This episode is the third in a three-part series that explores governance challenges surrounding the transition to clean energy. Listen to episodes one and two.
The International Energy Agency forecasts that electric vehicles could account for a third of the global new car market by the end of this decade. While the prospect of a growing fleet of EVs is good news for the climate, the emergence of electric vehicles raises its own set of sustainability challenges. One area of notable concern surrounds the raw materials that are used in EV batteries, which may be sourced from regions of the world where environmental and social governance are weak. This reality runs counter to the sustainable promise of the clean energy transition and has raised concern among clean technology companies, EV manufacturers, and ESG-minded investors.
David Manley and Hervé Lado of the Natural Resource Governance Institute explore the environmental and human realities surrounding the production of one such material, cobalt, which is an essential element in the lithium-ion batteries that power most electric vehicles. The majority of cobalt is produced in the Democratic Republic of the Congo, an impoverished and environmentally sensitive country that has attracted attention as demand for cobalt has grown. Manley and Lado discuss efforts to improve oversight of the cobalt value chain, and what’s potentially at stake for the clean energy transition, and economies that are dependent on raw materials production, should ESG concerns not be adequately addressed.
Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. The International Energy Agency forecasts that electric vehicles could account for a third of the global new car market by the end of this decade. While the prospect of a growing fleet of EVs is good news for the climate, the emergence of electric vehicles raises its own set of sustainability challenges. One area of notable concern surrounds the raw materials that are used in EV batteries, which are frequently sourced from regions of the world where environmental and social governance tend to be weak. This reality runs counter to the sustainable promise of the clean energy transition, EVs included, and has raised concern among clean technology companies, EV manufacturers and ESG- minded investors. Today’s podcast explores the environmental and human realities surrounding the production of one such material, cobalt, which is an essential element in the lithium ion batteries used in everything from smartphones to electric vehicles.
The majority of cobalt is produced in the Democratic Republic of the Congo, an impoverished and environmentally sensitive country that has attracted attention as demand for cobalt has grown. Today’s podcast takes a look at ESG concerns around cobalt production and is the third episode in our series that looks at governance questions surrounding the transition to clean energy. My guests are David Manley and Hervé Lado from the Natural Resource Governance Institute, which is a global organization that works to improve the environmental and social performance of mining industries. David and Hervé will discuss efforts to improve oversight of raw material value chains, in particular for cobalt. They’ll also look at what’s potentially at stake for the clean energy transition and economies dependent on raw materials production should ESG concerns not be adequately addressed? David and Hervé, welcome to the podcast.
Hervé Lado: Thank you, Andy. I’m happy to be here.
David Manley: Thank you, Andy.
Stone: So I wonder if you could get us started on a conversation about natural resource governance by telling us about the work of the organization that you both work for, which is The Natural Resource Governance Institute. What are the organization’s aims and where does it work? Hervé, I thought we could start with you.
Lado: Yes. Thanks, Andy. NRGI is an international, independent, nonprofit organization, and we provide policy advice, advocacy on natural resource governance from evidence based research and lessons learned from the field. We basically draw on our Resource Governance Index (RGI) and our natural resource chapter and we shared our analysis with – and expertise freely. At the global level, we share global norms with national policy makers and accountability actors like civil society groups in about 20 oil and mineral producing countries in almost all continents. We provide trainings, technical assistance, support on how to deliver transparency and accountability, including through the implementation of Extractive Industry Transparency Initiative (EITI) the use of data, strengthening fiscal systems, reforming state owned enterprises, improving the management of resource revenues in this energy transition context.
Stone: So, David, I wonder if you could help us set the stage for the discussion today and talk about the magnitude of demand and how that is changing for minerals that are key to the energy transition and particularly to electric vehicles. How quickly is the demand for a variety of minerals, cobalt, lithium, etc., growing as we’re seeing the EV market itself expand?
