Investing in battery metals: ‘It’s a re-education’

The shift to electric vehicles and renewable power is utterly reliant on metals such as lithium, nickel and cobalt.

So as China reopens and Joe Biden’s bumper green spending package boosts EV demand in the US, the boom in metal prices should be a win-win for sustainable investors.

But mining supply chains are still riddled with environmental, social and governance risks that new disclosure frameworks are seeking to quantify.

For our special edition on battery metals today, the FT’s commodities correspondent, Harry Dempsey, and I report on mining companies’ efforts to reduce their water consumption and carbon emissions, and the ESG rating agencies scrambling to respond to investor interest in the sector.

And don’t miss our story on a controversial seabed miner that hopes to sidestep the industry’s social and governance problems by searching deep underwater for the green gold that will fuel the transition. (Kenza Bryan)

Investors look for green ways to cash in on battery metals boom

Tainted by decades of environmental disasters, shattered communities and ravenous water consumption, mining companies — including those that dig up battery metals — are not traditional ESG darlings.

Veteran mining executive Sir Mick Davis — who led the resources company Xstrata until its merger with Glencore in 2013 — knows this all too well. Now running Vision Blue, a fund focused on clean energy related mineral and metal companies, he’s looking to ride a new wave in the sector as it seeks to up its game on sustainability while meeting huge demand for battery metals.

For decades, Davis told Moral Money, miners had sought a “social licence to operate” by cultivating relationships with communities and governments. Now, he said, they need to address customer and investor concerns about responsible practices in order to obtain a “social licence to market”.

Davis’s words reflect a wider shift in the resources sector, as investors seek to profit from demand for commodities used in the clean tech sector — while minimising exposure to environmental or human rights problems.

Rethinking natural resource sustainability

So far, the pressure on this front has come largely from electric carmakers led by Tesla. They’ve been demanding evermore supply chain traceability to root out cobalt linked to child labour in the Democratic Republic of Congo, lithium linked to droughts in Chile or nickel extracted at the expense of Indonesia’s tropical forests.

Institutional investors have perked up to these issues too. In recent months, S&P Global Ratings has fielded “increasing interest” from natural resource investors in sustainability-focused risk analysis of mining companies, Lynn Maxwell, who leads its commercial operations in Europe, the Middle East and Africa, told Moral Money.

Mining sector executives often complain that climate campaigners tend to lump them in the same bucket as oil and gas companies. Jamie Strauss, chief executive of London-based Digbee, a specialised ESG disclosure platform for the mining sector, said this sentiment seeped into the investment community too.

“It’s a re-education frankly . . . I think the world has become disconnected from where a lot of these products come from,” he said. “We’re not going to get these battery metals if we don’t have mining.”

Digbee’s reports help private equity groups such as Tembo Capital, Arch and Orion decide whether to invest, he said. So far it has assessed 25 individual mining projects and plans to have covered 40 by the end of March using dozens of industry disclosure standards for gold, copper, graphite, magnesium, nickel — and even metallurgical coal.

The company provides recommendations that managers can use to improve a mine’s sustainability credentials, and gives what it says is a more forward-looking view of each project than the algorithms used by major ESG rating agencies to look at companies as a whole.

Still, Strauss said, high-profile disasters have been a “blemish” on an industry now focused on causing “zero-harm” (many in the industry say “minimising harm” is a more realistic goal).

Globally, at least 28 thematic funds focus exclusively on battery technologies and metals, including 13 created in the past year, according to Morningstar data. Sustainability-focused equity funds are already a way of gaining exposure to the sector (in Europe more than 100 of these have at least 5 per cent exposure to the mining and metals sector). 

Investors are trying to gain exposure to battery metal prices without the risk attached to individual mining projects. Element Funds, a natural resources-focused asset manager, launched an ETF with $5mn seed funding tied to futures contracts for copper, lithium, nickel and cobalt last month.

But the nascent battery metal markets remain too illiquid for most big fund managers. And if they prove leery of the mining companies themselves, that could spell trouble for a sector that needs to spend hundreds of billions to boost the supply of copper, nickel and lithium.

Unsolved problems remain

Each of the battery metals presents unique sustainability challenges.

