The world’s natural stores of minerals and metals are critical for battery-powered electric vehicles, but these reserves must be used responsibly.
With the transport sector responsible for over 30% of global emissions, the case for transitioning from emission-intensive internal combustion engine (ICE) vehicles to electric vehicles (EVs) is clear for any corporate, government or investor focused on meeting their net zero targets.
“The regulatory direction is clearly pointing towards zero-emission vehicles,” says Matthias Heck, Senior Credit Officer at ratings agency Moody’s, noting that many governments have committed to the phase-out of ICE vehicles by 2035, which has already had a positive impact on EV production and sales.
In 2021, global EV sales more than doubled to 6.6 million, representing nearly 9% of the overall market, according to the International Energy Agency (IEA). China made up a huge portion of these sales, almost tripling sales volumes in 2021 to reach 3.4 million units.
The fundamental difference between an ICE vehicle and EV is that the former depends on finite and carbon-intensive fossil fuels, while the latter is powered by batteries. However, those batteries are dependent on another finite natural resource – critical minerals and metals like lithium, cobalt, manganese, nickel and graphite.
The manufacturing of these batteries poses a number of challenges, not least pressures on supply and production capacity, all of which needs to be underpinned by the understanding that any critical minerals and metals used must be used responsibly and recycled.
“The rollout of EVs is critical to the success of many countries achieving net zero, but dependencies on batteries powered using critical minerals and other substances is absolutely going to be a significant factor as to whether the level of penetration of EVs needed is going to be achieved,” Adam Matthews, Chief Responsible Investment Officer for the Church of England (CoE) Pensions Board, tells ESG Investor.
Tackling the tailback
With governments’ 2035 phase-out deadline edging ever closer, EV transition efforts may stall in the face of rapidly growing global demand.
The World Bank forecast that the production of critical materials will need to increase by nearly 500% by 2050 (the equivalent of nearly three billion tonnes) to sufficiently support the upscaling of clean energy technologies, as well as EV battery production.
Global demand for lithium-ion batteries, currently the most popular and effective form of EV battery, is set to grow by 33% annually to reach around 4,700 gigawatt hours (GWh) across the mobility sector by 2030, according to a report published by consultancy firm McKinsey.
“There is likely to be a massive bottleneck in the supply of these critical minerals and metals, because there currently aren’t enough materials being mined and not enough battery production facilities in operation in places like Europe,” says Ben Scott, Senior Automotive Analyst at think tank Carbon Tracker.
Over the past few years, macroeconomic volatility caused by the Covid-19 pandemic and Russia’s invasion of Ukraine has also had a huge impact, prompting delays in production and price spikes.
Frank Goguen, Portfolio Manager and Research Analyst at Newton Investment Management, notes automakers have been struggling with “major shortages of key components, such as semiconductors”.
General Motors announced it was delaying its plans to produce 400,000 EVs by the end of 2023 to mid-2024, citing battery supply issues. Last year, Volkswagen similarly announced delays to its EV ambitions, with its flagship EV project Trinity being pushed back from 2026 to 2030 and putting plans for a new European battery plant on hold.
The war between Russia and Ukraine didn’t just have ramifications for food and energy supplies. The price of nickel soared to over US$100,000 per tonne at the beginning of March 2022 due to the threat of sanctions against Russia, which is the world’s fourth-largest producer of nickel and home to Nornickel, a mining company that produces around 17% of the global class one nickel supply.
Nickel is a key component of lithium-ion batteries.
Rising commodity prices had a direct knock-on effect on the price of EVs. US-based Rivian Automotive cancelled its proposed 20% price hike for existing reservations in early 2022 following backlash from customers.
Short-term volatility aside, Peter Durante, Head of Technology and Innovation at Macquarie Asset Management, is confident that the world ultimately “has enough” critical mineral and metal stores to support the transition from ICE vehicles to EVs.
A recent study conducted by European clean transport campaign group Transport & Environment (T&E) noted that there is already enough lithium and nickel available to produce 14 million EVs globally this year, even without Russian supplies.
By 2025, even if raw material supplies tighten and remain below battery factory capacity, 21 million battery-powered EVs could be produced over a 12-month period, T&E said, which is almost 50% more than the market currently estimates.
“New lithium reserves are found all the time,” Durante tells ESG Investor.
Earlier this month, Iran announced it had uncovered a lithium reserve that could potentially yield 8.5 million tonnes of lithium, which would make it the second largest known lithium reserve in the world behind Chile’s 9.2 million metric tonne reserve.
“As demand grows, there will be more exploration and we can expect more of these announcements,” says Durante. “But it’s important to note that securing these supplies ultimately takes time; it’s not the kind of thing where we can just turn the tap on.”
Land grab
To ensure access to critical minerals in the long-term, “it’s important for automakers to secure the supply chain”, says Heck from Moody’s. To do this, car manufacturers are beginning to invest directly in mines.
