AP3’s Fredric Nyström: “Green mineral shortage is one of the most pressing issues of our times”

As the world divests from fossil fuels and turns to clean energy systems, the demand for base metals, battery materials, rare earths and more are set to increase exponentially.

Yet a recent McKinsey report found that even with the current decarbonization trajectory trending toward 2.4°Celsius, the supply of many minerals and metals embedded in key lower-carbon technologies will face a shortage by 2030.

While some materials such as nickel may experience modest shortages (approximately 10 to 20%), others such as dysprosium, a magnetic material used in most electric motors, could see shortages of up to 70% of demand.

The EU’s Critical Raw Materials Act identifies 34 critical raw materials that are expected to grow exponentially in demand but have complex production requirements and thus face a higher risk of supply issues.

Net Zero Investor asked AP3’s head of sustainability and governance, Fredric Nyström about what these shortages mean for the transition to a net-zero economy.

Are these potential shortages a serious concern? What are the implications for net zero?

It's a very serious concern. The transition starts with a mine. We need these critical minerals for all our low-carbon technologies. Moreover, as developing countries get richer, they buy more stuff and thereby increase global demand for these minerals. The potential shortage is one of the most pressing issues of our times.

States are ramping up efforts to secure critical mineral supply chains, notably with the European Critical Raw Materials Act in the EU, and Inflation Reduction Act in the US. Have these initiatives influenced the way you invest?

So far, the EU rules have not influenced how we invest or how we view the situation. The big difference between the EU and the US initiatives is that the EU is regulation-based while the US provides financial incentives, such as funding and tax credits for green mining and manufacturing activities. Given the pace we need, the regulatory approach is insufficient. We have to incentivize investment.

Why do these legal measures emphasise not only meeting mineral shortfalls but also onshoring activities?

It’s combination of things. Firstly, western governments have realised that the transition must happen and that minerals and metals are an essential part of it. Then, there is the background of increasing geopolitical tensions and the fact that many of these materials are sourced from countries with high political risks. For example, the Red Sea Crisis and attacks on global shipping lanes are already a compelling argument to safeguard the net zero value chain and the logistics around it. Onshoring and friend-shoring key mineral extraction and refining processes is one way to do that.

How is AP3 exposed to mining?

Like most investors, we are in line with benchmark or a bit below benchmark. This is something the investment community as a whole should change. Many sustainability funds are actually underweighted in mining because of the industry’s tough legacy around human rights abuses, and a whole spectrum of environmental, social and governance issues. Yet this is the one sector where we truly need sustainable development and impactful engagement. Sustainable investors shouldn’t shy away from the sector just because it’s challenging.

What does AP3’s own engagements look like?

AP3, the Council on Ethics of the Swedish AP Funds, the Church of England Pension Board and others have developed a global industry standard on tailings management, which is now seen as best practice. Most of the major mining companies have adopted it. Even though there's still much to improve, we see the wide adoption of this standard as a big success. This experience has shown us that targeted engagements can contribute to a more responsible mining industry.

Perhaps the most important general message here is that we have to work at the industry level to move the whole sector rather than focus on one-off engagements with individual companies. The challenges in the mining sector tend to be true for all mining companies. Investors should look to establish common solution to common problems.

Apart from the global standard on tailings management, what other solutions would you like to see?

We are involved in the Mining 2030 Commission, which is an investor-led multi stakeholder group that aims to develop a roadmap for a sustainable mining industry. The commission includes around 20 individuals representing the industry, NGOs, academia and labour union organisations. The idea is to develop this roadmap together.

What we realised from the tailings standard is that the best approach is the one that puts people at the centre. Few other industries have such a large impact on the local environment and communities. Those communities have to be involved in all the discussions from the beginning to manage the impact appropriately.

Is that difficult to achieve in countries with unstable political environments?

My impression from talking to people in the industry is that managing the impact of mining operations is a challenge for both developing and developed countries. Many major mining companies bring best practice into their operations across the globe. Yet no mining company can or should run away from the industry’s negative legacy. It is in everyone’s best interest for those companies to identify historical issues and find solutions for them. That’s also our philosophy in the Mining 2030 Commission: getting companies to acknowledge their bad legacy and move forward. This is absolutely essential if they want to attract more interest from sustainable investors.

Can progress be made? Will mining ever truly be sustainability-friendly?

I’m convinced it can happen. The experience from the development and implementation of the tailings standard shows that it is possible for companies to change. Eventually the changes trickle down into smaller companies too.

Have you noticed car manufacturers and other stakeholders in the net zero value chain take a more proactive role in mining, given the potential shortages?

Absolutely. A recent mining conference in South Africa was attended by not only car companies but also tech companies. They are part of the dialogue now. These companies are making big investments in mining to secure their supply.

Is recycling also part of the solution to mineral shortage?

We need to turn every stone, and yes, recycling is one of them. This is first and foremost a regulatory issue: policymakers need to encourage a higher level of reuse and recycling. There should also be a serious discussion about levels of consumption and the consumerist culture in general. The less we need, the easier it is to meet our mineral targets.

We also need more “re-mining” operations. There are thousands of tailings sites in South Africa alone. Those tailings contain metals of high value. I recently visited a site dedicated to extracting platinum from old tailings. The operation was profitable enough to warrant the commitment of a listed company. Anything that helps us extract more minerals without digging more holes is an important part of the solution.