From the mine to the wind turbine

• Even when producers strive for sustainability, value chains of goods - and the raw materials they contain - often contain negative ESG aspects as well as positive ones. Often there are conflicting goals: for example, copper mining always interferes with nature, but copper use in a wind turbine is climate-friendly. This initially leads to the question: Is it at all justifiable to weigh negative and positive sustainability effects against each other?
• If this is generally the case, how exactly should an asset manager assess countervailing ESG effects in individual cases, especially since these are often not quantifiable? How can the question be answered as to whether and why certain ESG aspects are more relevant than others? At Union Investment, systematic analyses form the basis for such an overall assessment. In the commodities sector, for example, we take a critical view of cobalt from an ESG perspective, whereas the positive aspects ultimately outweigh the negative ones in the case of copper.
• Investment decisions can also lead to a field of tension in a temporal dimension: From an ESG perspective, how should burdens in the present be assessed against benefits in the future - a typical constellation in the context of climate change? For example, it can be argued that the long-term benefits from the use of copper "trump" short-term ESG concerns.

• Challenges arising in connection with extraction and initial processing (extraction phase):

  • Ecological pressures occur primarily during extraction and can lead to environmental pollution, a threat to biodiversity and excessive water use. 

  • Social problems can arise during extraction, for example through child labour and the impact on indigenous peoples. 

  • Political dependencies on unfree and autocratic states such as Russia are currently almost unavoidable in the case of some raw materials and rare earths.

• Opportunities arising from use (use phase):

  • The ecological goal of decarbonising the economy is only possible through the massive expansion of renewables. For this, a sufficient amount of certain raw materials is technologically necessary. 

  • The expansion of renewable energy sources reduces the dependence on fossil energy sources from (partly) also critical states and limits the environmental problems associated with the extraction of coal, oil and gas - for example with fracking.

In summary: Selected commodities generate a sustainability benefit through their processing, but this is offset by negative ESG effects in their extraction. Can commodity investments in such a constellation be sustainable at all? Can one determine on a "sustainability scale" whether the problems or the opportunities carry the greater weight?

• Investments in raw materials:
  • In general, Union Investment has a value-based exclusion of investments in agricultural commodities, but also of uranium, the crucial raw material for the nuclear industry.
  • This is especially true for sustainably oriented investment concepts:
    • Types of raw materials whose production processes and use lead to particularly high ESG impacts are avoided, such as fossil fuels like coal, oil and gas. This is because their CO2 emissions are largely responsible for climate change.
    • The focus is on those types of raw materials that are essential for a sustainable transformation. Only the raw materials that make the most sense after weighing up all ESG aspects are taken into account. Two examples: Copper is a crucial input factor for the construction of renewable energy plants and electricity infrastructure. The positive use benefit is undisputed. But: The industrial mining of copper also leads to ecological burdens - for example in the use of water. From a social point of view, there are also problems - but to a lesser extent than with other metals. This is because copper is mined in politically less critical countries such as Peru and Chile. In Union Investment's view, the positive benefits of using copper outweigh the existing problems in the extraction phase. The situation is different for cobalt. The metal is urgently needed for battery production and the mobility revolution. However, the dependence on the main exporting country (DR Congo) is extremely strong. The many social problems associated with extraction outweigh the benefits for Union Investment. In this case, this leads to a negative overall assessment for sustainability investments.
• Investments in commodity companies:
  • Within the framework of sustainability-oriented investment approaches, companies are generally excluded if they have particularly critical controversies in their business activities, have a below-average ESG rating in a sector comparison or do not demonstrate a credible, sustainable transformation strategy. For example, even before the start of the Ukraine war, the Russian company Norilsk Nickel was excluded as an investment. Several serious failures in the areas of ecology and workers' rights contributed to the decision.
  • Analogous to the decision for commodity investments, those companies are interesting that - in addition to other ESG aspects - pay attention to an environmentally and climate-friendly use of resources and show openness in the engagement dialogue. Positive examples are the Scandinavian companies SSAB from Sweden and the Norwegian Norsk Hydro - even if they do not extract raw materials themselves but process them. SSAB is a pioneer in the production of "green" steel, which contributes to the company's smaller carbon footprint. Norsk Hydro relies heavily on hydropower as an energy source for its aluminium production, which also results in a noticeable CO2 reduction in production.

Such systematic processes of the asset manager should ultimately ensure that the fundamental prioritisation of the goal of decarbonisation can be comprehensibly justified for each individual commodity and corporate investment. Risks and possible reputational damage from commodity investments cannot be completely ruled out. However, critical aspects are an integral part of the analysis, are not ignored and are included in the overall assessment.