The LME is the world centre for trading industrial metals. The majority of all non-ferrous metal futures business is transacted on its platforms. In 2019, a total of 176 million lots were sold there, which is the equivalent of 3.9 billion tonnes of metal.
It was first established in 1877 and has since become a vibrant futures exchange, enabling the metals industry and the banks to come together in a regulated market that sets a price. It facilitates the transfer and hedging of risk but also has the clout to encourage the metals industry to do things better, both from the human and the planet's perspective.
Importantly, the LME enables the physical delivery of metals via the world-wide network of LME-approved warehouses; and this is what gives the Exchange the power to enforce responsible sourcing standards, says Chief Sustainability Officer, Georgina Hallett.
"It is because the LME offers the opportunity to settle a contract physically that it also has a responsibility to set the criteria for sourcing," she says. Essentially, metal is not only defined by its physical composition and shape; but also, since the new rules came in last year, its sourcing.
Understanding sourcing
In 2017, action was taken to address the whole question of sourcing. Roughly, there are around 350 different metal producers whose products are listed on the Exchange, and the LME began by issuing a survey to all of them to understand the extent to which responsible sourcing was embedded in their existing standards and processes.
There was plenty to talk about. There are also many complexities around ethics, provenance and sourcing of the various metals traded on the LME, but there was a definite mandate from the market to do something.
"Sourcing" is a simple word, but it is charged with significant issues like human slavery, child labour and conflict minerals. "There was a clear consensus that we needed to do something," says Hallett. "And rather than introduce another global framework and set of rules – which would likely have taken years to get consensus on – we decided to draw on the existing OECD framework."
Global frameworks
The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas is the relevant global framework that applies to metals and minerals generally. Importantly, although China is not part of the OECD, its (broadly) equivalent body, the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters, has adopted a similar framework.
"The market has been hugely supportive," says Hallett. "It helped that we built on an existing framework. By October 2019, we had published the rules, and we are now working with our producers to ensure all the new compliance processes and standards are in place for the first reporting dates in 2022."
There is further complexity. The LME is emphatic that its action in this area will not exclude small producers. Known as artisanal miners or small-scale miners (ASM), these subsistence miners are often not officially employed by mining companies. More usually, ASMs work independently, frequently by hand.
Evaluating ASM
There are myriad ethical issues around ASM – not least because women and children are often the bedrock of this stream of activity. Still, ASM activity also has the effect of reducing poverty and supplementing agricultural livelihoods in rural communities.
It would be much more straightforward for LME to exclude ASM producers from the supply chain. However, this would have the effect of denying large communities access to the markets, thereby augmenting poverty. That is not a desirable outcome.
"We think it is right that artisanal miners have access to the supply chain and these rules will bring greater due diligence to ASM," says Hallett. "Metal producers that do not source ethically will, in effect, be de-listed and their metal cannot then enter an LME-approved warehouse or be used to settle an exchange contract. Our aim is not to de-list lots of producers. We believe there is a greater positive impact if producers do the work; after all, the aim is to bring about positive changes in the whole supply chain."
Sustainable sourcing
In addition to the LME's focus on ethical sourcing practices, it is also engaging with its stakeholders on broader sustainability issues – especially in the aluminium sector. It is committed to supporting initiatives that facilitate the global transition to a low-carbon economy, particularly over the last year.
Action around this has been two-fold. The LME plans to build a spot-trading platform which will enable market participants to procure metal with their required characteristics, such as low carbon aluminium. [JM1] Also, they are looking to launch a scrap aluminium contract to support price risk management in what is a vital component of the circular economy.
The LME and the Aluminium Stewardship Initiative (ASI) have also developed a Memorandum of Understanding to underpin collaboration on responsible aluminium value chains. ASI is like a quality mark that helps identify best practice and, thereby, can only assist with both transparency and the spot market.
Hallett is clear that all of this workaround ethical sourcing and low-carbon metal trading is in response to market demand. "We have a market leadership role, and it is right for us to act, but we must do so in a way that reflects global consensus," says Hallett. "It was appropriate for us to bring in rules to ensure corruption and human rights abuses are excluded from metal supply chains – as there is clear global agreement here. But it's not the same with sustainable sourcing – to create rules that exclude those metal producers with no access to renewable energy supply would be wrong. That is why we've taken a different approach for now, by bringing transparency to the carbon footprint of a given batch of metal and providing access to procure the metal that meets a consumer's particular sustainability requirements."