Interview - Accelerating the energy transition ESG in mining

JN: I'm absolutely delighted to introduce Yulia Chekunaeva, who is here to share her experience and insights on energy transition which is interestingly contextualised by the metals and mining industry, and also with capital market trends. Anna-Marie Slot, our Ashurst Global ESG partner, will also join this segment.

Yulia is the Director of Capital Markets & Strategic Initiatives and a member of the executive board of En+ Group, the world's largest producer of lower carbon aluminium and independent hydropower. Yulia was also recently appointed as an independent non-executive director of Nord Gold. Yulia joined En+ Group in 2016 and successfully led the execution team to complete the group's IPO on the London Stock Exchange.  Prior to this, Yulia had 15 years of experience working in investment and corporate banking, with the likes of Goldman Sachs and Sberbank in Russia. Yulia is passionate about diversity, inclusion and environmentalism. Yulia, welcome, and thank you so much for joining us.

YC: Thank you, Jamie. Morning everyone.

JN: You've had a seriously impressive career in banking and now the corporate side of capital markets as well. Have you noticed a shift in focus over the past few years when it comes to business and sustainability, and where do you think it's all headed, particularly after last year?

YC: I think we've seen a tectonic transformation over the last year specifically, and I think many people thought that 2020 would be marked as the devastation year of COVID-19. I mean, it is the year that is marked by COVID-19 but what we also learned is that the pandemic has focussed everyone on the need for the businesses and economies to be more resilient and above all to build back better and this is the key element of society, governments and business, tackling the existential issue of the climate change. 

So we've seen a lot of pick-up and I can tell you that at the time of Goldman Sachs, I was working on the research report called Sustain, GS Sustain, that's a methodology that trains all of the issues that are covered along the lines of in-house ESG framework, which helps inform the investment decisions for the institutional fund managers. We released the report for the emerging markets EMIR region in April 2013 and our sales force were like, "Yeah, that's great that you've put this doorstopper together but people are not really interested”. 

After two years and endless work hours, that was a bit of a shocker but I can tell you, and you can google it, the recent chart that was very impressive in terms of percentage of meetings between oil and gas companies and institutional investors talking about ESG and climate change, and you will see it's above and beyond the chart as compared to zero for the last decade. So I think it's trending in the right direction and I think it is led by the consumer. So when consumer leads the change, it actually transpires into everything. And the fall in, for example, Paris agreement in 2016 to review greenhouse gas emissions - financial market regulations then kicks in and ESG disclosures kicks in from the fund managers. Meaning fund managers will need to disclose and financial institutions will also need disclose, then it requires that every portfolio company, be it a borrower, be it an investment vehicle or other will need to disclose. So a clear strategy on ESG is now clearly expected by the financial markets participant and by everybody else. 

I think the world needs to move to the place where everyone has a new justification to the licence to operate because that's coming from the consumer. And, Jamie, you would be aware from my personal cases that I'm a strong believer that at some point in future, governments simply would introduce carbon labelling and the blockchain technologies or any other technologies would be used to trace it. And when the consumer sees the differential, then everybody in the value chain for a specific consumer product would be on the hook to actually adjust.

AMS: I think that's what we're seeing as well. What do you see, though, as your risk? I mean, you're in the aluminium business, or, if you're in the UK that would be the aluminium business, and you're also surprisingly one of the world's largest hydro-power companies, which I don't think people have really cottoned onto until they start looking into you a little bit more. Given this kind of interesting background, how does that fit into your issues and your risks? What are you focused on at the moment?

YC: Well, the risk and opportunity I think it's two sides of one and the same coin, if I can put it that way. Let's frame it from the standpoint of the opportunity. The opportunity is there to recognise that the world is changing and where the consumer triumphs and the customer triumphs, because we are not consumer-facing, we are very, very down the value chain of a consumer goods product, be it electronics, be it packaging for beverages for example your soda can comes from aluminium - but when the consumer-facing industry is under pressure from their customers to produce climate change-compliant product or ESG-compliant product, and there were several, very harsh publications regarding one of the largest mining company board in Australia last year and we know that the CEO lost the job just because of mismanagement of the community. So those are the elements that society, given its state of mind, is becoming increasingly aware. People are becoming increasingly aware about the factors that impact the definition of what is the proper corporate citizen and that is your opportunity because some people would lose the business and some people would remain in the business and one of our key opportunities is actually what we have been pushing for is the creation of greater transparency from the standpoint of disclosure of the carbon footprint. 

And you rightly mention we are backwardly integrated into hydropower plants, that has been 95% of our energy sources for the aluminium smelting, and on that basis you need to understand that this is something that is truly differentiated in the business model. And we actually do not understand why our peers in the aluminium sector are so risk-averse because what we are pushing for is the creation of the new assets class, low-carbon aluminium, not competing among the brands. It's about the whole market transformation like it happened 30/40 years ago with leaded and unleaded diesel fuel - the whole market split apart. 

