Benedikt Sobotka, Co-Chair of the Global Battery Alliance, highlights risks and opportunities for investors across the EV value chain.
Across the globe, electric vehicle (EV) sales are continuing to break records and smash expectations. In 2021, almost one in ten global car sales were electric, according to the International Energy Agency, which means EVs have quadrupled their market share since 2019. In the UK, this number recently rose to one in five new car sales being an EV. With the UK set to ban the sale of new petrol and diesel vehicles by 2030 – and similar targets being introduced in other developed countries around the world – the market penetration for electric vehicle sales could well exceed 50% by 2030.
Dynamic market expansion
The reason for this dynamic market expansion in recent years is two-fold. Firstly, the global economy is in the midst of the clean energy transition, one of the biggest changes to an economic system since the second industrial revolution, which introduced mass production in the late 19th and early 20th century. At the centre of this transition is the transport sector, which accounts for 37% of CO2 emissions from end-use sectors. Reducing these emissions has required governments to introduce electric vehicle incentives, companies to set manufacturing targets and consumers to factor sustainability into their transportation decisions – positioning EVs as the clean technology that will dominate the future of transport.
Secondly, electric vehicle uptake has been catalysed by the recent record highs in diesel and petrol prices, which reached over £1.91 and £1.99 per litre respectively in July 2022. The crisis in Ukraine and resulting impact on energy prices has increased the cost of running conventional vehicles, and while EVs are still impacted, the energy powering them can come from a variety of sources, including cheaper renewables. In fact, consumer website Compare the Market claims that EVs are £600 a year cheaper to run than an equivalent petrol car, which is driving increased interest in EV ownership.
Promising investment opportunities
As with any growing market, the electric vehicle sector presents a major investment opportunity with excess returns potential. Investors have already reaped the rewards of investing in stocks on the consumer end, thanks to the meteoric rise of companies like Tesla and XPeng. However, there are currently overlooked opportunities that are not only financially promising but can also support the sustained long-term growth of the industry.
Beyond car manufacturers, this includes investment in companies involved in developing charging infrastructure, manufacturing batteries, and responsible sourcing and circularity. For example, opportunities in battery production are particularly promising given batteries typically account for 30 to 40% of the value of an EV. These areas must be developed and scaled alongside the downstream elements of the supply chain in order to facilitate the continued expansion of the market. On the flip side, without urgent and sustained investment in these areas – charging infrastructure, battery production, and the responsible sourcing of materials – the growth of the sector has the potential to stall further down the line, thereby reducing its long-term profitability and the continued electrification of the transport industry.
EV sector’s long-term growth
As things stand, charging infrastructure in Europe needs greater capacity to cope with the rapidly rising presence of electric vehicles on the road. The European EV Charging Infrastructure Masterplan for the EU27 estimates that by 2030 approximately €280 billion needs to be invested in installing charging points, upgrading the power grid, and building capacity for renewable energy production for EV charging. Not only will a lack of investment in infrastructure hamper the roll-out and adoption of EVs, but proactive investment in this area will increase confidence from consumers. Having the ability to charge their vehicles quickly and conveniently further encourages consumer uptake of EVs and creates an even more fertile ground in the sector for long-term investment.
Yet perhaps a more important challenge – and opportunity – relates to scaling up the supply of critical materials for the net-zero transition, such as copper, cobalt, nickel and lithium. EVs require 2.5 times as much copper as a conventional vehicle, while solar and offshore wind need two and five times as much more respectively than traditional energy generation methods, according to S&P Global. Benchmark Mineral Intelligence predicts that over the course of 2022 alone, cobalt demand from the battery sector will grow by over 30%. Given the unprecedented demand, investment in the responsible production of these materials is clearly needed now to prevent future bottlenecks and supply shortages, which would only decrease profitability in the market and the overall drive towards sustainable energy and power systems.
The lion’s share of responsibility for meeting this demand lies with the mining industry, a sector that is traditionally associated with increased risk for investors. It is an inconvenient truth that the production of many raw materials required for EV batteries, including cobalt, is associated with issues such as poor working conditions and human rights abuses and high carbon emissions. For example, around 70% of mined cobalt is currently produced in the Democratic Republic of the Congo, a country which is often linked with child labour, particularly in artisanal and small-scale mining.
Investors must therefore find ways to eliminate these risks if they want to invest in, and profit from, the EV industry, particularly given the current emphasis on integrating ESG criteria into investment portfolios. Investing in businesses that are providing innovative solutions to circularity and recycling is one promising way to achieve this. As supply for key materials becomes stretched, recycled materials can be used to plug the gap – creating scope for profitable investments in a range of fields such as the chemical, collection or waste management industries. This is particularly important given more than 339,000 tonnes of batteries will have reached end-of-life by 2040, according to the Advanced Propulsion Systems team of Manufacturing Group Warwick at the University of Warwick.
Importance of collaboration
In addition, investors should collaborate with industry actors and policy makers to make the battery value chain more responsible, fair and sustainable. Industry players need to take decisive and urgent action to improve the ESG impact of their operations, whilst investors and policy makers must call for greater environmental and human rights compliance in the battery value chain, including increased greenhouse gas emissions disclosures, including Scope 3. Increased transparency in the value chain would also help with efforts towards circularity, ensuring that the raw materials contained in EV batteries can be re-used and recycled.
The Global Battery Alliance (GBA), an organisation which brings together over 100 industry majors, financial institutions, NGOs, governments, and academics, including Tesla, World Bank Group, the OCED and Eurasian Resources Group, is taking steps to address this supply chain transparency. It is currently developing a ‘Battery Passport’, which will act as a digital representation of a battery, providing end-users with important data about its ESG performance, manufacturing history and provenance, thereby helping improve battery life extension, second use and recycling.
According to a survey by the Mobility Consumer Index, the percentage of consumers looking to buy EVs has reached 52%, which further corroborates the investment potential of the EV sector. However, this demand is largely driven by the desire to have a positive social and environmental impact, and if consumers no longer believe that the product they are buying aligns with their own personal values, then demand will inevitably decrease. Additionally, funds will begin to struggle to justify investment in the EV industry if it is incompatible with being categorised under Article 8 or 9 of the EU’s Sustainable Finance Disclosures Regulation (SFDR).
Therefore, to ensure a sustained viability and long-term value generation of the EV market, it is important to remember that the drive for sustainability needs to be placed at the centre of EV adoption. Responsibly sourcing the huge volumes of raw materials required and the sustained deployment of charging infrastructure is not only essential to protect our climate, but it will also ensure the long-term growth and profitability of the EV sector more widely.