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The ESG of EV batteries
New European rules for electric vehicle (EV) batteries are on their way. What will they mean for auto manufacturers and their suppliers around the world?
On 17 August 2023, the new EU Battery Regulation came into force. This replaces the previous Battery Directive.
Due diligence is at the heart of the new rules. Companies placing batteries on the EU market, including EV batteries, will need to undertake due diligence on the sourcing, processing and trading of four key raw materials: cobalt, natural graphite, lithium and nickel.
Due diligence is at the heart of the new rules.
Prevention and mitigation are key elements of the new requirements. Battery manufacturers will need to identify and address actual or potential risks in order to prevent or mitigate adverse impacts of the mineral supply chain in relation to a list of specific categories. Risk categories to be assessed include air pollution, water use, soil protection and biodiversity (environmental) as well as health & safety, labour rights, human rights and community life (social).
Importantly, verification is also required. An approved independent body will need to check that due diligence procedures have been followed. Battery manufacturers must also, on an annual basis, publicly report as widely as possible the steps they taken to comply with the due diligence requirements – including any findings of significant adverse impacts in any of the risk categories listed in the Regulation, and how these impacts have been addressed.
EV auto manufacturers will, in turn, need to check that the batteries they use – all of which are currently supplied by third parties – are compliant with the Regulation. The new rules will apply from August 2025.
No matter where those manufacturers are based, their supply chain is likely to touch on certain key geographies. A large portion of the named mineral supply currently derives from sources with significant ESG issues. The Democratic Republic of Congo is a major supplier of cobalt, for instance. Indonesia is a key supplier of nickel.
Meanwhile, China dominates the refining and processing of each mineral, as well as the recycling of EV batteries in general. Indeed, as of 2021, more than 80% of global EV battery recycling capacity was located in China.
>80%
Global EV battery recycling capacity located in China
This geographic concentration further complicates the challenge of meeting the new requirements. Nonetheless, we think the pressure for companies to make the shift towards more sustainable battery supply chains is strong. We note that civil society was vocal during the consultation period for the Regulation. We therefore think consumer, as well as investor, pressure will drive companies to act.
The impacts of the new requirements will be felt all along the value chain. Those companies who have not already done so will need to undertake detailed assessments of their EV battery supply chains going all the way back to mineral extraction. Battery makers and auto manufacturers who have already done such an assessment, and have responsible sourcing in place, could benefit.
The rules are also likely to have an impact on the battery recycling industry, as the due diligence requirements also apply to recycled versions of the named minerals. One potential consequence is that battery recycling capacity could shift from China to Europe. Indeed, as battery cell production increasingly shifts location to the EU, the incentive to build out European recycling infrastructure to handle the waste from these production plants (as well as the recovered raw materials from end-of-life batteries) will rise.
One final point is that the EU is far from the only jurisdiction taking an interesting in EV battery supply chains. For example, COP15 last December saw the launch of the Sustainable Critical Minerals Alliance, with founding members Canada, Australia, France, Germany, Japan, the UK and the US. The aim of the alliance is to promote environmentally sustainable, socially inclusive and responsible mining, processing and recycling practices, as well as responsible critical mineral supply chains. So, where the EU is leading in terms of policy today, it is possible that others could follow in the future.
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