Our Focus on Change series explores some of the issues relating to the climate transition and the pursuit of net zero. In our previous article we highlighted the opportunities that come from the growing deployment of batteries, but how can we ensure that batteries are made sustainably and what other issues should we be considering?

Whilst the global supply of lithium has increased dramatically, demand has also soared and is currently forecast to grow five times over the next decade. The key driver of this growth is batteries which are expected to account for 95% of lithium demand in 2030¹. 

Whilst a relatively abundant element, the extraction and processing of lithium is problematic both in terms of current capacity and the environmental and social impact. Its extraction from either hard rock or brine can be both carbon and water intensive. The processes employed can give rise to toxic chemicals contaminating the soil and the air, harming communities, ecosystems and food production.  

Generating one tonne of lithium from brine uses on average two million litres of water, equivalent to the annual water usage of 35 people in the UK. Given lithium rich brine is typically found in the most arid parts of the world, extraction exacerbates water stress issues giving rise to water-related conflicts. In Chile’s Atacama salt flats, lithium mining has diverted scarce water resources away from local communities as well as consuming and contaminating that water². 

Such impacts do not meet the goals of a just transition. Local populations are being disadvantaged to meet the energy storage needs of more developed economies, suggesting that the sustainability of lithium supply is a significant, potentially limiting factor, in the energy transition. 

Much of the answer to this challenge lies ‘simply’ in more sustainable lithium extraction and processing. To the extent that the exploitation of any finite resource can be sustainable, lithium production processes can be made less carbon intensive, more resource efficient and less exploitative. For example, Canadian based Snow Lake Lithium plan to develop the world’s first all-electric lithium mine, bringing the extraction and refining process closer to the end user, thereby removing shipping costs while also building local job opportunities. The result is a traceable, carbon neutral and low harm product for the electric vehicle and battery market in North America.

In Bolivia we find an example where strong political leadership and new technology meet. Despite Bolivia having the largest global deposits of lithium, this has remained largely untapped. The local constitution ensures the country’s natural resources “belong to the people” and must be accessed in a way that delivers this goal.  Emerging membrane technology which allows lithium to be extracted from brine pools without using fresh water, delivers up to 90% lithium recovery and uses a process which takes days rather than months. If successful, Bolivia could provide a blueprint for others, demonstrating that sustainable lithium extraction may be possible, but in a way which benefits all stakeholders, creating jobs and enhancing local quality of life³. 

Investors recognise that trade-offs will exist in the drive for a net zero world, but such trade-offs cannot be at any cost. As the demand for raw materials for batteries continues to grow, so understanding and managing supply chain risks and the associated environmental and social impacts will be essential.

One way in which this can be achieved is through greater vertical integration of industries. Sectors such as the auto industry which will need a reliable supply of batteries have to be very connected with their battery supply chain, this being crucial to their growth over the next decade. It’s likely that the most successful companies in this space will the those that are most successful in ensuring their manufacturing process integrates well with the battery supply chain. Tesla is really a battery company rather than a car company⁴.

What should asset owners do?

The challenge for responsible investors is primarily one of stewardship. A particular area for engagement will be in ensuring, through asset managers, that the companies in which they invest are striving for cleaner approaches to sourcing lithium and working to minimise their environmental impact. Ensuring that underlying working practices within supply chains are being managed is also a critical consideration.

Asset owners can also explore how other aspects of the supply chain are being managed by their asset managers. Whilst lithium is one consideration, the supply of other raw materials such as cobalt, graphite and nickel are also necessary. In the face of growing demand, failing to protect against supply chain strains may result in production being reduced or even halted.  As asset owners are challenged to frame themes for the exercise of stewardship, so issues related to the production of batteries may offer an interesting point of focus for ongoing dialogue.

Finally, it is necessary for asset owners to look beyond carbon emissions, water stress and social impact.  Biodiversity loss and deforestation are also issues linked to the pursuit of net zero and the lithium supply chain. These are both also issues which present global systemic risks, growing scrutiny from policymakers and sources of financial risk. Both need to be tackled if we are to retain any chance of being successful in the pursuit of net zero and provide a salient reminder that, as we pursue the transition to a lower carbon economy, we must be cognisant of the untended consequence of change.

If you would like to explore how climate opportunities may be factored into your investment arrangements, please contact us, or your usual Hymans Robertson consultant.

Sources

¹Redefining Energy (redefining-energy.com)

²South America's 'lithium fields' reveal the dark side of our electric future | Euronews; Net zero in jeopardy unless world meets lithium and copper demands - but there's a gap between supply and demand | Climate News | Sky News; 13_factsheet-lithium-gb.pdf (foeeurope.org)

³What does sustainable lithium mining look like? – Electrek; Snow Lake Lithium; Bolivia: A New Era in Sustainable Mining - EnergyX | Energy Exploration Technologies, Inc.

⁴Redefining Energy (redefining-energy.com)