From 2018 to 2020, Newton Investment Management Ltd participated in a PRI (Principles for Responsible Investment)-led collaborative engagement on responsible cobalt sourcing with companies in the electronics and automotive sector. 46 institutional investors engaged with 16 companies with the objective of improving human-rights assessments and due diligence, impact monitoring and corrective action, and encouraging collaboration on this systemic issue. This engagement also developed consistent investor expectations on the responsible sourcing of cobalt to establish a framework for companies to manage such risks.1 2

The importance of cobalt

Cobalt is an essential metal in facilitating the energy transition, given its role in lithium-ion batteries, which can be used in electric vehicles (EVs). There are forecast to be 130 million EVs globally by 2030, representing 65% of cobalt demand, versus just over three million EVs in 2017. As such, demand for cobalt has increased, and is forecast to continue increasing rapidly.3 However, cobalt mining comes with significant risks, and negative environmental and social consequences. Over half of the world’s supply of cobalt comes from the Democratic Republic of the Congo (DRC) where human-rights risks are rife. From an environmental perspective, cobalt mining can be heavily polluting with sulphur dioxide, which also poses health risks given its toxicity.

Human rights

Cobalt mining can also have a significant social impact. This is particularly the case for artisanal and small-scale mining (ASM), where infrastructure is less developed, work is informal, and protections for individuals are far weaker. In the DRC, the government estimates that up to 20% of cobalt is mined by hand. Moreover, there are estimated to be 100,000 artisanal cobalt miners with almost no health and safety protections. Fatalities can occur owing to collapsing tunnels or fires, but also from chronic exposure to dangerous pollutants.

Child labour is also widespread. Humanium, an international child sponsorship non-profit organisation, estimates that 20% of the mines in the DRC use mostly child workers who are forced to work because of extreme poverty. Engagement on systemic issues such as this can be challenging. It requires a deep and thorough understanding of the cultural, political, and socio-economic factors which influence conditions on the ground, and the root causes of issues, often associated with poverty, to be addressed. Moreover, the government plays a significant role in protecting and enforcing human rights. In the 2020 Corruption Perceptions Index, the DRC ranks 170th out of 180 countries, making this issue even more challenging to address.4

Engagement outcomes

Newton Investment Management Ltd has engaged with a number of electronics and autos companies on responsible cobalt sourcing, both independently, and as part of collaborative efforts led by the PRI. This has included conversations with Samsung SDI, Samsung Electronics, Volkswagen and Apple. We held discussions to establish the companies’ understanding of the situation, what actions they were taking to identify risks in the supply chain, and how they planned to implement the OECD (Organisation for Economic Co-operation and Development) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. The guidance aims for greater transparency and auditing in the supply chain.

In late 2019, we also hosted an investor round table on responsible cobalt sourcing, with attendees including asset managers, non-governmental organisations (NGOs), the PRI and companies. This forum was used to candidly discuss the progress that has been made, and the challenges that both investors and companies were encountering in improving the sourcing of cobalt, as well as to take account of insights on the ground from local NGOs.

All the companies that engaged but one have a supply-chain policy or code related to social issues – a 25% increase since the start of the engagement. In addition, 81% of companies have made a public commitment to respect internationally proclaimed human rights.

PRI: Responsible cobalt sourcing – Engagement results5

What’s next?

Despite the progress made during this multi-year engagement, companies remain exposed to human-rights risks associated with cobalt sourcing, and have far more to do. Human-rights abuses and child labour remain prevalent, and there are still concerns regarding pollution and health and safety risks, as well as the compensation of miners. As such, we will continue to engage on this topic. As aligned with recommendations by the PRI, we will continue to push companies to begin managing and understanding this risk by disclosing their due diligence exercises and audit and monitoring results. But we also want companies to go further, by integrating human-rights impact assessments as part of their core business processes, including offering confidential grievance mechanisms, and engaging with affected individuals to remediate and learn from issues.

We are pleased that every company within the PRI engagement programme is now a member of at least one multi-stakeholder initiative on responsible cobalt sourcing. However, we will encourage companies to enhance their involvement in industry-wide initiatives, for example to promote transparency through the Responsible Minerals Assurance Process, as well as to increase efforts on the ground, such as via the Cobalt for Development Programme, and the formalisation of artisanal mining. We are pleased that Samsung SDI was able to co-launch this initiative,6 and that Volkswagen has since joined to support this.7 Finally, we will continue dialogues around the potential for cobalt recycling, and the role this may be able to play in the circular economy.

1 https://www.unpri.org/download?ac=10879
2 https://www.unpri.org/download?ac=4502
3 https://ec.europa.eu/jrc/sites/default/files/cobalt_infographics_one-pager.pdf
4 https://www.transparency.org/en/cpi/2020/index/cod#
5 https://www.unpri.org/collaborative-engagements/responsible-cobalt-sourcing-engagement-results/8208.article
6 https://www.electrive.com/2019/09/19/cobalt-development-congo/
7 https://www.electrive.com/2020/11/19/volkswagen-joins-cobalt-for-development-initiative/

Important information

This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.

Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management Limited is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton Investment Management Limited’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. ‘Newton Investment Management Group’ is used to collectively describe a group of affiliated companies that provide investment advisory services under the brand name ‘Newton’ or ‘Newton Investment Management’. Investment advisory services are provided in the United Kingdom by Newton Investment Management Ltd (NIM) and in the United States by Newton Investment Management North America LLC (NIMNA). Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’).

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