider each in turn.
LME Responsible Sourcing Requirements
The LME is introducing responsible sourcing requirements for all brands listed for good delivery on the LME against physically settled contracts. The LME's approach is based on the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas 3 (the OECD Guidance).
Broadly, all LME brands will be required to check their supply chains for certain 'red flags' – for example, minerals originating from conflict-affected and high-risk areas (CAHRAs) such as the Democratic Republic of Congo (the DRC). A red flag assessment is known as an (RFA).
Brands identified as high-risk must then follow what the LME refers to as "Track A". Lower-risk brands have the option of following Tracks A, B or C.
- Once they have carried out an RFA, Track A requires brand producers to choose and follow an OECD-aligned standard: a documented set of requirements, together with an auditing procedure, that demonstrate adherence to the OECD Guidance.
- The LME will not publish its own standard(s). Standards can be "internal" (owned by the producer) or "external" (owned by a third party). In any event, the chosen standard must undergo OECD Guidance alignment assessment to the satisfaction of the LME.
- In complying with their chosen standard after carrying out their RFA, Track A brands will be required to (i) assess the risk of adverse impacts, (ii) design and implement a strategy to respond to identified risks, (iii) carry out independent third-party audits of supply chain due diligence and (iv) report on this due diligence.
Tracks B and C
- Track B and Track C brands can both use the LME's RFA standard-form template4. Under Track B, the RFA must be audited by a third party and the results published. Under Track C, the RFA is reviewed and (subject to a phased approach) published by the LME itself.
In addition, the LME will also require all brands to hold a certificate for (i) ISO 14001 (or equivalent) in respect of environmental management and (ii) OHSAS 18001 (or equivalent) in respect of occupational health and safety. The LME explains that this requirement will be administered in a similar manner to the existing ISO 9001 requirement.
When does this come into effect?
Track A reporting periods will be as prescribed by the brand's chosen standard. The first reporting period for all Track B and Track C brands begins on 1 January 2021.
In addition, by 30 June 2022:
- Track A brands must submit confirmation that they are on Track A as well as their chosen standard (with their first audit report to be submitted by 31 December 2023);
- Track B brands must submit their audit results to the LME; and
- Track C brands must submit their RFA to the LME.
How does LME Responsible Sourcing affect you?
In essence, if you want your metal to be deliverable on the LME, compliance with these new rules must be ensured.
The LME has given itself significant enforcement powers. Most notably, non-compliant brands can be publicly 'named-and-shamed' by the LME, suspended or de-listed. There is also a third-party grievance mechanism. Anyone can submit concerns to the LME that a certain brand does not adhere to the LME's rules, which may prompt the LME to investigate.
Nevertheless, there may be a wider benefit to complying. Doing so may also help to satisfy the supply chain due diligence requirements of other regulatory regimes. For example, the EU's new Conflict Minerals Regulation5 (CMR) comes into force on 1 January 2021 and section 1502 of the Dodd Frank Act already imposes obligations on publicly listed US companies in respect of certain minerals originating from the DRC or its neighbours.
LME Sustainability Proposals
The LME's new sustainability initiative aims to make " metals the cornerstone of a sustainable future", with a focus on electric vehicles (EVs), the circular economy and sustainable production.
The proposals include:
- New contracts for:
- lithium, a key component in EVs; and
- US beverage can aluminium scrap and Taiwan and India steel scrap,
to provide " price risk management tools" (such as hedging opportunities) for those in the EV, can manufacturing and global steel industries;
- "LME passport", a digital document register originally intended to support the "electronification" of the paper certificates of analysis that accompany shipments of LME metals. The LME proposes extending its use to the voluntary provision of additional ESG information about the relevant brand, such as recycled content, use of carbon offsets, etc.; and
- A new spot trading platform for physical metal that does not have to meet standardised specifications.
The LME passport and spot trading platform are the LME's response to a perceived increase in international focus on the environmentally sustainable production of low carbon aluminium in particular.
How does LME Sustainability affect you?
The LME has actively avoided proposing any rule amendments that would impose changes on the entire market. For example, in respect of low carbon aluminium, the LME explains that:
Although the LME has the power to effect such change[s] … the LME tries to work on a more collaborative basis, making such changes as a result of sufficient market demand which – in this instance – the LME does not believe yet exists.
The LME Sustainability proposals only aim to increase options for LME participants concerned about ESG. In contrast to LME Responsible Sourcing, no new requirements will take effect.
What should you be doing now?
In light of the above, LME participants should be considering the following.
Producers of LME-listed brands must:
- Establish appropriate management systems, including a policy for minerals originating from CAHRAs and an internal supply chain due diligence team;
- Identify supply chain risks via an RFA. You can use the LME's RFA template for this purpose;
- Identify your likely LME Track (A, B or C), depending on your risk level or preference;
- If you are on Track A, consider the standard towards which you will work to align your brand. Ensuring it has or will have undergone alignment assessment may take time. There are many standards which have not yet been alignment-assessed, as well as new standards which are still in development. However, note that the LME has indicated that standards which undergo alignment assessment to comply with the requirements of another body or regulation (such as the CMR) would also be eligible to submit those results to the LME for consideration, rather than commissioning a second alignment assessment; and
- Get your facilities ISO 14001 and OHSAS 18001 certified. This will require the implementation of environmental and health and safety management systems. You will need to develop, implement, monitor and report on new policies to facilitate improvements.
We also recommend that all LME participants consider the LME Sustainability proposals and how they might impact their business. For example, a commitment to providing additional ESG information via the LME passport may increase access to sustainable financing.
For more information please contact the authors of this briefing:
D +44 (0)20 7264 8354
M +44 (0)7976 916412
D +44 (0)20 7264 8087
M +44 (0)7768 553882
Research undertaken by Frazer Watt, Trainee Solicitor
- Available on the LME website, here: https://www.lme.com/en-GB/About/Responsibility/Responsible-sourcing
- See our Client Guide on the EU's Conflict Minerals Regulation here: https://www.hfw.com/Client-Guide-EU-Conflict-Minerals-Regulation-2021