Exchanges have role in ESG criteria, LME’s Chamberlain says

Exchanges have an important role to play in the growing push for the use of Environmental, Social and Governance (ESG) criteria in investing, the chief executive officer of the London Metal Exchange said.

Matthew Chamberlain said that the lack of a global regulatory body policing ESG criteria meant that sometimes it falls to exchanges and other market infrastructure players to step up and use their leverage in this area.

“To be honest, we spent a lot of time at the LME asking whether this was our role, because for 140 years, we only differentiated metal on the basis of its purity,” said Chamberlain, speaking on Wednesday March 13 during a panel at the 44th Annual International Futures Industry Conference in Boca Raton, in the US state of Florida.

“That meant, if you are pure copper or pure cobalt or pure aluminium, you can come in [as an approved LME brand]. And it was a very big philosophical leap for us to say we were going to evolve and have a second barrier – that you can be great quality metal, but if your sourcing is not responsible, we don’t want that metal on the LME,” he added.

Last year, the LME published new responsible sourcing principles which would give it the right to name and shame, suspend or possibly even delist metals brands that fail to comply.

“That’s been a really interesting journey for us, engaging with the markets on the specifics of how we make it happen, but I think everyone at the LME and the broader industry is now actually quite pleased we’re going down this route,” Chamberlain said.

But he acknowledged that part of the challenge with responsible sourcing principles is the additional cost burden being placed on various parts of the metals ecosystem. Several metals producers initially approached the exchange and objected to the responsible sourcing principles, Chamberlain said during the panel, leading the exchange to reiterate why it had made the move.

“Ultimately commodities markets work by the seller deciding what to deliver. If you have a low quality - be it metallurgical or ethical - brand on your exchange, then your price will fall to that lowest common denominator,” Chamberlain said. “Our market only works if you are prepared to stand up and say, we have to have a minimum standard.”

The LME is proposing a specific regime for cobalt, which has hit the headlines in recent years with concerns over child labor and poor working conditions in artisanal cobalt mines in the Democratic Republic of the Congo. The situation has subsequently led major Original Equipment Manufacturers (OEMs) to step up pressure on producers to prove their brands complied with responsible supply chain guidelines.

The standard-grade cobalt price – the benchmark for physical settlement across the cobalt supply chain – was most recently assessed by Fastmarkets on March 13 at $14.05-14.85 per lb, in-warehouse. This is down by 47% from the beginning of the year and by 65% from a year ago.

The imposition of standards are in themselves the focus of fierce debate, with proponents of transparency and informed consumer choice pitted against the concept of a minimum level of compliance to ESG criteria.

“I don’t think that issue has been fully determined yet – it’s a very active debate. It was a huge challenge to what we’re doing because when we put standards in, a lot of people said, ‘no, that is actually inhibiting growth in quality because everyone is going to go to the standard and not go beyond,’” Chamberlain said during the panel.

“A standard can embody transparency…I think there’s a balance to be struck there,” he added.

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