A sustainable future requires a sustainable energy transition, which in turn requires a sustainable materials transition. Many critical materials come from countries in Africa and Asia – cobalt from Democratic Republic Congo (DRC), rare-earth materials from China, nickel from Indonesia, for example. APG APAC’s Head of Responsible Investment & Stewardship, Debanik Basu and Responsible Investment Manager, Miranda Zhao give us their insights on the materials transition from an Asian perspective and on how APG as a major global investor can play a key role.
In summary
- Many of the world’s critical materials for transition are located in emerging markets.
- Engaging on this topic involves tackling issues right across the ESG spectrum.
- Asia is a key hub in global supply chains and home to some of the world’s most innovative companies; the region can play a key role in the transition.
Developing Asia offers multiple powerful structural drivers that will present significant growth opportunities in the decades ahead, according to Basu. “This is not only in terms of the critical materials located in the region but also as a result of the continent’s position and role in key supply chains and products. Many innovators for achieving the transition are also located in Asia.” Basu heads a team of responsible investment specialists who work closely with the portfolio managers in the region to talk to companies and other key stakeholders on all aspects of the climate and materials transitions. The diversity of the team and their local and cultural knowhow also make it easier to foster trust and get better traction with key stakeholders.
A broad spectrum of environmental implications
“There are numerous challenges and hence numerous types of discussions to have with investee companies when it comes to this topic”, acknowledges Zhao. “First and foremost, encouraging them to ensure they have reliable sourcing partners and diversification of supply.” According to the IEA, an energy system powered by clean technologies like solar photovoltaic (PV) plants, wind farms and electric vehicles (EVs) requires significantly more critical minerals than the current fossil fuel-based one.100 McKinsey estimates some materials used in electric motors could see shortages of up to 70% by 2030. Zhao: “Against a backdrop of increased regionalization and geopolitical challenges, this could cause supply constraints and price volatility. Then there are the environmental implications of the accelerated sourcing of these materials – ranging from greenhouse gas emissions, air contamination and deforestation to water stress, soil degradation and loss of wildlife habitat.”
Social and governance factors are also key
APG’s largest client ABP has a clear focus on the human rights aspects of the materials transition and is targeting the automotive value chain. The focus is to encourage companies to ensure that there is no forced labor and that local communities and activists are protected from human rights abuses. Zhao: “Given the role of governments and their level of intervention in certain key sectors related to the materials transition, such as mining, corruption & bribery incidents also pose major reputational and liability risks. Our investee companies must ensure they have strict policies and codes of ethics in place and undertake thorough supply chain due diligence to ensure global best practices in line with international human rights and labor standards (OECD Guidelines and UNGP on Business and Human Rights), especially in countries where there is little or no regulation.”
The cobalt conundrum
“Supply of critical materials is often concentrated in a handful of countries – in some cases where allegations of child and forced labor or dangerous work conditions are prevalent among the workforces involved in the sourcing and production.” explains Basu. According to Save the Children, thousands of children work in mines in the DRC, where around 70% of the world’s cobalt reserves are located. “Back in 2016, APG carried out a detailed study on the cobalt supply chain, focusing on systemic risks of child labor and other human rights violations in DRC,” continues Basu. “We focused on 15 major electronics, car, and battery producers, requesting them to identify their cobalt source and take measures if necessary.
Our initial contact confirmed that most companies were either unable or unwilling to identify, understand, or respond to these risks at that stage, so we started pushing them to establish systems to screen sustainability risks. As between 15-30% of the cobalt from the DRC comes from informal or artisanal mines (ASM), where child labor and unsafe working conditions are common, it may seem logical to encourage companies to buy only industrially extracted cobalt instead.101 Basu: “But it’s not that simple – many local communities are dependent on artisanal mining, so a more nuanced approach is required, for example, by improving supplier awareness and investing in health & safety training.”
Renewables in Asia – focusing on the supply chain
China is the largest renewable energy producer in the world, making it a critical stakeholder in the materials transition. Zhao: “We have initiated a China Solar Initiative, aiming to investigate, engage with, and identify investable Chinese companies in the photovoltaic supply chain that meet our clients’ sustainability standards. Even though the value chain partners are different from those involved in sourcing transition materials, the engagement methodology relies on the same principles and has similar asks, relating to transparency, traceability and responsible sourcing practices.” Separately, in June 2024, Basu conducted a high-level India engagement trip. “One of the key focus areas of the trip was to initiate a dialogue on energy transition with key stakeholders, including regulators and government bodies.”
Supply chain oversight is a major challenge
“In terms of outcome so far, the response to our engagement efforts has been mixed”, acknowledges Zhao. “Commitments tend to be vague and in the form of policy statements, rather than tangible, quantifiable, targets. Disclosure could also be better but given that many companies operate in a large ecosystem with multiple stakeholders, it is difficult to oversee the entire supply chain. It is important for us to be pragmatic and not overly idealistic– we need to be seen as a credible partner for change. Companies should not push their suppliers too hard on disclosure and transparency either. It requires all parties involved to walk a fine line.”
“Despite the complexities and challenges, this is a multi-year plan, only launched in 2023, so we are still in a phase of promoting awareness. Our engagement efforts on behalf of our clients have, to date, given us an enhanced understanding of the practical constraints and on-the-ground realities, across the entire environmental, social, and governance spectrum”, says Basu. “This perspective enables us to ask companies more focused questions on their intentions, targets and commitments. At the same time, our strategic partnerships and collaborations with investor peers, NGOs, and regional organizations enable us to push for change at a higher level to facilitate a more accelerated transition across entire supply chains, product life cycles and our entire portfolio.”
This article is part of a report in which APG shares its research and learnings about the materials transition. It is intended for research purposes only and should not be interpreted as investment advice.