The mass adoption of electric vehicles (EVs) is set to bring a progressive end to the era of the internal combustion engine or the ‘ICE age’. This great transition will fuel demand for critical materials and minerals driven by the EV boom and surge in renewables.
This implies a fundamental switch from a dependency on fossil fuel energy to a material-intensive economic model. Underlying this great energy revolution are essential metals and minerals including lithium, cobalt, manganese and copper. This has created an unusual ESG paradox whereby decarbonisation is only possible through the extraction of critical minerals and metals, traditionally associated with sectors screened out by ESG funds.
Miners up ESG credentials
We believe investors have developed a healthy mistrust of the mining and processing of metals and minerals for good reasons. However, these processes are producing essential components to the world’s decarbonisation efforts.
We also think too many funds are managed on static ESG criteria and exclude companies with credible transition approaches Moreover, a general improvement of ESG practices in the industry is underway, with some producers already demonstrating firm commitments to ESG practices and a reduction in their CO2 footprint. We have an inclusion policy for metals and mining for companies that contribute positively to the energy transition.
Within this sleeve, we avoid concentration, are opportunistic, selective and rely on forensic ESG due diligence. We try to understand the supply and demand imbalance because of these changing trends.
It is hard to understate the importance of lithium in the EV revolution. The more you move away from liquid batteries to solid batteries, the more you require lithium. Its demand will be driven by the surge in Li-ions batteries in EVs and stationary energy storage.
Meanwhile, copper demand will be boosted by the EVs and charging infrastructure. Both face mining capacity bottlenecks and structural deficits. Meeting this future upheaval in demand will require investment and drive a boost in mining capex.
For illustration, we are invested in SQM, a global mining operation. It produces lithium for industries that are strategic for sustainable development, such as EVs and clean energy.
We are also playing the direct EV story. One company we are looking at is Dutch-based Stellantis, which is hot on the heels of Tesla, but without the price tag. It is developing potentially game-changing in-house battery integration. Recently, it signed a joint venture with Foxconn to develop breakthrough in-car interfaces.
Rare earth elements such as neodymium, praseodymium and dysprosium are also essential to the world’s electrification through renewable energies. However, this is a more precarious investment, as it remains an asymmetrical game dominated by China, which controls between 70-90% of the world’s supply of materials. Secondly, finding liquid and ESG-compliant names in this space is challenging.
Recycled metals revolution
While we are positive on renewable energies, we are concerned there exists a green bubble – momentum for pure renewable plays has started to fade, but valuations remain too elevated.
The more interesting area is in recycling and what we like to call urban mining. In Europe, we lack raw materials, but we have lots of cars and iPhones. These are an essential resource that could sustainably boost European economies in the future.
Indeed, we view material recycling as an essential part of the energy transition solution. Given the material intensity of clean energy technologies and mass deployment of EVs, the annual waste production from wind turbines, solar PVs, Li-ion batteries and e-waste is set to increase radically by 2030.
While it is complex to build a viable recycling model under current legislation, Western countries will likely adopt regulations to develop this future alternative source of supply for critical materials.
Meanwhile, hydrogen remains a complex matter which is often oversimplified to promote it as a solution to the energy transition. With a production that is still highly fossil-intensive, we believe more commitments are needed to green hydrogen production to avoid a ‘hydrogen gate’ and we intend to remain selective on the hydrogen theme.
Against the backdrop of a great green rush and the potential for bubbles, we are as diversified as possible. This is aided by expertise in emerging new sectors that mitigates risk, particularly as most ESG funds are structurally underweight these sectors.
This also means our approach is also better equipped to manage the rotation out of growth into value stocks.