So that is where we see the risk and we see the opportunity. In April and May when everybody was in shutdown, we thought, Okay, this is an opportunity to reach out to the procurement managers of largest OEM producers and discuss with them what are the products of the future they're going to have, in 5/10 years, because we need to know where we need to update our production technology to produce the aluminium that is going to be used in the car of the future. And that is the mentally I think everybody in the value chain has to adopt.

AMS: Interesting. And interesting that you took the slack in the business as an opportunity to look to the future. That's something that not a lot of people have done, and really a game-changer for you. Another game-changer, is that you have announced SBT goals. So for people outside of the lingo of sustainability, that's science-based targets, kind of a gold standard of how you get to a resilient and sustainable world. So can you give us some insights into what practical steps went into that?

YC: The way the businesses has been created, it's the ESG or sustainability paradigm which is at the centre and we are a signatory of the United Nations Global Compact and it was really an easy step to take for us to simply sign up to what we already believe in – that relates to SBTi. You are right, we are the first aluminium company globally that announced the SBTi-aligned goals and we are the first Russian corporate that has announced commitment to net zero. We are going to publish the report on the pathway to net zero. This is going to be released in September and it's very heavy lifting. It's going to include modernisation and upgrading of our asset base, investment in major technology advances such as inert anode – this is like a technological revolution – improvements across the entire value chain – so we formed joint ventures, partnerships with our customers, OEMs, packaging companies, producers of electronics. We are gathering feedback, what is the product of the future they would like? 

But we also working, for example, with transportation companies because we need to measure the carbon footprint across the entire value chain and we have to trans-ship bauxite from Africa to Ireland to make it refined, and then from Ireland we may have to bring the alumina into Siberia to process it into the aluminium. So that is also the value chain, the supply chain, that we need to look at. And, for example, the largest advance that we would be looking into is the technological transformation because the smelting technology has been there for a couple of centuries. It is changing but the chemistry and physics are exactly the same. 

But to make sure that from 2030 to 2050 both industries are aligned in the climate change pursuit, then you have to have the revolutionary transformation of the production technology. And in the case of aluminium, it's inert anode technology where you substitute the carbon anode with the polymetallic component, and then when it burns in the electrolytic cells, it actually emits the oxygen, not CO2. So we want to develop that quickly. We are not the only ones, our Australian and North American colleagues are working hard on that too. It's an R&D effort and it's a transformational effort and everyone in the company has to embrace it.

AMS: Definitely, it's really interesting and you can see what is achievable when you look at, for example, the COVID vaccines, when people really are up against the wall, how fast can you innovate? And I think the answer to that is probably "quickly". What are you seeing from investors and in particular what are you seeing around your ability to access the finance market given your, particular strength on this area?

YC: That is the largest area that we see as developing on the financial markets. More and more funds are raised via the ESG or sustainable fund managers. I think that is the fastest growing asset management or effort allocation category on the market. However, you need to remember that investors and financiers will be playing a critical role in building effective decarbonisation strategies because the world currently invests about US$500 billion per annum versus the requirement of two to three trillion annually. 

From the standpoint of our ability to access the markets, our metal segment was very successful in the pricing differential. I think a couple of years ago there was no pricing differential but currently there is pricing differential and that is something that motivates a corporation. If you can get cheaper capital and transform yourself it's a double-edged sword that is serving this whole purpose. 

So we signed the first sustainability-linked PXF in 2019 which was over US$1 billion and in the first half of 2020 we performed the first annual testing of the sustainability KPIs under this PXF. PXF is a pre-export facility.

And then in the beginning of 2021, we signed another sustainability-linked pre-export facility with Société Générale. That's one of the leaders in sustainability financing. Again, the facility is priced very competitively and it has a step change if you achieve KPIs, which we are hoping to achieve. But I think, to be successful in this market, you have to not only talk the talk but walk the walk. So you have to deliver on your hardcore KPIs and you have to be transparent about it. So disclosure is one of the key elements, and I will say that there are currently many standards like GRI, SASB, CDP, the latest recommendations of TCFD; and the trend is financial markets regulators are going to be introducing those into mandatory disclosure. As you know, FCA, for next year is to explain or comply with TCFD disclosures. So that is a huge area where I think everyone for example, the financial markets regulator, advisors, corporates and the think tanks that are producing those KPIs or indicators, all have to think properly and create one map that is going to make it simply easier. Because it's a nightmare, frankly speaking, for a corporate to keep on top of the disclosure requirements on sustainability, IFRS or any other standard.

AMS: And they're all kind of focused in different ways, right? SASB is backwards-focusing because of the accounting, TCFD is forward-focusing because it's about risk and the future, and then all of them speak in different languages. So I think you identify something that we see as well as our clients; just mass confusion in the market and people having to be kind of really precise about what they mean and what they say. 

JN: Thank you so much for sharing your insights. That was very interesting. And I think your organisation has to be commended for just how systematically you've embraced the challenge around energy transition, every function, every element of it has been embraced. So congratulations and really well done. And, again, thank you very much for your time, we really appreciated that.

YC: Thank you so much, guys, and I hope that that was valuable.