The world’s most powerful mining investor has given firms permission to prioritize decarbonisation spending over volume expansion, in the expectation that low-carbon commodities will eventually fetch “green premium” prices.

Evy Hambro of BlackRock, who oversees more than $20 billion in assets through his World Mining, World Gold, and Circular Economy Funds, believes commodities will increasingly be priced based on how they are produced.

Mr Hambro said the evolution of “green premiums” would allow companies to grow value without growing volume when they invested in reducing their carbon footprint; a relatively novel concept in an industry that has traditionally viewed decarbonisation as a cross to bear.

“There is a decision that companies are going to have to take between investing for growth in volumes and investing for decarbonisation, and our view is that over time we will see commodities increasingly being priced on how they are produced rather than necessarily the commodity itself,” he told The Australian Financial Review.


“If you can produce a commodity with lower emissions and it meets all the related ESG requirements you might end up with premium pricing for that commodity, or those commodities become the market price and ones that have high carbon emissions trade at discounts.”

“We will see these characteristics being built into commodity pricing, and therefore to minimise your operating footprint, a focus on Scope 1 and Scope 2 emissions is going to be of value to your customer who buys those commodities.

“Therefore most companies are likely to lean towards investing in that direction over the near to medium term rather than necessarily investing for growth in volumes, unless the decarbonisation is twinned with volume-related capital investment.

“From the engagements we’ve had with companies just recently, there is little sign we will see a surge in growth in volume-related spending.”

The comments are notable in the context of the challenge put to investors in February 2020 by then Rio Tinto chief Jean-Sebastien Jacques, who publicly asked investors to clarify whether they would be “willing to see a reduction in shareholder returns to finance climate action”.

That challenge was laid out as Rio warned its plan to spend $US1 billion ($1.4 billion) over five years on projects to reduce the carbon footprint of its mines and smelters was unlikely to generate the financial returns the company normally expected from its investments.

Mr Jacques’ successor Jakob Stausholm last year supersized the decarbonisation spend to $US7.5 billion over the next eight years and said some of the projects could be cash-flow positive before the company factored a voluntary $US75 per tonne carbon price into its investment decisions.

There is no consensus within the mining industry as to whether “green premiums” or an equivalent “brown discount” will emerge for commodities based on their carbon footprint, nor the speed at which such pricing dynamics will evolve.

South32 chief Graham Kerr said he was seeing very early signs that commodities were being priced in accordance with their environmental impact and his company might experience positive and negative impacts if the trend became established.

By this time next year South32 will have almost doubled the amount of “green aluminium” it makes from smelters powered by renewables in Brazil and Mozambique.

“We have seen small [price premium] increments, you are seeing more of a buyer preference. We do believe over time that green premium does come into play,” he said on Friday.

“In aluminium you are probably looking in the longer term there will be a green premium somewhere between $US300 and $US350 per tonne.”

Such a premium would be more than 10 per cent at current prices; the London Metal Exchange’s benchmark price for aluminium delivered in three months time was $US2908 per tonne on May 24 and has averaged $US3199 per tonne since January 1.

The LME has flagged a long-term ambition to set up a formal market for low-carbon aluminium and has set up a certification process that would be an important enabler of such a market.

But Mr Kerr said the evolution of green premiums might hinder South32’s Cerro Matoso nickel mine in Colombia, which extracted a type of nickel geology that was less attractive to battery manufacturers.

“Over the past two years we have seen that discount [on Cerro Matoso’s received nickel price] has widened … our long-term view would probably be that that would widen,” he said.“That, if you like, is a green premium in a different mechanism.”

ASX-listed Bellevue Gold has been the most bullish toward green premiums in the local gold industry, telling shareholders its product could fetch higher prices than gold produced by rivals because it planned to make Western Australia’s Bellevue mine carbon-neutral by January 2026.

Mr Kerr said even if green premiums did not emerge, miners might need to decarbonise their assets to simply stay in business and win government approvals for mine expansions or new projects.

“You are going to need approvals, I have no doubt they will start tying Scope 1 and Scope 2 emissions to those approvals. That is going to come into play,” he said.

Mr Kerr said the Scope 3 emissions of customers would also start to creep into conversations with governments when miners were seeking approvals.

Mr Hambro agreed that new generations of consumers may see decarbonisation of assets as a minimum requirement.

“An inability to be able to convert your production base into acceptable sustainable characteristics might make those assets stranded through time,” he said.

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