Efficient Raw Material Use: A Key Environmental Focus
The Raw Material Use Material ESG Issue (MEI) focuses on a company's efficient utilization of raw material inputs (excluding energy and petroleum-based products) in production, along with the effective management of associated risks.
The Growing Importance of Raw Material Use: A Key Component in Decarbonization
The demand for raw materials is set to nearly double by 2050 due to population growth, rising living standards, and the low-carbon transition that will see widespread and increasing use of low-carbon technology. While physical scarcity serves as the upper limit of raw materials availability, accessibility issues related to the unequal spread of raw materials across countries and high cumulative demand for raw material inputs are becoming more prevalent.
Although global market trade in commodities can overcome availability issues for raw materials that cannot be sourced locally, it also introduces a slew of factors that heighten environmental, social and corporate governance (ESG) risks.
Subpar sovereign governance practices (bribery and corruption) and geopolitical tension (trade disputes, export bans or conflict) provide another dimension of risk, particularly where raw materials are supplied by only a few commodity-producing nations.
Evaluating Raw Materials Risks
Morningstar Sustainalytics' ESG Risk Ratings assess material risks related to a business models’ reliance on raw materials, the availability of specific raw materials, and how effectively the company manages associated risks with programs and policies.
Companies are expected to use raw materials responsibly and avoid excessive resource extraction or depletion, particularly for raw materials that are physically scarce and carry significant environmental impacts during their sourcing or refinement. Companies that do not meet these expectations can lose market share, face pressure from NGOs and activists, or grapple with business disruption concerns.
Transparent and responsible production of raw material inputs is essential to de-risk investments.