A large proportion of the world’s lithium, for example, comes from mineral-rich brines in South America. Over decades, freshwater flows from the Andes into basins beneath salt flats, leaching lithium from surrounding rocks. Mining companies evaporate the brines to extract lithium — something that has been depleting local water supplies, according to some communities in Chile’s Atacama region.

While Chilean mining leader SQM has contested those claims, it has been rushing to strengthen its sustainability credentials. Last year, it promised a $1.5bn overhaul of its practices, which would enable it to halve its extraction of brine by 2030 while still boosting output.

But the controversy over water has added to the incentives to invest in production in the US — something that could lead to more localised processes and lower transport-related emissions. In June, when Joe Biden’s Inflation Reduction Act was still being debated, the world’s largest lithium producer by market capitalisation, Albemarle, said it planned to build a plant near its mine in North Carolina capable of processing 100,000 tonnes of lithium chemicals annually.

Similar initiatives in nickel, however, could be tricky. The pace of Chinese investment in Indonesian nickel reserves, which also rely on coal power for extraction and processing, is so overwhelming that projects with potentially lower emissions elsewhere could struggle to be economic, analysts say.

Across the industry, measures to reduce the carbon intensity of operations, and to make them safer and less water hungry, could ease tensions with local communities and activists, while signalling to investors that miners are starting to take ESG seriously.

But mining will remain a relatively polluting and carbon-intensive business for the foreseeable future. The rush to expand production of minerals for electric vehicles and renewable energy plants means “increasing emissions in one sector to reduce emissions in another sector”, Seth Goldstein, chair of the electric vehicle committee at Morningstar, told Moral Money. “It’s a net benefit but still a risk.” (Harry Dempsey and Kenza Bryan)

Mining the seabed

Is deep sea mining the answer to concerns about the hazards of extractive industries on dry land — or an environmental problem in its own right?

The industry is still at a nascent stage, and subject to rules laid down by the UN-backed International Seabed Authority. That body is expected to issue a regulatory framework in July, in what looks like a moment of truth for the fledgling sector.

The ISA’s website lists 11 companies and governments with active exploration licences. If July’s document gives the green light for them to start applying to extract minerals, it could trigger an underwater gold rush.

Among the first movers in this space is The Metals Company, a Vancouver-based pioneer backed by mining company Glencore and Denmark’s Maersk.

After harvesting nearly 5,000 tonnes of potato-sized nodules containing nickel, copper, cobalt and manganese in its first Pacific Ocean test run last month, TMC hopes to start commercial mining next year, it said.

“If you’re a large resource company or battery cell manufacturer and looking for these projects or assets, there is no other resource of this size or quality that compares,” chief executive Gerard Barron told Moral Money, referring to the company’s three exploration zones in the waters between Mexico and Hawaii.

Nauru, a tiny Pacific island ravaged by phosphate mining in the 20th century and now threatened by sea level rise, has given its backing to one of these zones (each project in international waters must be “sponsored” by one of the 167 countries that have ratified the UN Convention on the Law of the Sea), and has been pushing the ISA to accelerate its rulemaking process.

“My country is on the front lines of the climate crisis right now,” Ambassador Margo Deiye, Nauru’s representative to the ISA and the UN told Moral Money. “We think it’s a more responsible and sustainable way to get these resources without actually clearing forest and digging.”

But that argument is far from universally accepted. Some scientists say the practice would cause colossal disturbance to marine life and the seabed. France and Germany are among the countries that have called for a ban on the practice, and carmakers BMW and Volvo have already said they will not use metals mined from the seabed.

Even if the practice does get the go-head this summer, concerns over capital remain. The Metals Company suffered a shortfall of cash from investors in 2021. Then last month, its low share price triggered a delisting notice from the Nasdaq stock exchange.

TMC in effect controls one of the largest undeveloped resources for nickel in the world, according to Kevin Murphy, principal metals and mining analyst at S&P Global Commodity Insights.

But he cautioned that mining 3km or 4km under the surface, using mostly autonomous equipment, was “extraordinarily different” to mining on land, and that any new entrant would see a lead time of up to 20 years from initial exploration to production.

“[Seabed mining] still has to run the hurdle of feasibility studies, whether that be from a mining standpoint or an economic one,” he told Moral Money. (Kenza Bryan)

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