Out-Law Analysis 6 min. read
14 Sep 2023, 10:41 am
The energy transition will provide mining companies with opportunities to grow, amidst the anticipated surge in demand for the minerals needed to facilitate the shift to renewables and other ‘cleantech’.
New mines, in new locations, will almost certainly need to be opened to meet the increase in demand. However, the drive to scale-up renewables generation, and promote the electrification of sectors such as transport, is also likely to cause corruption risks that are inherent in both mining and renewables projects to surface – risks that businesses will need to navigate.
To understand how corruption risk may materialise, it is first important that businesses understand why and where it may arise.
The Extractive Industries Transparency Initiative (EITI) is a body that encourages member countries to disclose data relevant to the way it manages natural resources. It has said demand for a range of minerals is set to grow markedly in response to the shift towards low-carbon energy technologies.
A study commissioned by EITI (108-page / 13MB PDF) and undertaken by the University of Queensland in November 2022 projected that, by 2040, demand for lithium will have increased by 904% in comparison with annual production levels in 2021. Lithium is used to make batteries, which in turn are core components in electric vehicles – with the electrification of transport widely acknowledged as central to decarbonising the global economy.
The study also projected significant growth in demand for other minerals over the same period, specifically for graphite – by 385%; cobalt – by 268%; and nickel – by 141%. Those minerals are important to the cleantech transition – graphite, for instance, can be used in solar panels, while cobalt can be used to form magnets that help power wind turbines, and nickel is a material used in energy storage.
The scale of the expected growth in demand for some minerals is such that new mines will need to be opened where significant deposits of those minerals are found. This is likely to entail mining of minerals in locations where those minerals have not been mined at scale before.
Take lithium, as an example. A British Geological Survey in November 2021 identified that lithium is predominantly extracted from minerals in Australia, Zimbabwe, and Brazil, and from brines in Chile, Argentina, and Bolivia, currently. China has also been a key source of lithium. The British Geological Survey has also mapped lithium deposits in other locations.
Currently, the world is almost entirely reliant on production from three countries – Australia, Chile and China. According to the World Economic Forum (WEF), in 2021 these three countries accounted for approximately 90% of global production –Australia alone accounts for 52%
Considered in the context of the projected 904% increase in demand for lithium flagged by EITI, it is clear that the current production base will need to be expanded. This may result in new mines being developed in current producer countries such as Chile, Argentina, Brazil, Zimbabwe and China. It may also result in new producer countries entering the market, such as Peru, Mali, or the Democratic Republic of Congo.
The EITI study, and a separate publication by the WEF, provide good examples of how corruption risks may materialise.
EITI said corruption risks arising in the context of mineral value chains for the energy transition include those associated with the awarding of contracts and licenses and requirements arising under localisation laws – that often promote the involvement in projects of local business partners – as well as from interactions with corrupt officials and politically exposed persons (PEPs).
In its article, the WEF cited the increased demand for minerals arising from the energy transition that had been identified in the EITI study and, like EITI, warned of the temptation companies may face to offer bribes to speed up the approval of mining licence applications, or to “cut corners on environmental and social impact reporting and due diligence in general” in response to pressure from government officials or their agents.
These risks are particularly relevant in jurisdictions where there is a high-risk of corruption, notwithstanding the fact that corruption risk is inherent in any project where a lot of money is at stake and time pressures on delivery – as there is in the context of the energy transition and associated climate emergency.
We are going into a new era of mining and locations that were not previously in focus. The minerals and countries concerned will gain in strategic importance.
Transparency International’s annual Corruption Perceptions Index (CPI) ranks countries and territories by perceived levels of corruption in their public sector, factoring in issues such as the level of regulation and transparency in place.
The CPI can provide us with valuable insight into potential corruption risk in countries around the world. Historically the two anchor lithium producers, Australia and Chile, which accounted for 77% of global production in 2021, have ranked relatively well in the CPI. In the most recent rankings, Australia placed 13th in the world and Chile placed 27th. As such, lithium production has largely taken place in two countries that could be considered lower risk from a corruption perspective. The other current producer countries have ranked less well, with China being assessed as 65th, Argentina and Brazil as joint 94th and Zimbabwe as 157th. These rankings suggest that these countries face higher perceived levels of corruption. Potential new entrants have also not ranked well. For example, Peru ranked 101st, Mali ranked 137th and the Democratic Republic of Congo ranked 166th.
This suggests that if lithium production is to expand beyond the historical anchor producers, the expansion is going to need to take place in countries that face higher levels of corruption risk.
There has been historical corruption risk in mining and the forthcoming renewables and low carbon technologies boom will cause that to resurface. As mining companies pursue the opportunities that will arise from this boom, they must also navigate the risks.
An important first step in any mining project will be to undertake a specific bribery and corruption risk assessment to understand key points of corruption risk. The risk that may arise are unlikely to be new or novel. For example, mining companies have historically faced corruption risk when they seek to obtain or renew prospecting or mining licences. If lithium mining capacity is going to expand in existing producer countries or new entrants, these licences will have to be obtained and mining companies should be aware of the risks. Mining companies should not simply tick the boxes by doing a risk assessment, they should also ensure that key risks are acted upon with appropriate controls.
When entering new markets, companies often rely on agents to help them navigate unknown landscapes and local knowledge can be integral to business success. As highlighted in the EITI study, some countries may also promote the inclusion of local business partners. In fact, some countries may even have laws that require mines to have a degree of local ownership. Mining companies should pay particular attention to who they partner with. An obvious “red flag” would be a situation where a government official introduces an agent to a mining company or “suggests” that they involve a particular person or company in a project. Proper due diligence should be undertaken, and these circumstances typically warrant an enhanced approach as opposed to light touch ordinary due diligence.
Appropriate training should also be put in place to ensure employees or agents of the company understand the processes for obtaining necessary licences and permits, to help them identify if bribes are being solicited to facilitate their grant. Strict policies should also be applied to ensure representatives only meet with public officials in formal settings and communicate through formal channels, and in relation to gifts, entertainment, or sponsorship. Robust financial controls should be implemented to avoid unnecessary cash handling and ensure a paper trail of receipts.
The high-profile settlement agreed earlier this year by Rio Tinto with the US Securities and Exchange Commission (SEC), which resulted in Rio Tinto agreeing to pay a $15 million penalty to settle charges raised under the US Foreign Corrupt Practices Act (FCPA) in relation to alleged bribery, is an example of the financial and reputational issues at stake in this new era of mining.
The irony is that the energy transition will not only result in corruption risks for renewables companies that may face rent-seeking behaviour from officials responsible for awarding needed generation and other licences, but it will also reintroduce similar risk for mines who have long faced these challenges. The world clearly needs to expand its production of the minerals needed to fuel the race to renewables and this will likely require developing new mines in countries that have greater corruption challenges than the two current anchor producers. This will require mining companies to take extra care and to be vigilant so that they don’t get caught out by the clear corruption risks.
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