sustainable investment
Engaging with aluminium on net zero and biodiversity
Aluminium is an energy-intensive industry that is crucial for the energy transition to net zero. Different companies are adopting varying approaches to reducing their carbon emissions. This case study outlines our engagement actions with two producers, highlighting the need for enhanced biodiversity considerations as a key issue in the energy transition and recognising there is no single way for any industry to decarbonise.
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Need to know
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Aluminium: an essential material
Accounting for 1.1 bn tonnes of CO2 emissions per year, the aluminium industry generates around 2% of global emissions resulting from human activity. In parallel, demand for aluminium, an essential material for several key industries including construction, transport and power transmission, is expected to grow by more than 50% by 2050 versus 2020.
The inherent properties of aluminium – it is lightweight, durable and recyclable – make it the material of choice for energy-efficient buildings, fuel-efficient mobility and recyclable packaging. As such, aluminium players have a pivotal role to play by delivering low-carbon-footprint products.
Engagement background and aims
There is no single way for any industry to decarbonise. The tabs below contrast two aluminium producers with different approaches to proposing low-carbon aluminium products: a US aluminium producer and a Scandinavian industrial company. Both engagements are at an early stage and the companies are advancing their decarbonisation in distinctive ways: the strength of engagement is understanding precisely that, and helping each company pursue its pathway.
In addition to carbon emissions, aluminium’s value chain, especially the extraction part, poses important environmental challenges. Ensuring biodiversity preservation is thus an essential engagement angle in this industry. Both companies have developed their own, unique methodology to assess the biodiversity impacts of their activities and establish restoration metrics on their mining sites.
We believe engagement offers investors double value: 1) By moving the decarbonisation needle at depth, one company at a time. While we cannot ensure what decarbonisation success lies ahead, as engagers we are encouraging progress for the benefit of investors; 2) By identifying best-in-class business models and approaches, we seek to foster improvements in laggard companies, even if more progress may still be needed in particular areas.
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The company is a leader in carbon-free aluminium products and offers diversified low-carbon products. Using recycled aluminium to produce new formulations is key to aid the decarbonisation of the material and also supports the circular economy. The company has invested heavily to reduce the carbon footprint of its production processes and boasts industry-leading products for environmental performance, including:
- A primary low-carbon aluminium product with emissions of less than 2.5 tCO2e per ton of aluminium, or 75% better than the industry average
- Aluminium with recycled content that is produced using as much as 95% less energy than traditional methods
- Low-carbon alumina with emissions of less than 0.6 tCO2e per ton of alumina
- A joint venture that is aiming to produce carbon-free aluminium
Engagement activities
The company′s high ITR1 temperature score was the trigger for our engagement because a high reading on this forward-looking measure indicates climate risk. We engaged with the company on several topics including R&D, production of recycled aluminium and management of forest practices.
- R&D. The company is developing a new technology that could eliminate carbon in its bauxite site. The project is still in the R&D phase but is planned to roll out within 3 years. It has received a grant from Australia and other governments, and already features four commercialised, low-carbon aluminium products.
The company is also in talks with a joint venture partner, a major technology company and the governments of Canada and Quebec to produce the world's first carbon-free aluminium. This could give the company competitive advantage as it believes it alone is developing this technology in the industry. The project will lower production costs and a premium could be charged for the sustainability aspect. - Production of recycled aluminium. Although the company was closing one of its recycling facilities this year, it is also looking to increase the recycling aspect of production because it could lower production costs and reduce its carbon footprint. Ultimately, the eventual profitability will depend on scrap prices, which vary by market and time of year. We believe the company’s high ITR reading could be positively impacted by increasing recycling as this will help reduce its emissions.
- Management of forest practices. The firm is focusing its efforts on its mining operations in Brazil and Australia, as these are vital biodiversity areas and regions where deforestation is a significant issue. On each site, forestry processes and operations related to biodiversity are assessed on a case-by-case basis: at times the company operates jointly with, for example, states, thereby reducing its control over operations. In terms of biodiversity, it aims to have a neutral impact over a five-year rolling period. We assessed current practices as needing improvements.
Engagement outcome
The company’s poor ITR reading raised our concerns, leading to the launch of the engagement. Positively, we found an encouraging story behind the numbers: despite having a high temperature, both relative to the industry average and to its closest peers, the company is working on very promising new technologies that could significantly lower (and even eliminate) carbon emissions from its products.
The impact of its lower or zero-carbon products has been now integrated into the company’s decarbonisation targets, hence improving its ITR score from 3.6° to 2.6°. This leads us to believe that further temperature reductions are achievable and within reach for the company.
The biodiversity impact of its mining operation as well as restoration efforts also need to be monitored. This led us to conclude that ongoing engagement is needed to address the gaps we have identified.
Next steps
Based on our findings, we continue to be committed to using stewardship to promote this company’s net-zero transition, inclusive and mindful of recycling and other non-climate specific environmental considerations, such as biodiversity and restoration efforts, which need to become more demanding and specific.
Sources.
1 ITR stands for Implied Temperature Rise and is a measure of how a company’s emissions are aligned with the Paris Agreement objective to keep global warming well below 2 degrees Celsius. Lombard Odier’s proprietary ITR is LOPTA, Lombard Odier Portfolio Temperature Alignment. When we give a temperature reading in this paper, it refers to our internal LOPTA reading.
Please click on the next tab to explore our engagement with a Scandinavian industrial company.
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