Batteries are a solution

Decarbonisation of global economies to combat climate change is at the heart of government policy today, particularly in the run up to the COP26 conference. Battery technology is cited as the key to pivot industries away from the use of fossil fuels towards renewables and to significantly reduce carbon emissions in both the transport and power sectors, which jointly are responsible for about 40% of the 50Gt of global CO2 emissions[i].

As a result, battery demand is growing rapidly and is expected to rise by 25% annually to reach 2,600 GWh in 2030. The main drivers of growth, electrification of transportation and the deployment of batteries in electricity grids, is global. By 2030, worldwide passenger cars will account for the largest share (60%) of global battery demand, followed by the commercial vehicle segment with 23%. Geographically, China is the biggest market with 43%. Consumer electronics, which account for more than 20% of the market today, will represent only a marginal share of the global battery market in 2030[ii].

So, batteries are a key technology to achieve the Paris Agreement and support the UN SDGs 12, but there are issues with scalability.

Scaling up raw material production for batteries over the next decade will come at an unprecedented pace. Four battery metals are impacted the most by this growth towards 2030: lithium by a factor of 6, cobalt by a factor of 2, class 1 nickel by a factor of 24, and manganese by 1.2[v].

Approximately 50% of global cobalt mine reserves are in the war-torn Democratic Republic of Congo (DRC), where nearly three-quarters of citizens live in extreme poverty. Around one-fifth of cobalt comes from small-scale artisanal mines where it is not uncommon to find children working, extracting the mineral by hand. Hazardous working conditions resulting in health risks are well documented. These social risks and in particular wider human rights abuses remain characteristic of the industry[vi].

In turn, almost all (99%) of lithium reserves are in Chile, Argentina, Australia and China, and there are question marks over existing supply volumes and extraction methods, which are often hugely water-intensive in desert regions. Traceability of chemicals and metals used in the production of lithium-ion batteries, is also one of the main sustainability challenges faced by automakers. Ethical sourcing of raw materials and CO2 footprint are two key supply side ESG risks.

The infringement of historic land rights is also an issue. In 2020, a coalition group protecting the rights of Indigenous Peoples in Siberia, and the Far East of the Russian Federation, released an open letter to Elon Musk, billionaire and CEO of Tesla Inc., concerning the mining company Norilsk Nickel. The group called for a ban on the purchase of Nickel from the miner until remediation and compensation for identified environmental damage had been addressed[vii].

Demand for cobalt, nickel and lithium will increase related business opportunities for the metals and mining sector. Copper prices that have been high due to the rise of China during the last decade offer a blueprint to companies expanding both upstream, downstream and through M&A activity.

While revenues are attractive though, ESG risks that were previously given less prominence are now rising, and being given more prominence by investors in their decisions. Companies that exist within the battery value chain will need to take account of ESG factors in their business models today to avoid the pricing of these negative externalities in both environmental and social issues in the future.