Martin Grosskopf is a vice-president and portfolio manager at AGF Investments Inc.
There is a dark side to a brighter, cleaner and smarter future.
It starts with lithium-ion batteries that contain cobalt, the material needed to power our new technologies, giving way to the 21st century’s version of the great gold rush as global giants such as China move to wrest control of the world’s supply.
These batteries are used in everything from our smartphones and laptops to electric vehicles (EVs) and have earned the “blood batteries” moniker because they are sometimes mined by children and other locals in unsafe conditions in the Democratic Republic of the Congo.
The misery in which these so-called artisanal miners work, and their rising death toll, has thrust cobalt mining in the Congo into the international spotlight. The issue is also raising vexing questions for those with an interest in responsible investing.
In fact, the issue illustrates the kind of difficult trade-offs investors concerned with environmental, social and governance (ESG) issues are often forced to consider. On the one hand, many investors are concerned with improving working conditions as well as human rights violations. On the other, many of these same investors are also interested in protecting the environment and ushering in the next technological revolution driven by new technologies such as EVs and renewable energy.
Moreover, the issue isn’t just being denounced by human rights advocates around the world. Increasingly, companies such as Apple Inc. and Daimler AG, eager to clean up their supply chains, are also demanding ethical standards be enacted covering all cobalt mining in the Congo, which produces the vast majority of the world’s supply. However, while there are initiatives in the works, rigorous and broadly accepted standards are still a ways off.
The issue hit close to home in the summer when dozens of miners were killed on the property of Katanga Mining Ltd. (a company listed on the Toronto Stock Exchange), raising concerns about the grave risks artisanal miners take to scour tailings and waste rock in search of valuable metals. And while these miners were working illegally on the property, ensuring appropriate safety conditions remains a challenge even for the mining giants.
Some worry that working conditions will be slow to improve given that China – a country with a weak track record on working conditions – controls a majority of the world’s cobalt. China has been bulking up its cobalt supply to fuel its plans to further boost its fleet of EVs in a bid to establish technology leadership as well as to tackle pollution. Although the market has slowed in the short term as China has revised its subsidy scheme, it’s currently the world’s largest producer of EVs.
Meanwhile, important players such as Umicore N.V., a global leader in cathode manufacturing, are committing to ethical sourcing despite the higher costs this may entail. However, the market seems unmoved by its stance, punishing the company for near-term margin pressures and its revised plans to scale back production due to subsidy changes. The reality is that the big miners from which Umicore buys cobalt are likely the first to shut down production when prices decline, while artisanal supplies continue unabated.
However, there seems to be a larger issue at play here for investors wanting to unleash their capital to make an impact – and quite frankly, it’s where the rubber truly hits the road. Among the key tenets of impact investing is the desire to produce beneficial social or environmental outcomes that wouldn’t be possible without the investment.
Some would claim this isn’t possible in public markets and it’s better to identify and minimize the environmental, social and governance risks that come with public markets. However, shouldn’t responsible investors be willing to provide a stable source of capital to a leading company that is trying to improve working conditions for a key material needed in the transition to cleaner energy?
Energy transitions are high in financial and ESG risks – both for the incumbent players as well as newly emerging supply chains. While existing players have entrenched business models and broad index representation, companies in emerging supply chains are inherently more volatile and attract fewer truly engaged shareholders.
There’s little question the financial rewards of this transition are significant for well-positioned companies. But it does require a long-term horizon and, more importantly, a recognition by responsible investors that they will need to transfer an increasing proportion of their risk budget from entrenched to emerging players.
The consequences of not doing so are simply too high.
The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations. AGF owns stocks of Apple Inc., Daimler AG and Umicore N.V.