Financiers and investors to drive stronger ESG performance – ASI’s role
Trillions of dollars in capital need to be mobilised to transform the world’s supply chains to mitigate environmental, social and governance (ESG) risks, including climate change. This makes the finance and investment sector an increasingly important driver of ESG performance in the aluminium value chain. Third-party assessment and certification, including through ASI, is expected to facilitate market transparency and credibility. To support this, ASI is engaging with the finance and investment sector to grow linkages into the ASI Certification program.
Financial institutions and investors are increasingly motivated and measured by high ESG standards. Funding is expected to incentivise strong ESG performers more and more, including by offering lower interest rates for meeting ESG hurdles and other favourable funding terms. For companies in the aluminium value chain, attractive financing is a key enabler of improved ESG performance, particularly where expected returns on ESG capital expenditure are difficult to quantify, in the absence of a widespread common carbon price or product premiums for excellence in ESG performance. Conversely, companies in the aluminium chain that are not improving their ESG performance are likely to experience greater difficulty in obtaining funding.
It is unlikely that all current participants in the aluminium value chain will be able to transition to a high level of ESG performance, due to various factors such as cost, age, output and physical location of existing facilities. Common value chain ESG targets, which can be audited and verified by third parties, will be important differentiators for potential funders evaluating competing funding requests.
Whilst there are well-developed general principles for green bonds, social bonds and sustainability-linked bonds as models for incorporating sustainability into capital markets, aluminium-specific standards and key performance indicators are needed to support market developments. Clear and high product standards, transitional benchmarking and common technical evaluation and terminology for the aluminium value chain will be important reference points for the finance and investment sector. Third-party assessment and certification, including through ASI, is expected to facilitate market transparency and credibility. To support this, ASI is engaging with the finance and investment sector to grow linkages into the ASI Certification program. As an example, ASI is a member of the Sustainability-Linked Bonds, Climate Transition Finance and Impact Reporting working groups of the International Capital Market Association.
Whilst a key focus of new projects in the aluminium space will be decarbonisation, it is important that reducing emissions does not come at the expense of other important ESG factors, such as the need for free prior and informed consent of indigenous peoples, and to minimise water use and waste generation. Companies seeking funding for an ESG purpose should also report on any other ESG impacts of the project, so that any trade-offs are transparent and can be weighed. The ASI Standards address a wide range of sustainability issues and, therefore, can also play a role in the measurement and auditing of metrics, enhancing integrity and transparency.
The insurance sector is a related area where similar considerations are likely to assume greater importance. A key focus of insurance companies is assessing and pricing risk, and this increasingly means incorporating ESG risks into their modelling. This is likely to lead to insurance-related incentives and disincentives in assessing future ESG performance and risks in the aluminium value chain. This would also be enhanced by aluminium value-chain-specific benchmarks.
ASI aims to bring together producers, users and stakeholders in the aluminium value chain to maximise aluminium’s contribution to a sustainable society. A critical element of this is to assist in the development of financing that facilitates responsible production, sourcing and use of aluminium.