Navigating the energy transition: Critical minerals and climate finance // The Week in Sustainability #45

Minerals critical to the energy transition The International Energy Agency’s inaugural edition of the Critical Minerals Market Review offers intriguing insights into global energy markets as the world transitions from a fossil fuel-based system to renewable energy. While the transition has happened in significantly less time than it took to build a fossil fuel-based system (we’re already seeing record deployment of solar panels, wind turbines, and electric vehicles), it hasn’t been without challenges. The shift towards renewables and the growing demand for this technology underpin the growth in the critical minerals markets. In fact, the market size for energy transition minerals has doubled compared to 2017, making it a massive $320 billion industry. The challenges with the energy transition are largely tied to critical mineral extraction. The demand for minerals like copper, nickel, lithium, and rare earth elements like neodymium used in electric vehicles has skyrocketed. But as market demand for these minerals grows, so must the mining industry. The mining boom raises concerns about the environmental and societal impacts of expanded mining operations. The Critical Minerals Market Review highlights an interesting tension between battery production for electric vehicles and consumer preferences, alongside potential negative implications of meeting the growing demand for minerals. While progress in improving the gender balance of workers and community investment by mining companies, concerns about worker safety, emissions, water use, and waste production persist. Furthermore, equitable access to the technology developed from these minerals for resource-rich countries remains unsolved and unanswered. Climate change scenarios in financial services The University of Exeter’s Institute and Faculty of Actuaries released a paper (The Emperor’s New Climate Scenarios) highlighting that commonly used climate models in financial services often underestimate the risks of climate change. It’s an area often overlooked in the discussions around climate change; however, financial services increasingly incorporate potential climate events into their risk assessments to improve their strategies. While it’s encouraging to see a willingness to understand how climate poses a material risk to company performance, the paper warns that these models often produce “artificially benign” predictions, which could pose significant economic risks. The critical issue with these models is their failure to accurately incorporate the cost of real-world impacts of climate change. According to a survey by the Global Association of Risk Professionals, 80% of firms used climate-scenario analysis in 2022, but the models often overlooked the escalating costs of climate phenomena such as sea-level rise and crop die-off.  Misinterpretation of these models is also prevalent due to financial firms’ lack of climate expertise. Models built on a near-term time horizon of one to five years should not be applied to longer-term decision-making, and assumptions that we are on track to meet the Paris Agreement are inaccurate. To rectify these issues, it’s recommended that models incorporate current emissions rather than assumed progress and that model creators convey what a model does and doesn’t describe. Paired with a qualitative narrative, this could bridge the gap between climate and financial experts and foster a better understanding of climate implications across industries. ‍