The pitfalls of securing clean air

This year the British government announced, in accordance with its clean air plan, it is to ban all new petrol and diesel vehicles from 2040. Naturally, this policy announcement has sparked debate about the type of battery that will be used in electric cars and their capacity and power, much of which depends on the battery’s components.

Lithium-ion batteries are currently the preferred choice among carmakers and the main component of these is cobalt. Unfortunately, while cobalt is deemed a superior product there are many concerns around sourcing the necessary quantities in an ethical fashion.

The key ingredient

Cobalt is a hard-grey metal found in the earth joined with another metal (usually nickel or copper) and works well for high-energy batteries, meeting customer requirements for range and speed. However, sourcing it can be difficult due to the fact that more than half of the global supply comes from the Democratic Republic of Congo (DRC), a volatile country known for civil war and corruption. When scarcity of supply is coupled with a lack of producers, there is potential to encounter supply chain issues for those who manufacture or purchase batteries containing cobalt. These political and supply constraints are already becoming apparent, with prices for the metal surging by more than 80% over the past year alone. The rapid growth of the electric car market can only further complicate the situation.

Supply and demand

Carmakers are fully aware of these issues and are trying to address them by securing stocks of this sought after metal – think of VW’s recent attempt to guarantee fixed pricing of a certain amount of cobalt for a set period. This is ideal if you can close the deal but not all cobalt miners are going to be willing to sign fixed price agreements, as they benefit financially from the rising demand. On the flip side, miners need to be mindful of the potential impact of rising prices. If the price rises to a level where the metal is no longer affordable businesses may look to alternative technologies, which rely less heavily on the component.

The main mining companies are also well aware of the potential supply issues and are currently undertaking projects to increase the amount of cobalt available to the market by upgrading and reopening mines. Unfortunately, these projects are taking place in the DRC and, whilst helping to keep the cost of the component metal under control, the political risks of reliance on the DRC are increased.

The concerns surrounding the purchase of cobalt stretches beyond pricing and supply chains. There are wider legal issues that companies need to be aware of to ensure that, as well as supporting the government’s clean air plan, they are also ensuring that they operate clean supply chains. Modern slavery and bribery are two topics that can strike fear into the hearts of companies as the reputational and legal implications for stepping the wrong side of the line get higher and higher.

Modern slavery

Amnesty International, in conjunction with Afrewatch, carried out research last year into the mining of cobalt in the DRC. A critical finding revealed that there is significant risk of cobalt being mined by children and adults in inhumane conditions in the DRC. In fact, the research showed that artisanal miners (miners who use their hands) as young as seven are working in cobalt mines.

This raises concerns for UK companies managing their supply chain. The damage this information could have on a company’s brand and reputation is indisputable. Additionally, from a legal perspective companies need to think about the reporting requirements in the Modern Slavery Act 2015. This requires all UK organisations with a global group turnover of £36 million or more to report on the measures they are putting in place to avoid slavery and unethical practices in their supply chain.

The definition of slavery extends, among other things, to forced or compulsory labour. However, as children are particularly vulnerable, the Modern Slavery Act recognises that it is not necessary for a child to have been forced, threatened or deceived into their situation for it to be defined as exploitation. Meaning that it is highly likely that the use of child labour to support mining for cobalt in the DRC falls foul of the slavery definition.

As a consequence, companies will be need to produce an annual statement on the anti-slavery and human trafficking risks in both their own business and the supply chains in which they have purchased components or products containing cobalt. This will require carmakers purchasing materials containing cobalt and appointing new suppliers to thoroughly vet the supply chain, in addition to creating or developing existing policies and processes for sourcing cobalt.

Bribery and corruption

In addition to the risk of slavery, companies need to have an eye open for corrupt practices. In accordance with the Bribery Act 2010, it is an offence for organisations incorporated in the UK or who carry on business in the UK to bribe another person, to be bribed, or for someone in association with the company to bribe a person or be bribed themselves. Guidance published by the Secretary of State makes it clear that the Bribery Act is intended to give a broad scope and could embrace a wide range of business relationships.

Consequently, it is advisable that companies operating in markets where there is a high risk of bribery, to carry out much higher levels of due diligence checks and monitoring of their supply chain. Mitigating the risk of bribery, as well as imposing contractual obligations on suppliers to avoid any offence under the bribery legislation is critical. Due diligence and ongoing monitoring is key to ensuring that you are happy to be associated with the companies that form your supply chain and protect yourself against potential brand and reputation damage.

Batteries containing cobalt have long been used to power goods such as our laptops and smartphones but the growth of the electric car market is likely to draw more attention to the issues and result in more organisations being held accountable. Carmakers will therefore need to reevaluate and continue to keep under review their current and new supply chains to ensure that they are doing enough to guarantee that they are clean, not only in terms of the air that we breathe but also from an ethical and legal perspective.

Sofie Richardson, Associate at national law firm, Mills & Reeve