Matthew Chamberlain

LME SUSTAINABILITY – WHAT'S NEXT?

LATEST FROM MATTHEW CHAMBERLAIN – December 2020

Following broad market support for our sustainability strategy, we are really pleased to be moving ahead with our plans to make metals the cornerstone of sustainability.

Our strategy aims to provide customers with the option of gaining greater transparency of and access to sustainably produced metal – such as low carbon aluminium – as well as to metal that itself plays a significant role in global decarbonisation and the circular economy – such as EV materials and scrap metals.

On 16 December 2020 we issued an analysis of the feedback we received in response to our recent discussion paper, which highlighted a few areas that I’d like to address.

Whose job is it to make the metals industry more sustainable?

Over the last few months we have seen various different perspectives emerge on how the metals world should respond to sustainability challenges – which highlight the fact that more work needs to be done to find industry consensus on driving real change. While the vast majority of our discussion paper respondents support the view that collaborative action is necessary, some questioned the LME’s role in this action – and this is a notion I feel compelled to respectfully counter.

As the central marketplace for metals, it is our responsibility to be an integral part of the drive to transition our industry to a low carbon future. While many metals businesses, trade associations and standards bodies continue to do admirable work within different metals markets and related to a wide spectrum of areas in the sustainability space, it is vital that the LME, as the central market for the industry, can appropriately reflect and embed this work into its operations – across brand listings, trading, clearing and warehousing. Every single stakeholder has a role to play in the industry’s transition to a sustainable future – ignoring this responsibility means risking irrelevance.

And furthermore, it’s important to note that we don’t see sustainability as a commercial competition. We are keen to work with all of our stakeholders on this topic, and strongly welcome the work already being undertaken by producers and merchants to facilitate the sale and trading of sustainable metals. It has always been the case that the LME’s activities are highly symbiotic with the much broader bilateral trade in the physical metals market – and so, I believe, it will be for sustainable metals also.

I also recognise that it takes some time for the market to adapt to transitions of this nature. When we first unveiled our responsible sourcing proposals in 2018, there was significant concern from the market that such initiatives were not needed, or that the LME was not the right organisation to advance this agenda. But, today, I believe there is very broad support for the LME’s central role in ensuring the responsible sourcing of metals in the supply chain – and I predict that role will extend to broader sustainability considerations as well.

What does “sustainability” actually mean for metals?

A key point of our discussion paper was that we want to adopt a broad definition of sustainability.  What that means is that there are very many factors which could be argued to affect the sustainability of the metal in your car, or your beverage can, or your household wiring – ranging from the water stewardship of the mine site to its respect for indigenous rights; from the energy consumption of the smelter to the amount of recycled content in the casting; from the job creation and poverty alleviation potential of the operations, to the avoidance of corruption through transparency of payments to governments.

But the point here is arguably even more fundamental – I don’t believe that it is the place of the LME, or indeed anyone in the metals industry, to decide which sustainability factors are important, and their relative degree of significance. That power belongs, in my view, to the end consumers of metal-bearing products. Our role is to give those consumers the supply chain they expect and deserve – namely, a supply chain which transmits the consumer demands all the way back to the mine site, and can then give confidence to those consumers that the sustainability factors they think important are being reliably measured, improved and reported.

One thing we do know is that consumers feel very strongly about the human conditions of the supply chain – and that’s why we were confident in making our responsible sourcing requirements mandatory for all LME-registered brands.  But for other dimensions of sustainability, consumers have not yet spoken clearly – and that’s not a surprise, since they probably don’t feel that they have the relevant data to take a view.

And ultimately, this is why our definition of sustainability must be broad – so that we can inform and empower consumers as to the holistic ESG footprint of their purchases, and then reflect their emerging preferences.

What exactly is the LME doing on low carbon aluminium?

As I’ve already mentioned, we see sustainability in a broad context, and so we’re not focusing just on carbon footprint, or aluminium.  That having been said, it’s clear from responses to our discussion paper that “low-carbon” aluminium is a topic on many people’s minds – and so I think it’s helpful to specifically comment on what we’re planning to do, and, equally importantly, what we’re not planning to do.