Last week, Volkswagen unveiled plans to invest in mines to bring down the cost of battery cells, drawing on these reserves to meet half of its own demand and to sell the remainder to third-party customers through its battery unit PowerCo. General Motors has done the same, taking an equity stake in an Australian mining company sourcing nickel and cobalt. Both are following Tesla’s lead, which was investing in mines as early as 2020.
“This scramble from companies to secure critical materials is indicative of a sudden realisation that [car manufacturers] need to secure their supply chain to meet their existing EV commitments, let alone additional future commitments,” says Matthews.
“However, the presumption that a car company can switch to manage mines and is competent enough to do so responsibly, given the decades of engagement investors have had with mining companies who still get things wrong, is a proposition that needs testing.”
Investors recognise the importance of the mining sector to the climate transition, yet acknowledge the sector is far from perfect, with a number of environmental and social issues to consider, ranging from continuing controversies around mine safety, land rights, and poor management of toxic waste – to name but a few.
Improving visibility
Ongoing issues like these prompted the launch of the Global Investor Commission on Mining 2030 earlier this year. It is working to address these systemic environmental and social risks and ensure a just transition to net zero. The initiative is Chaired by Matthews from the CoE Pensions Board, advised by the UN Environment Programme (UNEP), and backed by the Archbishop of Canterbury, Archbishop of Cape Town and the UN-convened Principles for Responsible Investment (PRI).
“One of the core reasons we established the Commission is to develop our understanding of the [critical minerals] demand landscape and the various challenges that may arise from this,” says Matthews, adding that the Commission recognises they must work quickly to produce guidance for investors and companies, as well as promote transparency.
“Investors engaging through initiatives like Climate Action 100+ (CA100+) or independently need to be looking to understand [car manufacturers’] demand expectations, as well as whether these companies are aware of the social and environmental risks in mining and have a plan for managing them,” he says.
Macquarie AM’s Durante counters that automakers are already under pressure to address the embedded emissions and lifecycle costs of the materials they use, so some of the risks that exist in the mining sector “aren’t issues these companies have never thought of before”.
“The EV industry is going to create much more pressure on ensuring high-quality ESG-related compliance and transparency in mining,” he says.
Lauren Pamma, Programme Director of the Coalition for the Decarbonisation of Transport at the UK-based Green Finance Institute (GFI), says innovation is already happening to improve transparency.
Supported by over 70 organisations, including the GFI, the Global Battery Alliance (GBA), a multi-stakeholder organisation to establish a sustainable battery value chain by 2030, launched the proof of concept for its Battery Passport at the World Economic Forum’s annual meeting in Davos earlier this year.
The idea is to design a ‘digital twin’ for a physical battery which can convey the sustainability-related information of the product, including its carbon footprint and child labour and human rights performance.
“The reason the GFI joined the alliance is to ensure the passport is developed with the information needs of investors in mind, so that they can assess their potential risk exposure,” says Pamma.
Closing the recycling circle
Beyond securing enough critical minerals and metals to support the transition to EVs, it’s also about bolstering their full lifecycle, so minerals and metals can be efficiently reused and recycled once they are in use.
“The credibility of the EV transition depends on our ability to recycle battery materials,” says Carbon Tracker’s Scott. “We can’t just keep digging and getting new materials.”
Fortunately, Pamma from the GFI says that she is already seeing some investment into battery recycling, although this is largely focused on recycling gigafactory scrap metals.
“The role of car manufacturers will become a critical part of the circular economy of batteries over the next few years,” she tells ESG Investor.
The recycling technology is there and already in use, Pamma adds.
Finnish state-owned energy company Fortum employs a combination of mechanical and hydrometallurgical technologies to recycle up to 95% of the materials used in lithium-ion batteries. US-headquartered battery recycling company Redwood Materials, which partnered with Ford Motor Company in 2021, also claims to be able to recycle 95% of EV battery materials, including nickel, cobalt, lithium and copper.
Other companies are exploring ways to reduce dependence on lithium and other critical minerals altogether, says Goguen from Newton IM.
“There are many public and private companies working on new types of batteries with different chemistries, but those will need to be cost competitive and be able to have at least similar efficiency as the current ones,” he notes.
In 2021, Chinese battery manufacturer CATL announced its first-generation sodium-ion battery and has since said these batteries may be viable for EVs with ranges of up to 500 kilometres.
To catalyse further investment into the battery circular economy, Pamma says the GFI is in the process of developing its Battery Investment Facility, which will serve as a blended finance initiative predominantly targeting the UK supply chain.
“If we don’t invest [in reuse, recycling and battery innovation] now, when the batteries we currently have reach their end of life years down the line, we’re going to have problems,” says Pamma.
“It’s about building the whole battery value chain up in parallel to manufacturing them.”
