In January 2021, Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (“PIF”), announced the second phase of its strategic goals under Vision 2030. Named the Vision Realisation Program (VRP2), it plans to commit $320 billion to non-oil and gas projects by the end of 2030 and to launch thirty new companies in alternative sectors, including mining and metals.
As industry, governments, and households prioritise shifting from natural gas in line with ambitious climate change goals, we’re seeing sustained demand for materials including aluminium, cobalt, copper, and lithium in what is being dubbed the Age of Minerals. Aluminium is expected to be in particular high demand as it is a lightweight metal with high fuel efficiency properties, making it increasingly valuable to electronic vehicle manufacturers to build batteries for example. In 2020 alone, Saudi Arabia’s annual aluminium production was 999 thousand metric tons.
However, aluminium production faces ethical and environmental challenges that Saudi Arabia must address to fully capitalise on growing demand. Here’s how:
- Improving labour conditions
The challenge: Saudi Arabia recently implemented much needed labour reforms targeted at its migrant workforce—the third largest in the world. However, these have so far failed to meet international human rights standards. Saudi Arabia’s local labour force in the mining sector has increased to 18.6% of its total workforce since 2013. The remainder of which are migrant workers.
The solution: By improving labour conditions for both foreign and local miners, the country can increase the appeal of its aluminium to purchasers, such as the automotive industry, who are under increasing pressure to source sustainable Aluminium. One way to do this would be to allow for third-party verification schemes and standards to certify their mining locations. Examples include the Global Reporting Initiative’s Sustainability Reporting Standard, and the International Council of Mining and Metals.
2. Be mindful of environmental risks
The challenge: China is the world’s largest aluminium producers. Its smelters and refiners are not connected to the electric power grids and are often powered by coal, making Chinese aluminium responsible for a significant amount of greenhouse gas emissions, about 667 million tonnes of CO2 in 2020. In addition, the supply chain concentration of aluminium in China is considered a strategic issue to the United States government who may look elsewhere to avoid having to source the material from an area where there are tense geopolitical relationships, while simultaneously demonstrating that they are curtailing emissions in their own value chains. Saudi aluminium has not received the same criticism that its Chinese counterpart has; in 2018, Saudi-based mining company, Maaden, announced a memorandum of understanding (MoU) with General Electric to use digital technology to enhance the aluminium value chain’s efficiency.
The solution: The MoU was a positive first step in improving aluminium-production’s energy efficiency, and PIF, in line with its goal of establishing more mining companies aligned with VRP2, should ensure that any investment is mindful of the potential environmental risks associated. Additionally, aluminium is a highly recyclable metal and Saudi Arabia could establish itself as a leader in the circularity of the material by ramping up investing in R&D for improving its re-usage capabilities.
3. Use Sharia-expertise to comply with ESG standards
The challenge: ESG investment principles have been dominating the banking and finance sector’s talk since the Paris Climate Agreement and the launch of the United States Development Goals. In addition to proving that they are generating profits, companies are now being asked to demonstrate that they are actively integrating ESG principles into their investment strategies. Saudi Arabia has typically been one of the countries lacking in effective environmental strategies which comprise the “E” criteria under ESG, primarily due to its dependence on oil and gas and its role as a globally leading producer.
The solution: What investors commonly overlook is the congruence between ESG investment and Sharia-compliant principles, with the latter being based on the fundamental principles of social justice. Both investment strategies require high-level screening to avoid investment in what would be considered “harmful”. Saudi Arabia is among the Arab region’s leading countries in setting Sharia standards. Sharia-compliant funds typically invest in resilient sectors such as healthcare and manufacturing. So the country’s aluminium sector should draw on its cultural affinity for Shariah-compliance to also meet ESG standards. This will draw further foreign investment and portray local aluminium supplied as more sustainable and reliant on the world stage.