Firstly I’d like to dispel the misconception that the LME is launching a new low carbon aluminium contract. We do not intend either to launch a futures contract competing with our main aluminium product, or to change our existing aluminium brand listing requirements – by tagging low carbon brands or insisting on mandatory carbon disclosures. Doing either of these things, we continue to believe, could negatively impact the liquidity of our existing contract and rather than driving consensus, may well have the opposite effect.

Instead we simply aim to provide those producers and consumers of physical metal who wish to buy or sell sustainable aluminium with the tools to enable them to do so. These tools – available on an optional basis – are: LMEpassport, a digital register for metals that can store sustainability credentials of specific batches of metal; and an online marketplace for physical spot metal – which is entirely separate from our exchange trading platforms. This voluntary approach, we believe, will be more effective in driving industry consensus in order that we may then collaboratively effect real change, based on market-led demand for sustainable aluminium.

What are the right sustainability standards and who should be setting them?

Unlike with responsible sourcing, where strong global consensus exists on the eradication of human rights abuses and corruption from supply chains, views on sustainability in metals are much more varied, and different metals naturally have different areas of focus. Therefore, the LME is not proposing to itself set any global requirements or rules in respect of sustainable production standards at this stage, as it risks excluding or overlooking whole segments of the industry that may use different sets of metrics or which characterise sustainability differently.

What we can do and what we intend to do is to create centralised visibility of a range of market-supported and verifiable standards and disclosures, which metal producers can use to showcase their sustainability credentials, and which consumers can use to help procure sustainably produced metal – based on their own sustainability criteria.

Again, to return to the example of low-carbon aluminium – we have heard calls, for example, that the LME should set a “low-carbon threshold” (for example, 6 tonnes of CO2-equivalent emissions per tonne of aluminium), and only allow metal below that threshold to be identified as “low-carbon” in LMEpassport. But I think this would be wrong for two reasons. Firstly, there may be producers whose carbon content is slightly above the threshold, and who may be performing strongly on other axes of sustainability – but would be arbitrarily classified into the “non-low-carbon” bucket. But equally concerning, there will be producers whose carbon footprint is very significantly below the threshold – and, in a simple binary world, they may not receive adequate credit for their significant over-performance.  

So this is an excellent example of why it is better for us to provide a platform to enhance visibility of, and trust in, underlying sustainability data – and allowing consumer views to determine the optimal sustainability profile of the metal.

How can disclosure be trusted?

Of course, none of our proposals will work if the sustainability data in LMEpassport cannot be trusted.

That’s why we are clear that we will only permit disclosure of datasets or certifications which are supported by industry, are specific, and which include adequate audit or validation documentation. The metals industry (and, in particular, its trade associations) have created a rich set of standards and certifications which will meet these criteria, allowing important information to be disclosed in a manner which is trusted by buyers.

And we will also work to bring further clarity to disclosure, where possible. To again take the low-carbon aluminium example – many market commentators have remarked on the difficulty of comparison between different emissions reporting methodologies. This is an area where the LME believes that a centralised database can record not just the quantitative emissions data, but the calculation parameters (for example, the specific process steps which are within the scope of carbon disclosure), and hence make it easier to compare. Similar opportunities exist around recycled content data (for example, whether the figures relate just to post-consumer scrap, or also run-around scrap collected during the production process).

And finally, I would note that the LME has been in the business of verification for over 140 years – our market does not work unless users have full confidence in the metallurgical quality of our brands, and we spend a lot of time and effort in ensuring that assay data is properly provided to prove that quality. So for the LME, sustainability data is just an extension of that challenge – and we’re totally confident that the skillset of our exceptional staff will help us, and our industry, to meet that challenge.

To sum up

In a nutshell, we believe sustainability is the most urgent challenge facing our sector – doing nothing is not an option if we want our businesses to survive. There is power in coalition and by working together, the metals industry can – and must – embody global expectations on sustainability.