For over 140 years the metallurgical properties relating to quality, shape and weight were the main requirement for a producer of metal becoming a London Metal Exchange (“LME”) approved brand. Over time, however, social and environmental considerations have evolved considerably and this is reflected in the increased focus on the provenance of products and materials at all stages of the value chain. As a leader in its field, in October 2019, the LME introduced a series of responsible sourcing requirements for producers of LME brands, designed to complement existing brand listing requirements and put additional focus on the origin of metal.
Designed as a primer for those not overly familiar with responsible sourcing, in this LME Insight piece, Christian Mildner and team explore the evolution towards responsible sourcing, provide an overview of the drivers, associated guidance and standards behind the LME’s responsible sourcing requirements, as well as the new requirements themselves. In a recent LME Insight article we outlined the metallurgical brand listing requirements and this article can be read in conjunction to give the reader a fuller picture of both the physical and responsible sourcing requirements for metals listed on the LME
LME brand registration requirements - pre-October 2019
Prior to October 2019 the requirements for producers to list metals on the LME focused on shape, size, weight and other metallurgical details such as purity. Producers also had to evidence a minimum track record in the business, a minimum production capacity (which differs from metal to metal) and provide references from clients.
Whilst these requirements (which we explored in detail in our recent LME Insight article have not changed, the LME has since introduced additional requirements which focus on the provenance of metal. The LME continues to maintain a list of brands that are approved for good delivery against LME contracts.
Evolution towards responsible sourcing
While responsible sourcing has formerly been seen as “going the extra mile”, it is now commonly accepted as the baseline for doing business. What constitutes responsible sourcing itself has evolved over time too. Initial focus was on supply-chain due diligence to ensure the extraction and trade of minerals “support peace and development, not conflict[1]”. But, as we note in our discussion paper, it has since grown to include to include:
“… the risk of forced labour, the worst forms of child labour, abuse of human rights more generally, money laundering, corruption and bribery.
Clearly, the possibility of such abuses is greater in regions also impacted by conflict; however, more broadly, “high risk” areas may not manifest overt conflict, but (due to political instability or weakened institutions) may be more at risk of harbouring such abuses.
Other areas frequently considered under the umbrella of responsible sourcing, such as environmental concerns, could be equally important in lower risk jurisdictions.”[2]
Strong supply chain management and command over provenance is today more crucial than ever. Transparency and good oversight have become a necessity in global supply chain management.
The legal framework is also evolving making responsible sourcing not only good practice but a legal requirement too. The EU’s Conflict Minerals Regulation[3] and Section 1502 and Section 1504 of the Dodd-Frank Act[4] have been some of the better known examples.
Responsible sourcing - the rationale
The LME decided to introduce new responsible sourcing requirements because of three interlinked and mutually reinforcing reasons:
- Collective ethical responsibility – buyers should not be in a situation where the metal they receive has not been responsibly sourced
- Commercial imperative – to ensure that price discovery on the LME is not distorted by metal that has not been responsibly sourced
- Leadership – the LME’s central role in the global metals industry enables it to take a leading role in promoting this process
Whilst those who work in the metals industry bring strong ethical views on the activities of their own companies, the ultimate arbiter of ethics is the global consumer. Increasingly it is the consumer who is standing up for their ethical beliefs and demanding that the products they purchase are made from responsibly sourced metal.
Responsible sourcing - guiding principles
Four key features, or principles, formed the core of the LME’s approach.
Transparency and standards
The LME’s approach combines transparency with standards. Both elements together provide a level playing field that is fair for producers, while ensuring that consumers receive metal which meets globally accepted standards.
Transparency allows consumers to understand the steps producers are taking to ensure responsible sourcing.
“Metal standards serve to promote understanding and communication between metal producers and users, including processors, fabricators and distributive traders, and thereby facilitate trading in products used by the metal industry. Standards are documented voluntary agreements that establish important criteria for products, services and processes. Standards help to make sure products and services are fit for their purpose and that they are comparable and compatible” [5]
The LME’s approach embraces and builds upon much of the good work done by industry bodies and associations who have developed pre-existing standards. Such standards can be used, provided they meet the OECD Guidance (more on this below). Given that most standards are developed by the industry itself, they are often best suited to, and ready to be adopted by, the sector.
OECD guidance
The LME has based its approach on the Organisation for Economic Co-operation and Development’s (“OECD”) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (PDF) (“OECD Guidance”) – the most recognised reference in this area.
Companies must utilise the five-step framework to establish management systems, identify risks, and take appropriate mitigation action, a process which – combined with appropriate transparency – provides a consistent and widely accepted model to ensure all metals brands can address supply chain risks consistently and effectively.
