Insights
The future of battery power, its ethics and economics

Battery power affects us all, from the devices we use to how we move around. Every year the world runs more and more on batteries. It’s a multi-billion-dollar industry that can’t be ignored.

Transitioning to battery power will allow humans to decarbonise and help us reach net-zero emissions by 2050. Batteries will help us manage electricity supply through demand peaks and troughs and improve living standards for communities in remote regions. The transition will require lots of batteries - and better and cheaper ones. But there is a negative underbelly when it comes to batteries, in particular, to do with sourcing battery components, their disposal and questions around human rights in supply chains.

So how do we navigate this industry, filled with pros and cons, while delivering on our promise of making money ethically for our investors?

We are in a global race to decarbonise by 2050. The International Energy Agency (IEA) says clean energy investment must reach $4.5 trillion per year by 2030 to limit warming to 1.5°C.

McKinsey analysis suggests the global lithium-ion battery market alone will grow into a $400bn industry by 2030. These are extraordinarily large numbers.

The largest emitter of CO2, the transport industry, has experienced a threefold increase over the last decade (with 75% of that due to emerging Asian markets). But this industry is changing, and fast, for instance:

The Indian government has targets to achieve a 30%-growth in private electric cars and an 80% growth in two and three e-wheelers by 2030.

Recent climate legislation in the US is pumping billions into battery manufacturing and incentives for EV purchases.

The European Union, and several states in the US, passed bans on gas-powered vehicles starting in 2035.

Mining lithium, cobalt, and nickel to make batteries has been associated with modern slavery, pollution and environmental degradation. However, it’s important to note, that mining standards are dramatically different depending on which country the material is coming from. For instance, mining within the lithium triangle (between Chile, Argentina, and Bolivia), where the majority of lithium is being produced have robust standards.

Pollution: EVs require almost twice as much greenhouse gas to produce compared to a conventional car of similar size. So, it can take several years, depending on the kilometres travelled to break even on emissions. But the increase in air and noise quality, as well as reduced maintenance costs should also be considered.

The infrastructure for charging EVs efficiently still needs to be built and additional power needs to be generated to “fuel” them. There is high demand for computer chips - needed throughout this supply chain, from the solar farm to the car- to run them.

Recycling: It’s predicted that only 5% of the world’s total batteries are currently being recycled due to the cost and the process required to recycle them. Batteries in landfill result in harmful chemicals leaching into surrounding soil and groundwater. There is significant innovation happening in this space including one of our impact investments Mint Innovation recently developing a business case for battery metal recovery technology.

It’s important that we deliver on our promise of making money but doing it ethically for our investors, states Pathfinder CEO John Berry. Here are some of our key considerations when it comes to investing in this billion-dollar industry.

Innovation: It’s important to be open minded as new technologies emerge. Lithium-ion batteries are one current source of power storage but there are major advancements in solid state batteries, kinetic, thermal, gravitational and modular nuclear energy on the horizon.

Hydrogen is currently a hot topic in the energy space resulting in major funding for research and development from car manufacturers and governments. The possibilities for a hydrogen future are exciting, but there are some big issues to solve before we get there regarding cost, safety, technology, infrastructure, and funding. However, if we think back, solar power used to be in a similar vein – expensive and costly, now it’s on residential roofs with various business models to offset and fund it.

Thinking laterally: We must recognise there are multiple solutions to energy storage and the world as we know it now may not be the same in the future. Better batteries is not the only answer. We must look broadly at themes like the decentralisation of power infrastructure e.g. home solar and local solutions for energy in emerging markets. There could also be big leaps in the development of AI and digitisation (think driverless cars) which may be more energy efficient and alter the way we transport ourselves. As a historical example, look how far we have come regarding modes of transportation, it used to be predominantly driving or walking, now we can scooter, e-bike, e-bus, fast-train, Uber, segue, fly, foil or ferry (to name a few).

Future companies: Increasing amounts of investment is needed in research and development to make positive advancements (for people, planet and animals) to become mainstream. It’s likely this will come from the venture capital space and big global corporates. The large companies can afford to back very high-risk ventures and need to develop the new technologies to achieve their goals for decarbonisation in the future (e.g. car manufacturers).

Supply chains: Let’s use Tesla as an example – when we invested in Tesla they were leading the decarbonisation of transport, pushing our thinking for all modes of transport not just cars. But it was also important that our ESG Analyst investigated their supply chain including issues like labour rights and how they contribute to environmental and social issues through their supply chains.

We do as much as we can when it comes to checking ESG credentials, goals to decarbonise, environmental targets the company has set and analysing their supply chains. We may need to balance - 'does their good outweigh their baggage’ and do we have visibility of their supply chain? But it’s not always easy – we may be able to see who their immediate suppliers are, but things can get convoluted when you get down to suppliers of suppliers. Further governmental regulations will help make this process more transparent but presently, we can only consider the information we’re able to discover via research or reported directly by the company itself.

Value chain: We always look at the margin captured in the value chain within an industry or product. For instance, if you think about an EV and where the profit sits, it’s split between the battery, the electronics and the assembly and parts. There are also opportunities to capture value on the electricity generation and distribution side. We own stocks in renewable utility companies like Infratil, Contact and Brookfields; suppliers of renewable energy like Vestas and Enphase; and electricity distribution companies like Hitachi and Hydro One. We also invest in chips, Nvidia has been a standout performer in this space recently. We don’t currently own any raw material stocks.

Our goal as an ethical fund manager is to be clear and transparent about how we use moral principles to inform our investment process. Then investors can make a clear decision on whether they support our thinking and want to invest with us. Doing the best we can within our ethical investable universe (see diagram) with the complexity of the issues we face is never binary - it’s a matter of navigating the grey areas to come up with what we believe is the best solution at the time and this is where our active investment strategy plays a major role.

We will continue to assess whether the good outweighs the bad and analyse issues such as human rights, environmental harm, companies’ decarbonisation goals and the life cycle of what our holdings are producing. There is no right or wrong answer. It comes down to what you value.

What’s next for batteries in 2023 | MIT Technology Review

Electric vehicles may not be as good for the planet as you think (msn.com)

Ferguson partners with Holman and Electrada to launch electric vehicle program - EVs - MOVEMNT

Nvidia Looks to Add Their Computer Chips Into Cars | U.S. News (usnews.com)