Manley: It’s going to be pretty large. Like all these technologies EVs, windfarms, solar, they’re all going to be low carbon, but they’re really high metal. So an EV over the course of its life will be much less carbon intensive than a normal internal combustion engine car. A diesel, a petrol, gasoline car. But it needs about six times as much metals, a lot of cobalt, a lot of copper, lithium, manganese, these things. And we need to replace the whole of the world’s fleet of cars with EVs to be hitting the Paris Agreement for climate change. And we need this done pretty quickly. In Europe, we’ve got bans on petrol and diesel cars coming up in the 2030s. The UK’s banning the new sales of petrol and diesel cars in 2030, the rest of EU in 2035. So this will see a really rapid expansion or need for a rapid expansion in EVs and the batteries and therefore the demand for stuff like Cobalt.
Stone: Hervé, let’s jump back to you. I wonder if you could introduce us to what some of the major governance concerns are around the mining of these materials. What are the key countries beyond DRC where these minerals are mined, and what are some of the human rights and environmental concerns that we’re looking at here?
Lado:There are many countries, especially in Africa, that are home to those minerals that are already playing a role in the energy transition. We are talking about cobalt, but there’s also nickel and to some extent, copper and bauxite and so on and cobalt especially in the production of batteries. So the DRC and the whole Southern Africa is a space where things are moving really fastly since last year to develop cooperation that will help harness the potential in Zambia, in Madagascar, in South Africa and so that value chains can be created there to enhance production and add value so that production can be extended and expanded in this territory. Regarding the DRC, and those countries as well, on ESG, (Environment Social Governance) overall governance, we published in 2021 our Resource Governance Index that measures governance with a focus on transparency and accountability. And on 13 mining countries assessed with the Resource Governance Index, seven of them had a governance poor or weak level of governance. And the DRC governance was the worst of those countries. In fact, when you go in details, you observe that with the 70 percent of world cobalt production and 10 percent of world tropical forest that I recall, that covers about 60 percent of the national territory in the DRC.
Mining exploitation is already competing with forest preservation, but with the expected expansion of cobalt demand in coming years, the areas of production might expand and then raise risk of increased deforestation. Another aspect of ESG or governance concern is that DRC production is mainly processed in China, like from other countries, because China process a lot of cobalt to more than half in the world. Meaning a large supply chain with sharp increase in CO2 emissions if cobalt is not well processed in the DRC. And I would also mention that cobalt production is associated with human rights abuses as part of that is produced by artisanal miners who work in, as many know, in precarious and dangerous conditions and involve child work. On corruption, especially as this is part of governance, cobalt is associated with corruption as well, because of a lack of transparency and accountability especially in licensing processes, contractor negotiation, beneficial ownership to know who owns the titles, the licenses and who benefit ultimately.
Tax collection and utilization, subnational revenues collection and utilization, environmental and social commitment and payments resource. But loans like in the Sicomine deals, you know that deal that started in 2018 in the DRC involving Gécamine, the state-owned enterprise and Chinese partners which has been a new pact… Deal with undisclosed contract and with complex financial structuring with unmet commitment on infrastructure, unmet commitment on the colbalt production and mining production in general. So there are many areas where in those countries we need an improvement, a substantial improvement of governance so that the price of cobalt, for example, is more rewarding to artisanal miners, for example. Because you know cobalt price is not sent into international markets. To be short, in context of opacity, ruling elites and your partners, including companies, can capture institutions and prevent citizens from benefiting your resources.
Stone: Hervé, you mentioned the artisanal mining in the DRC. I wonder if you could tell us what that is. And you’ve been on the ground there. Tell us a little bit more about the context of how cobalt is mined. Artisanal mining is part of this. There are also quite a few large industrial companies, I think many Chinese-owned, that do the mining there. Tell us what you see on the ground.
Lado: There are many options. People will go from individual mining to cooperatives and it’s sort of nascent companies, but still in the artisanal operations that operate there on cobalt mining. And the attempts in recent years have been to organize that sector into cooperatives, into more organized and easy to monitor organizations so that they can be formalized somehow. The artisanal production there in the DRC represent about 20 percent of the national production. So it is a significant sector involving about 200,000 people.
Stone: Well, so 200,000 people are in these informal, artisanal or small scale mines, is that what you’re saying?
