Lithium: A Circular Economy Perspective for ESG Investment and Stewardship
TDAM Sustainable Investing +
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New Thinking
The race to achieve net-zero emissions by 2050 presents an interesting challenge and opportunity for the circular economy, which applies regenerative design thinking to economics and aims for sustainability.
To reach net-zero greenhouse gas (GHG) emissions by 2050 commitments, big shifts are underway. One of them is the ongoing switch to electric vehicles (EVs).
EVs are powered by lithium-ion batteries, so demand for these batteries is expected to grow significantly. But lithium production has environmental and social costs.
Priti Shokeen, Head of ESG Research and Engagement at TD Asset Management Inc., has written an insightful article which sheds light on the externalities associated with lithium, what this means for investors, and the opportunities in battery recycling.
Lithium's environmental impact and recycling opportunities
Extracting 1 tonne of lithium uses 500,000 gallons of water1. So, one car battery requires approximately 6,000 gallons of water.
Lithium extraction methods also use chemicals which are hazardous to aquatic life and water quality. They ultimately affect communities and their water supplies as they cause air and soil pollution.
In addition, if not properly recycled, rechargeable batteries contaminate groundwater, soil and air.
Given these contamination risks and the expected growth in battery demand due to electrification trends, recycling can offer great benefits.
A systems view of sustainability and stewardship
Shareholders, direct investors and creditors of companies involved in the EV supply chain can help adopt a circular economy approach to sustainability by doing the following things:
Considerations for public market investors (shareholders and creditors):
- Research and establish best practices in lithium supply chains through ESG analysis of operating companies and industry best practices.
- Encourage research and development to spur technological innovations in reuse, recycling and disposal.
- Adopt best practices in product stewardship programs and plans to phase out hazardous chemicals.
- Encourage target setting for reduction of harmful emissions. Key metrics to track can include GHG, NOx, Sox emissions and other effluents.
- Understand political and governance risks of the regions from which battery minerals are sourced.
- Integrate ESG performance of companies into investment analysis and financial models (e.g. through a discount rate for ESG laggards to account for potential higher operational costs, fines or litigation costs that may arise from negative environmental and community impacts).
- Regularly engage with companies to better understand their practices, targets, performance metrics and future plans about minimizing environmental and social impacts. Engagement also helps to better understand companies' research and development plans about identifying more sustainable and viable options and technologies.
Considerations for direct/real asset investors:
- Integrate ESG factors into project planning and development - e.g. initial impact assessments as well as free and prior informed consent.
- Conduct regular environmental and social impact assessments, including ongoing effects on biodiversity and community resources.
- Establish operational best practices and performance reporting on sector/business-relevant ESG issues, such as waste management, air emissions (including carbon emissions from transportation), health and safety practices and performance, ESG accountabilities in executive compensation, and skills diversity at board level.
- Deeply understand ESG risks in their supply chains.
By engaging with companies on issues and metrics that ensure a holistic view of a company's ESG performance, investors can help mitigate ESG bubbles created by specific themes and contribute to a socially and environmentally just transition towards a net-zero economy.
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
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