McR ESG: spotlight on green commodities – more than unlocking customer premium

The ESG evolution means that corporate sustainability practices attract more attention and more scrutiny.
Australia Energy and Natural Resources
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Interest in the supply of 'green products' has never been higher. Both from producers looking to offer a differentiated product and possibly unlock premium pricing but also from customers under pressure to demonstrate their commitment to sustainability by procuring carbon neutral or lower emissions products. The commodities market has been experiencing these shifts for some time now, however there is still a lot of uncertainty about how exactly this all works and the benefits.

We've all heard of 'green commodities' but what exactly is the opportunity?

The ESG evolution has meant that corporate sustainability practices are attracting more attention and more scrutiny than ever before.

Supply chain management, particularly through procurement, has become a big focus moving into 2023 with customers seeking out commodities associated with lower greenhouse gas (GHG) emissions with the potential added benefit of managing their own scope 1 and 2 emissions. Producers are responding to the increased focus on green commodities by exploring diversification of lower carbon product offerings and in turn, the potential to influence their scope 3 emissions. This can look anything like commodities which are produced and transported with lower or limited emissions (for example, produced by utilising renewable power, carbon capture and storage technology or electrified transport) through to carbon neutral production or shipping, whereby products are sold alongside other carbon products which offset emissions associated with production or transport.

The exact offering will depend on the specific sustainability profile of the project concerned with the environmental benefit being a further point of differentiation from other 'green commodities'. To date, there has been limited consistency within the market as to how to quantify the environmental benefit, and how to manage a price premium throughout the value chain. It is also difficult to attribute value to a green label without the ability to accurately certify its purported benefits. Notwithstanding this, for producers it can introduce the potential for attracting new customer groups and customer segments.

Case study – ArcelorMittal

Steel producer ArcelorMittal has announced that it will offer green certificates called 'XCarb', to customers willing to pay a premium for low carbon steel for the benefit of reducing their Scope 3 emissions. 'XCarb' is the document confirming the lower CO2 equivalent of the content of the purchased steel that can be used by the customer to record a lower emissions inventory amount.

In order to adhere to GHG accounting principles, the customer cannot reflect a reduction of emissions without evidence that would satisfy a GHG auditor. The benefit of an 'XCarb' therefore depends on whether the auditor is satisfied, as the auditor could prevent the claimed environmental attribute from being passed to the customer.

Balancing limited supply with the uncertainties associated with being a first mover

Although the economic rationale and customer demand is clear, there are no accepted industry standards or rules to certify 'green commodities' and consumer laws are only just beginning to zero in on 'carbon neutral' and 'low carbon' production labels. Until there is some industry or regulatory direction or consensus as to producer expectations for the offering of 'green commodities', it is expected that the range of products available will continue to be fractured. Further, those producers who do move to offer this will be subject to a high standard of due diligence and likely also be required to demonstrate a higher degree of transparency with respect to their own organisational decarbonisation and/or sustainability initiatives to both satisfy customer concerns whilst ensuring the integrity of the green benefit as well as manage the risk of greenwashing allegations.

The producers and customers who work together to extend their existing supply relationship to include this offering will find this to be an easier exercise. Collaboration can range from partnering to develop new low-carbon products and processes, to implementing internal carbon pricing which allows for auditable carbon tracking throughout the value chain. Establishing overall sustainability alignment and actions against the background of an existing relationship will also mitigate the risk that existing customers will seek this offering elsewhere.

Case study – BMW

In 2021, BMW AG and Emirates Global aluminium PJSC struck a deal worth at least 100 million euros for the carmaker to buy 43,000 tonnes per year of aluminium produced using solar power. This was one of the first times a customer has agreed to pay a premium for aluminium with a smaller carbon footprint. This is significant in setting BMW on track to achieve its ambition of reducing emissions in its supplier network by 20% by 2030.

As BMW is a supplier of low-carbon technology through e-mobility, they are seeking solutions to decarbonise their upstream supply chain and reduce the energy intensity of their battery cells through the procurement of green products. BMW has also agreed with suppliers that their battery cells will be produced exclusively using green power, and the company is also looking to actively participate in manufacturing inputs by investing in start-ups that are producing green commodities.

On the customer side, being a first mover to procure green commodities can mean the ability to lock in lower pricing for managing scope 1 and 2 emissions at a time when emissions reduction technology alternatives are still developing but also the recognition and value that comes from demonstrating supply chain decarbonisation leadership.

Case study – Bellevue Gold

Australian gold miner Bellevue is one such corporation seeking to diversify its product offering in response to changing customer preferences. The miner is planning to revive Western Australia's Bellevue mine with a view to producing 'green gold' that will be sold at a premium. Bellevue believes that there is a market for certified net zero emissions gold, and that the production of this commodity would allow them to become an industry leader.

The miner seeks to achieve a 'green' label by implementing overarching sustainable practices starting at the construction phase. Bellevue's strategy is to be powered by a forecast average of 80% renewable energy each year using a wind, solar and battery hybrid power solution. This would make it the lowest emitting major mine in Australia.

Overall upside is worthy of consideration

Despite the challenges of being a first mover, the upsides of aligning on sustainability priorities and engaging with your supplier (as a customer) or with your customers (as a producer) are significant, and with the benefit of some careful due diligence, the pursuit of this offering can result in clear opportunities and benefits on both sides of the relationship.

McR ESG continues to support producers and customers across a range of industries to navigate these emerging opportunities. If you have any questions or would like to discuss any of the topics raised in more detail, please contact McR ESG.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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