Lado: Yeah. And that is really the issue. How to move those people from informal activities to activities that can benefit from support from the government, from civil society groups, from donors. So the issue is in identifying those miners and supporting them so that they can regroup. And sometimes people mine behind their houses. You know, even digging holes within their homes or illegally mining in areas already allocated to mining companies. So it is a complex situation there. Artisanal miners not only receive very little from their efforts, but also they also face various physical threats. There are usually blasts in tunnels there because of pollution, gas, accumulation in tunnels. Because of flow, that’s where there are collapses under the ground, causing deaths very frequently. This is one of, in fact, the dirtiest aspects of the cobalt story. And this is likely to treat them the criticality of cobalt in the future. This is where we believe that this situation can divert investors away from cobalt because it is hard to defend the association to these dirty aspect of mining. The DRC government has attempted to organize the sector, creating 2020 the EGC, the state-owned enterprise, as the [Inaudible] the cobalt as a marketing board with the aim to clean the artisanal mining supply chain and also influence the price, the price setting and the benefit of the government but also of miners. But EGC is still on- boarding now.
Stone: So obviously there are very poor working conditions. These workers are working in informal conditions for very, very, little money. The question I’ll ask then, so you said that there is a state-run enterprise that works in this area. There are also a number of larger private industrial mining companies. In moving these workers to the industrial companies, do those companies have better track records of performance in terms of environmental and worker conditions?
Lado: Yes. In general, industrial companies have adopted well-advanced international standards. And this goes from EITI, to regarding payments, to UN global compacts and all the standards that are of reference. I think the issue in the DRC and in those institutional settings, it is the implementation, the monitoring and the enforcement of national rules and international standards. And this is where our resource governance index measures the gap, the important gap between rules and practices. And clearly, even though this gap is narrowing in many countries, DRC is lagging behind on this. This is an area where civil society groups and other actors can support the government and support actors and monitors in the fields those operators, those companies so that they clearly enforce the rules they have adopted. But the issue or the plan is not really to convert artisanal miners into industrial production. It is to keep them at the level where they operate because it is hard to convert 200,000 people into industrial mining.
Stone: I’d imagine industrial mining wouldn’t require that many workers, so many people would be out of work. Is that right?
Lado: Yes, because it is technologically intensive, not human resources intensive at the industrial level. So it is a challenge to the DRC government to keep those people at work because that sector provide jobs to Congolese citizens. The interest for the government is to keep those people at work, so not directing them into industrial operations.
Stone: Well, David, as you point out in the recent report from the organization on mining in the DRC, about 60 percent of the households in these areas where the mining takes place are actually dependent on the mines for their livelihood. So obviously, it’s in the interest of the country and the workers to maintain as many of those jobs as possible. So switching to the demand side of this for just a moment, David, what are the risks that poorly governed mining and poorly governed resource activities in the DRC presents to technology companies, particularly the companies that are relying on these lithium ion batteries that use cobalt, namely in this case, EVs.
Manley: So there’s a few risks. One is the image of all this. Hervé just painted a really strong picture of the human rights abuses, some of the environmental destruction around cobalt mining. And some of the tech companies, the EV companies, particularly in places like the US and Europe, are worried about their brand image over this. So that’s one image. That’s one issue. And that partly led to Elon Musk saying we’re going to do away with cobalt in our batteries. I think probably the bigger risk, though, is down to just getting the amount of metals under a good enough price to feed that huge demand that I was talking about. Because the world to transition quickly needs EVs to be as cheap as possible. They need to be cheaper than normal cars, for starters. And poor governance, I think, has a huge role to play in this. So we need huge amounts of money coming into this to develop these mines. The last estimate was about $1.5 trillion over the next 15 years. That compares with about $600 billion in the last 15 years. So a really substantial amount. We’re not seeing that at the moment. Partly that’s just because mining is a risky business. It’s hard to just find the metals. They have very long lead times. It takes about 16 years to go from discovery to actual production and this matters a lot. But we’ve only got 28 years left to the Paris Agreement targets of 2050. But a lot of what’s coming here is it’s what’s slowing down the discovery and development and creating bigger risks for investors is there things around poor governance, whether that’s strikes.
