ESG requirements spotlight complexity of EV supply chain

The urgent need to combat climate change has spurred global efforts to transition away from fossil fuels towards clean energy solutions. Electric vehicles (EVs) represent a crucial component of this transition, offering the promise of reduced carbon emissions and improved air quality. However, the widespread adoption of EVs presents its own set of challenges, particularly in securing a sustainable supply chain for the critical minerals required in battery production.

Central to the proliferation of EVs are advanced battery technologies, which rely on a range of critical minerals. Compared to traditional internal combustion engine (ICE) vehicles, EVs require significantly larger quantities of minerals, particularly for their battery systems. For example, a typical battery electric vehicle (BEV) necessitates six times the mineral input compared to a conventional ICE car.

The two predominant battery cathode technologies, Lithium-Nickel-Cobalt-Manganese-Oxides (NCM) and Lithium-Iron-Phosphates (LFP), rely heavily on minerals such as lithium, nickel, cobalt, and natural or synthetic graphite. These minerals are essential for enhancing battery performance, energy density, and overall efficiency.

Supply chain risks and challenges

While the transition to EVs offers environmental benefits, it also presents significant supply chain risks and challenges. The global concentration of critical mineral reserves and mining operations raises concerns about supply availability, price volatility, and geopolitical instability. Additionally, the extraction and processing of these minerals can entail significant sustainability risks.

Specific mineral challenges

Lithium is the key component in all lithium-ion batteries, and its extraction can present several environmental challenges. The primary sources of lithium are brine and spodumene ore. In regions such as South America and Australia, lithium extraction from brine sources can contribute to water scarcity, as the process requires significant water usage. Additionally, the extraction of lithium from spodumene ore can result in soil degradation, air and noise pollution, and negative biodiversity impacts. Efforts to mitigate these risks include implementing water recycling and conservation measures. Potential alternatives to traditional lithium extraction methods include direct lithium extraction technologies and the development of new lithium sources, such as geothermal brines and seawater. These alternatives offer the potential for more efficient, sustainable, and economically viable lithium extraction practices.

Nickel is essential for enhancing the energy density and stability of lithium-ion batteries, but its extraction and processing can pose equally significant challenges. Most of the nickel production comes from laterite or sulphide ore, with significant reserves located in Indonesia, Australia, and Brazil. Nickel mining activities have led in the past to significant air and water pollution, habitat destruction, and conflicts with local communities. Deep-sea tailings disposal, a common practice in nickel mining, has raised concerns about its environmental impact on marine ecosystems. Solutions to address these challenges include adopting more sustainable mining practices, reducing reliance on deep-sea tailings disposal, and enhancing environmental monitoring and regulation.

ESG compliance is destined to become a baseline expectation, potentially prompting the valuation of materials with reduced environmental footprints at a premium

Cobalt plays a critical role in stabilising lithium-ion batteries, but its extraction is especially associated with water pollution and water depletion. Various scientific studies and reports by civil society have shown that the waters in the vicinity of cobalt mines were heavily polluted with heavy metals and acids in the past. Efforts to address this challenge include implementation of environmental policies (e.g., closed water loops without waste water discharge) and improving traceability and transparency in the cobalt supply chain. In addition, the cobalt content is expected to be gradually reduced with the coming battery cell generations and a shift towards batteries with a high nickel content and LFP batteries.

Regulatory initiatives

Recognising the need for greater transparency and sustainability in battery production, the European Union has adopted regulations aimed at improving supply chain practices. Producers and importers selling batteries in the EU must implement due diligence policies concerning the raw materials lithium, nickel, cobalt, and graphite. For social and environmental risk categories such as air, water and soil pollution, damages to biodiversity as well as human and labour rights need to be considered. Additionally supply chain transparency needs to be ensured through disclosing information on the country of origin of raw materials and the suppliers involved.

The EU regulation’s strict due diligence requirements for OEMs and battery producers will have a significant impact on ESG efforts in the upstream value chain and could promote exploration of alternative sources and more sustainable refining processes. ESG compliance is destined to become a baseline expectation, potentially prompting the valuation of materials with reduced environmental footprints at a premium. Mining and processing methods that have high environmental impacts (e.g., high CO2 emissions or deep-sea tailings) will no longer be acceptable. Non-compliant players therefore risk exclusion from the EU market and could face greater difficulties in raising capital for new projects or project expansions.

Moreover, the EU mandates the usage of secondary materials though minimum recycled material requirements for every battery sold within the bloc. Commencing in 2031, EV batteries must include at least the following proportions of recycled content: cobalt 16%, nickel 6%, and lithium 6%. Subsequently, from 2036 onward, these proportions are set to increase to cobalt 26%, nickel 15%, and lithium 12%.

The ESG requirements imposed by the EU might also have a knock-on effect on other EV markets such as the US, where current regulatory pressure on supply chain transparency is focused more on localising and reducing dependence on China.

Towards a more sustainable future

Creating a sustainable EV and battery supply chain requires concerted efforts from governments, industry stakeholders, and civil society. While EVs offer a promising pathway towards decarbonising transportation, addressing the challenges associated with critical mineral supply chains is essential for ensuring the long-term sustainability of the transition. By adopting responsible sourcing practices, implementing robust regulatory frameworks, and fostering collaboration across sectors, players can navigate the complexities of the EV revolution and accelerate towards a cleaner, more sustainable future.

About the author: Tim Hotz is Principal at Roland Berger