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 sulfur 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 labor is also widespread. Humanium, an international child sponsorship non-profit organization, 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. 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 (Organization 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 organizations (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 labor 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 program 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 Program, and the formalization of artisanal mining. Finally, we will continue dialogues around the potential for cobalt recycling, and the role this may be able to play in the circular economy.

* Newton Investment Management Ltd only

Important Information

This is a financial promotion. This material is for institutional investors only.

Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell this country or sector. Please note that strategy 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 is authorized 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 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 Limited (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’). 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 website or obtained upon request.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton.

Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.

In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.