So I’m lead to think about 5% of mining output generally in the world is lost through strikes each year. So even though work conditions may be better in industrialized mines, they cannot always be that good. There can be general disasters because safety standards aren’t up to scratch. There’s a load of miners at the moment trapped in a mine in Burkina Faso. Tax disputes can be a major risk. So Zambia is a great case study if you want to be looking at risks to mining from governance. They got into a dispute with Vedanta, one of the major copper mines there. And that led to the seizure of the mine. The government’s taken off the hands of Vedanta and have still, even after three years, hasn’t been given back. And that’s holding up investment. Vedanta says that they’re going to invest another $2 billion to expand that mine, but they need that land back. So it’s these sort of things that are holding up the investments. And governance comes into this because all this relates to how the governance and companies and communities are dealing with each other. And usually it’s down to a breakdown in trust. So in various ways, better governance, better rules, and particularly better implementation of these rules can fix these issues, make sure there’s less disputes, less disruptions, and then reduce these risk and get investment going.
Stone: Well, it sounds to me you’re talking generally about what we’d term, I guess, geopolitical risk. Or one element of geopolitical risk because you’ve got potential for regime change, resource nationalization, different tax structures. I mean, the companies that are depending upon these resources are depending on countries where governance generally is maybe unstable. So a lot of this risk goes along with it. Is that right?
Manley: Yeah, completely. And the reason we focus on cobalt is because, as I said, 60 to 70 percent of cobalt’s all coming from the DRC. And that’s the same in some of the other metals that, as we expand the demand for these metals, they have to be found in countries that a lot of investors fear to tread. So, yeah, there’s huge geopolitical risk. But I think what’s really key here is that we need these metals for the energy transition and we need that because otherwise the world is burning. We’ve got some serious problems. But these metals aren’t ours. They aren’t Europeans or Americans. They’re the Congolese or Zambians or Indonesians. And they need a fair return on the extraction of these metals. They need jobs. They contracts to their local businesses. They need to make sure their forests and rivers and farmlands aren’t polluted by this. So there needs to be this balance. And sometimes this can work and has worked and both sides are getting a fair deal out of it. But where it breaks down, both sides are losing. So really I think a key message for what good governance means is that it has to be a balance.
Stone: David, you said a few minutes ago, you alluded to the fact that Elon Musk has said that he is going to try to engineer cobalt out of the batteries that are used in Tesla’s cars. Is that a possibility? And what does that mean for the future opportunity that DRC would find in cobalt?
Manley: Yes, a possibility. I mean, Elon Musk says a lot of things. And that was a few years ago. But we have seen new designs of batteries using much less cobalt. We talk with industry analysts. They think because of the way EV designs are made and the life cycle of each new car, these things won’t affect demand for at least the next ten years. Then after that, things are much less certain and we can’t really predict it. But given both the high price of cobalt or the risks that I was detailing, there’s a lot of incentive to try and use less cobalt. And there’s some batteries, the LFP batteries, that are using no cobalt at all. I guess in some ways that’s a big risk to the DRC that they could be losing a big demand for cobalt. And by the way, so about half of all cobalt is used in batteries, right? So you get the EV industry moving away and that’s a real slump in cobalt demand. Well, what the opportunity is, is there’s an opportunity now over the next 10 years to make the most of what’s going on and improve governance quickly and get as much out of that and investing those revenues in areas of the economy. If there is a slump in cobalt after 10 years, then the DRC can keep going, the economy can keep going.
Stone: Hervé, let me ask you this question. We’ve been talking obviously about governance. And I think one of the questions here that needs to be addressed is who governs? So are we looking at governments such as the government in the DRC to take this responsibility? Are we looking at foreign governance, governments where a lot of these products end up in Europe, in the United States, to impose some type of regulation? Or are we looking for the companies, the mining companies or the EV or battery manufacturers to do this? Who does governance fall upon? And if governments themselves fail to find a sustainable ESG path forward here, to what extent can companies at any level take over that role?