Large scale and small scale/artisanal mining
Careful consideration has been given to make sure that there is no discrimination between large-scale and artisanal or small-scale mining. The livelihood of millions of people is dependent on artisanal mining and for that reason, sufficient time to implement the responsible sourcing requirements has been allowed, in order to ensure that all producers have sufficient time to comply.
Challenges often more associated with large-scale mining, such as financial crime and corruption, are addressed through the requirement to make disclosures under the Extractive Industries Transparency Initiative (“EITI”) in EITI member countries. Brands sourcing from non-EITI member countries are also encouraged to make disclosures in line with the EITI principles.
Clear and pragmatic
Throughout the whole process the LME has sought to ensure that its approach is not only clear, but achievable. With that in mind, there are a number of paths that producers can take to ensure compliance, all within a transparent and practical structure.
What are the LME responsible sourcing requirements?
By way of a reminder, the LME responsible sourcing requirements are in addition to the existing brand listing requirements and apply uniformly to all physically settled metals.
The LME has developed several “tracks” (see below) that producers can choose from, depending on their individual circumstances, to meet the LME responsible sourcing requirements. In addition, all brands will be required to hold a valid certificate for ISO 14001 and ISO 45001 (or equivalent), to ensure that environmental and occupational health and safety management systems are firmly embedded in their operations.
They requirements closely follow the OECD’s five steps, which can be summarised as follows:
- Step 1: Establish strong company management systems
- Step 2a: Identify risks in the supply chain
- Step 2b: Assess risk of adverse impacts
- Step 3: Design and implement a strategy to respond to identified risks
- Step 4: Carry out independent third-party audit of supply chain due diligence
- Step 5: Report on supply chain due diligence
For all brands sourcing primary material, the first stage is the establishment of company management systems and the identification of supply chain risks. After completing these stages, the brand can choose from three possible routes to reach LME compliance: Track A, B or C.
The choice of track will depend on the brand’s preferences and specific situation, including whether red flags have been identified.
Red flags are triggered in multiple ways, including if the origin of material cannot be established or the metal comes from Conflict-Affected and High-Risk Areas (“CAHRAs”). It is important to mention that raising a red flag is not a problem per se, it simply means that the brand needs to obtain additional information to provide confidence that the metal is responsibly sourced. It also means that the brand is required to follow track A and cannot be considered for track B or C.
The tracks:
Track A offers a route for all brands including those which have identified red flags. They can choose to align to an internal or external standard, such as those listed on the approved partners webpage. The standard needs to be independently verified as aligned with the OECD Guidance.
Track B and Track C offer a route for brands without red flags in their RFA template. If these brands do not wish to comply with a specific standard, they can fill out the RFA template and have the RFA audited by an approved auditor (Track B) or verified by the LME and subsequently published on the LME website (Track C).
Track D accounts for the specificities of secondary materials. Brands that source their input exclusively from secondary materials (sometimes known as “recycled”) can satisfy their requirements through the submission of the secondary-material sourcing attestation form without implementing the OECD 5 steps.
The following graph gives a visual overview of the individual tracks:
A detailed description of the responsible sourcing requirements and of each track can be found in the Responsible sourcing handbook (PDF)
Timeline
The first reporting period for the new LME responsible sourcing requirements was the calendar year 2021, with the first reporting due in June 2022. The following table gives an overview of when the various requirements come into action depending on the chosen track:
Grievance procedure
A grievance procedure is available to provide a formal way for any party with concerns about the validity of responsible sourcing adherence of a particular producer, to raise these issues with the LME. The LME will assess the validity of any submissions made and seek clarification. If necessary, the LME can request the producer to undertake an independent audit of the claims raised.
Brand action
The LME responsible sourcing requirements represent a challenge for many existing and prospective LME producers. The LME hopes that as many brands as possible embrace this challenge positively and achieve compliance. The LME is working with all producers to help on this journey.
In a situation where adherence to the requirements cannot be achieved, the brand may be suspended or delisted.
Future evolution
Consumer attitudes and legal requirements evolve constantly and the LME’s brand listing and responsible sourcing requirements need to mirror this evolution. In future, the introduction of additional environmental or other sustainability criteria could be possible. An introduction of new requirements would need to be balanced and closely align with global industry standards. The market would be formally engaged and consulted if new compulsory requirements such as these were to be introduced.
In August 2020, the LME published its sustainability strategy that outlines how metals can play a positive role on the path towards a more sustainable future. This includes LMEpassport, where producers can voluntarily share additional sustainability metrics and certifications that go beyond the responsible sourcing requirements. Read about the latest updates on our sustainability agenda.
Supporting documents
For any questions, please get in touch with responsiblesourcing@lme.com or sales@lme.com.
Due Diligence Guidance: towards conflict-free mineral supply chains (PDF)
Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act
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