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Lithium: A catch-22 investment

Ratings providers are in the hot seat; the ESG bubble debate intensifies; Util makes IW Sustainable Investment Awards 2021 shortlist. Plus, what lessons can we learn from Rio's lithium investment?

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🚨 Who’s picking up the bill for ESG ratings? As raters begin advising companies on how to improve their scores, IOSCO warns of “conflicts of interest” that could, says the FT, follow the trajectory of the credit-rating/MBS house of cards.

🚩 Cue more rumblings about ratings: How did Phillip Morris get into Dow Jones Sustainability Index? Simple, says SSIR: the bar is “abysmally low” and may have made ESG a greater destabilising force than if it didn’t exist at all.

🇯🇵 The ex-chair of Japan’s GPIF sounded caution on ESG, saying focus shouldn’t stray from returns. His comments, which follow reports GPIF is ‘cooling’ on ESG, speak to a tension at the heart of finance. Is fiduciary duty ripe for a reset?

⛏️ Speaking of tensions: Rio Tinto is investing $2.4bn into a lithium mine. While it marks a (greenish) pivot into the EV battery space, environmental groups are pushing back. Development will be a big test of big mining’s green credentials.

📈 Bloomberg data predict ESG assets will exceed $50trn—over a third—of the world’s projected $140.5trn AuM by 2025. They hit $35trn—also a third—of global AuM in 2020. Is Bloomberg suggesting market share doesn’t rise from here?

🛁 There’s no ESG bubble, says Bridgewater. In fact, ESG indices track the market because they simply cut out the worst instead of choosing the best. (Is bad-but-a-bit-less-bad—even if to avoid concentration risk—the best we can do?)

🧑🏽‍🤝‍🧑🏼 Human rights are a perennial risk for public companies. Startups should face similar scrutiny, according to Amnesty, which last week released a damning report on the failure of VCs to invest with a view to social impact.

⛓️ Unlikely though it is, blockchain and ESG could be future bedfellows. In a new report, Candriam asks whether proof-of-stake protocols, renewable power and action by regulators might drive the future greening of digital assets.

Util in the news

🎉 We're delighted to announce that Util made the shortlist for Investment Week's 2021 Sustainable & ESG Investment Awards, as one of five finalists for the Best Sustainable & ESG Research & Ratings Provider.

🎙️ 150 million studies. Thousands of sustainability themes. 45,000 companies. Speaking on The Sustainable Finance Podcast, Patrick explains how we process complex data to answer a simple question of every listed company.

Lithium: A catch-22 investment

2021 may prove to be the year of the electric vehicle (EV). Just today, Market Watchrevealed that, while sales of all cars are accelerating, nothing is gaining ground as fast than EVs: In Q2, sales jumped 201.1% vs. 49.5% for total vehicle sales.

Still, EV sales last year accounted for only 4% of the global total. But that’s projected to expand to 34% in 2030 and 70% by 2040, reported the FT today. Despite short-term environmental concerns—particularly around energy-intensive battery mining and manufacturing—that figure represents a long-term net positive for the climate.

There’s just one problem. The EV revolution is powered by lithium, a material that forms the basis of rechargeable batteries. And, as we’ve reported before, there’s a looming mismatch between the demand for and availability of minerals such as lithium, which will, writes the FT, lead to a “mad scramble” for materials. Last week, Seeking Alpha reported that lithium demand will likely surge 500% by 2030, with one-third of that percentage increase monopolised by EVs. That will lead to massive price hikes at best and limited development at worst: Already, reports are emerging that a global lithium shortage is putting the brakes on UK EV adoption.

Why, then, are environmentalists up in arms about lithium mining?

Last week, news emerged that Rio Tinto is investing $2.4 billion in developing the Jadar lithium mine in Serbia. It’s big news. Big for Rio Tinto, whose pivot to the EV battery minerals space represents a strategic shift for mining. Big for the lithium market, which has, until now, been served not by international companies but by speciality incumbents. It’s a market that needs Jadar, reports Reuters: Low prices over 2019 and 2020 have left producers ill-prepared for the sharp recovery in EV sales as the world emerges from lockdown. Supply is now struggling to catch up with demand.

Yet environmentalists don’t see it from the same perspective. An online petition against the mine has already garnered over 120,000 signatures, in a pushback that echoes similar recent reactions in the US. As objectors point out, the mining process uses billions of gallons of ground water, potentially contaminating it for 300 years, while leaving behind significant waste.

While Rio is promising to build Jadar to “the highest environmental standards”—reflecting the degree to which ESG considerations must now be baked into strategy—it’s true that lithium mining is a complicated business.

According to our analytics, lithium mining performs devastatingly badly on SDG 3 (good health & well-being), SDG 6 (clean water & sanitation), SDG 13 (climate action) and SDG 15 (life on land). It has a detrimental impact on water quality, resource and ecosystems, while increasing water pollution and scarcity—not to mention its role in desertification and deforestation. And yet: It contributes positively to SDG 7 (affordable & clean energy), thanks to its role in clean tech and renewable energy.

The world’s a complicated place. In the transition to a low-carbon economy, there’s no easy answer. Everyone, from policymakers to investors to consumers, has difficult choices to make on the road ahead.

Lithium may be a catch-22 investment—but then again, aren't most?