Lado: Yes, that is a very good question. The shortest answer is the DRC governance. The DRC government governs the DRC. But of course, it’s not completely true especially when institutions are weak. The government is at the forefront of that fight for better governance. But of course, all the actors it some multi sectoral and logistic holder issue, the overall governance, because it is not the government mining most of this cobalt. It is not the government designing standards, international standards especially. It is not. So the government has a limited role, especially again in weak institutional settings. So have observed important steps forward on the overall governance at the global level with the important standard in the sectors like EITI which had been reviewed in 2016 and 2019. The latest review is really interesting because it requires now the publication of all contracts, which was not the first engagement commitment of countries including the DRC. So since 2021, EITI standard requires all member countries to disclose contracts. This is a great advance. There also an aspect about who owns titles, mining licenses. Who owns projects. This is about the beneficial ownership. This was adopted in the EITI standard and is supplied in country members, even though it is a different various stages of integration in geolegislative frameworks. Many of them are already disclosing in practice legal and beneficial ownership in the annual reports. So you see, it is a combination of international norms, national governments.
And I would also mention a standard like Global Reporting Initiative that provide companies with indicators for their ESG reporting, and they are being updated to incorporate new considerations relating to energy transition, for example, corruption in the supply chain. And companies in Africa are increasingly integrating or adopting those standards, including the UN Global Compact, which contains principle to fight corruption, human rights abuses, child work. And specifically in the DRC, we have observed something interesting, a great move from the government, which is that political will to domesticate the production of batteries, electrical batteries, to serve the electric vehicle industry. This is something DRC wants to build on the coming years and the overall origin with the participation of mining companies. Many of them are backing that commitment. And on the governance side, specifically contract transparency and beneficial ownership, payment disclosure, social environmental payments and adopt reports on specific challenges in the governance like resource-backed loans, subnational units, payments, we are seeing an improvement, even though it is still slow in the context of DRC. Of the EITI space that has been revamped in recent years. And you know in the EITI stakeholder group participate the government, the mining companies and civil society.
Stone: So, David, what options exist? For example, bringing production closer to home. In some jurisdictions, I know that in the United States there has been talk about engaging in cobalt mining in the western part of the country. Are the reserves adequate to the demand? Can this be done in in a timeframe that we would need to meet the demand for EVs?
Manley: We certainly can’t meet the full demand from certainly not just American land mines. There are some mines found across Europe, but even that is not going to be enough. There’s two problems. One is a lot of the land mass in developed countries like both in Europe and America has been explored already. And we’ve either extracted the stuff or we know the stuff is not there. The other major issue is we have very strong environmental standards and strong community groups that don’t want mines near them. So it can be really difficult to open up a new mine, at least in the UK, both on oil fracking, gas fracking and some lithium mines and so on. With densely populated islands, it can be really difficult to get people to agree to say, can we open this mine? It’s going to be hard to do from closer to home. So it’s another reason why we really need to companies need to look out outside and all across the world.
Stone: I want to jump back to an issue that we very briefly touched on earlier in this conversation, and that is China’s role in mining of cobalt in the DRC. China is the largest owner by far of cobalt mines in the DRC. It is also, and this is also critical, by far the dominant player in the processing not only of cobalt, but of many minerals in metals that are critical to the energy transition. So my question is as follows. Given that China is also very reliant upon these resources for its own development of its EV industry and related clean technologies, what supply risk and what transparency challenges might be presented again by China’s dominant role.
Manley: Well, I’m going to flip that around a bit. In some ways this is good. China dominates the supply chains because it has really efficient companies and could do this at scale. And it’s producing the batteries, it’s processing the cobalt, producing the battery and producing EVs. I think about 40 percent of all EVs in a way that is low cost. And so that’s good because we need low cost stuff for the energy transition. But a lot of the EU, the US, there’s these big economic groups saying this is a new scramble, that this energy transition is a new industrial revolution and they all want a piece of it. And because it’s around energy, it’s about important things of making sure there’s enough transport infrastructure, enough energy, it’s a real kind of strategic, critical issue. So in another way, each of these groups is trying to vie for control. So that’s going on in the broad political level. Broad geopolitical level. Then there’s kind of issues around there’ll be, not only Chinese companies, but lots of companies are vertically integrating across the whole value chain. So they may own some shares in the mines in DRC. They’ll own the processor and they might own parts of the battery precursor plant or cathode manufacturing. And this means a lot of the trades that would be going on between unrelated parties is all being done behind screens, behind this wall where we can’t really see what’s going on.
