Multinational mining giant Anglo American has issued a €745 million sustainability-linked bond, tied to its performance on emissions reduction, job creation and abstraction of fresh water.
- The bond commits Anglo to its delivery of 3 key performance indicators (KPIs), with its coupon rate set to rise if sustainability targets are not achieved.
- Anglo will struggle to meet these commitments, with many of its core business operations exposed to water-related risks while almost 90% of its emissions are generated through its supply chain.
- Sustainability-linked bonds will become an increasingly attractive option for the mining sector as it faces competing pressures to become more sustainable while meeting demand for vital transition resources.
Anglo American’s (LON:AAL) sustainability-linked bond issuance comes as a €745 million offering of 10-year notes, due to mature in 2032. Its initial coupon rate is set at 4.75%, but will increase by 40 basis points if the firm fails to deliver on its key performance indicators (KPIs) by September 2031.
The three KPIs tied to the bond are:
- A reduction in Scope 1 and 2 greenhouse gas emissions by 30% by 2030, on a 2016 basis.
- A reduction in the amount of fresh water abstracted from water scarce areas by 50% by 2030, compared to 2015.
- The creation of five offsite jobs for every onsite job by 2030.
Sustainable finance for hard-to-abate industries
Sustainability-linked bonds differ from green, social and sustainability bonds in that they are not issued to raise funds for predetermined projects.
Instead, they offer general purpose funding, tied to KPIs that demonstrate the issuing entity’s progress towards meeting its sustainability commitments. Failure to meet these KPIs increases the bond’s interest costs, thereby incentivising the issuer to strive for their delivery.
This differentiation makes sustainability-linked bonds an attractive financial instrument for financing the transition of hard-to-abate industries such as mining, as they raise proceeds that can be used to fund ongoing business activities while exploring transition solutions.
Water scarcity threatens Anglo’s delivery of KPIs
Anglo American’s KPIs represent ambitious goals for a mining company, with emissions reduction and fresh water consumption being two major challenges for the industry.
According to a 2019 analysis by S&P Global’s market intelligence business Trucost, which assessed over 1,400 mines worldwide, around 20% of metal mines are operating in water-stressed areas where they consume over 80% of the available water supply.
The abstraction of fresh water is vital to metal and coal mining operations, leading them to suffer substantial disruptions during periods of drought. As climate change contributes to an increase in global incidences of drought, lack of water becomes a significant material risk to these operations.
Indeed, Trucost’s analysis reveals that 30% of iron ore mines are already highly exposed to water risk, while around a third of gold and copper mines were expected to see their water risk doubling by 2030 if they continued operating under a business-as-usual scenario. This comes as a significant challenge to Anglo, which includes iron ore and copper among its core business areas.
The company claims to have reduced its water withdrawals by 10% between 2020 and 2021, though this apparent progress was largely associated with the pandemic’s lowering of demand for its commodities.
As global economies recover, demand is expected to rise once again, compromising Anglo’s ability to deliver its targeted reduction in water abstraction.
Interim emissions reduction goals are possible, but how much further can Anglo go?
Beyond its interim target of reducing greenhouse gas emissions by 30% before 2030, Anglo has set an overarching goal of achieving carbon neutrality across its operations by 2040.
While Anglo’s initial emissions reduction target, as committed to in its KPIs, could be achievable, its 2040 ambitions will prove more of a challenge.
Based on an assessment by the Transition Pathway Initiative (TPI), Anglo is ahead of the diversified mining sector in terms of reducing its carbon intensity, having achieved a 43% reduction between 2016 and 2021.
Although this demonstrates some level of progress, Anglo’s achievement of carbon neutrality by 2040 will largely depend on its ability to eliminate its scope 3 emissions, which it reports as accounting for 87.7% of its overall total.
The elephant in the room for most miners are Scope 3 emissions, which on average account for 95% of total GHG emissions. Based on its 2020 climate change report, Anglo’s Scope 3 emissions were 87.7% of its total.
Mining sector under pressure to deliver contradictory objectives
Anglo’s core business activities supply several materials that will be vital in delivering the global energy transition. The metals it supplies will be needed to produce electric vehicles, solar panels and battery storage systems, to give just a few examples.
Meanwhile, pressure is mounting on the mining industry to become more sustainable itself – with increasingly strict regulation and rising costs of carbon posing a substantial risk to their business.
This suggests that sustainability-linked bonds will become an increasing trend within the mining sector, as it seeks the necessary funds to continue delivering its core business activities while progressing its efforts to become more sustainable in the long-term.