And this is problematic for a few reasons. One, we don’t really know what the prices of this stuff really is. It’s very difficult to actually find the true price of cobalt. You can’t look online and they’ll give you something from the London Metal Exchange. But the actual prices that are going on across these value chains is much less transparent. And this is difficult because the tax authority in the DRC, for example, needs to know the right price so they can verify the profits and the revenues that these companies are making so they can they can tax them properly. So, yeah, it’s issues like that that are creating a lot of problems. On top of that, just this scramble for the resources, I think, exasperates the problem that Hervé was talking about around corruption. There’s much greater incentives and much greater pressure to be getting slices of this pie. And that, I can say, is just going to put fuel on this fire and with more corruption really can mess up things that can make the risk for more legitimate businesses much more difficult. Acquiring licenses for mines, acquiring trading permits, much more difficult. And for the energy transition itself, this can, I think, slow things down and be more difficult.
Stone: Hervé, I wonder if you could give us a little bit of insight. Are there any initiatives at the global level that are really working to try to improve governance and performance of extractive industries that we’ve been talking about?
Lado: Yeah. We are observing at the international level an important mobilization at the OECD level or in the US, in the EU. Energia itself is co-leading along with the OECD and EITI working group explicitly on anti-corruption in critical minerals supply chain. And the recommendations coming out of this work should feed into evolving mining focused ESG standards. The review of the EITI standards in 2024 will also be an opportunity to extend some requirements on energy transition, on resource backlogs, on contract transparency. And so there are a lot going on specifically at the EU level. US and EU are enhancing transparency and reporting requirements about the supply chain. The EU and UK have developed a duty of care legislations that compel European and UK companies, subsidiaries and their suppliers to observe ESG principles. And the number of litigations is expected to dramatically increase in coming years. The EU’s latest review was in February 2022. So you see it is really going on now. This will support civil society campaign at the global level and at the national level so that subsidiaries that work in the supply chain or local subsidiaries of international companies and geo-suppliers as well can be accountable of geo-practices on the on the ground. I think this would be really interesting to follow up.
Stone: David, a final question for you here. We’ve talked about a lot of the challenges around raw materials governance today. Are there any models of good governance in particular that you’d like to highlight that could be models going forward, before we finish up our conversation today?
Manley: Yeah, it depends on which policies you’re talking about. And when we’re talking about policies, it’s like if your listeners want to know look for the Natural Resource Charter and look for the stuff on our website, that gives loads more details. But Chile is often seen as a great leader in a lot of mining policy. They’ve taxed companies well and they’ve invested the money well, particularly. That’s particularly important because it’s no good taxing companies and taking money away for them if then you’re going to lose it. And Chile has has generally been able to manage the macroeconomic risks of the boom and bust of these revenues, and has started to diversify in various ways. To diversify their economy. So that’s a key one to look out for. Indonesia is starting to develop value chains. It’s still on early days, but it started actually quite dangerously by banning the export of raw metals. The press and lots of analysts said, oh, this is an awful idea. It was a slow start, but now we have some major batch of manufacturers coming in and saying we’re going to invest. Even Tesla and so on have been suggesting they’re going to be opening up EV factories there too. And I guess the last one would be support for local supply companies there, because not only this would be developing jobs, but it can also, I think, reduce costs for the industry itself and so accelerate the transition. And there are some good countries that are doing this. South Africa’s got a great supply base. Chile again. And then obviously places like Australia and Canada are very strong on this. So, yeah, I think lots of good examples to look for and emulate.
Stone: David and Hervé, thank you very much for talking.
Lado: Thank you, Andy. It was a pleasure.
Manley: Thank you.
Stone: Today’s guests have been David Manley and Hervé Lado of the Natural Resource Governance Institute. If you liked this podcast and aren’t yet subscribed to Energy Policy Now on your favorite podcast app, please sign up to make sure you get every episode delivered to you. Energy Policy Now is published bi-weekly on Tuesdays, and you can check out our archive of over 130 episodes by visiting the Kleinman Center for Energy Policy website. Our address is Kleinmanenergy.upenn.edu. Thanks for listening to Energy Policy Now and have a great day.