Are EVs Upsetting the ESG Ecosystem?

Sustainability and carbon neutrality are buzzwords that surround us wherever we go these days, and it’s not without reason. Our world is surely moving along the path to a low or even zero-carbon future, and there is indeed a growing urgency for sustainable practices across various industries and sectors. One area where we're witnessing a major transformation is the automotive industry, especially when it comes to electric vehicles. EVs, as they are popularly known, are increasingly seen as a realistic and eventually low-cost way to attain this goal, which is why there is a rapid transition towards the technology.

Electric vehicles offer a genuine solution to a plethora of environmental problems caused by vehicles running on traditional internal combustion engines. EVs greatly reduce greenhouse gas emissions and air pollution by relying on electricity as a power source instead of fossil fuels.

We know that the transportation sector is a major contributor to carbon dioxide and nitrogen oxide emissions across the globe, and EVs present a viable alternative to lessen this impact. According to data gathered by numerous global studies, the transportation sector, comprising both commercial and consumer transport, accounts for around 30 percent of the European Union’s total carbon dioxide emissions. Of this, a staggering 70 percent is attributed specifically to road transportation.

Policymakers in Europe have made strong commitments to tackling these emissions by adopting an ambitious approach to emissions reduction; they intend to reduce emissions by 60 percent by 2050, compared to levels that date back 30 years. It is a similar story in China, which is looking to become carbon neutral by 2060 and grow its leadership in the EV space.

Global investors are keenly watching the EV landscape, thanks largely to the phenomenal rise of companies like Tesla. With more and more people adopting the move towards zero-emission vehicles, it is expected that the market share for electric vehicles will skyrocket in the coming decade. Estimates suggest that electric cars will make up for around 60 percent of total sales in China, the EU, and the US combined. It must be said that the blistering pace of electrification also has a positive knock-on effect for battery production and supply chains.

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Does Electric Mobility Really Help Save the Planet?

Due to the rising investments in EV manufacturers and increasing integration of ESG principles, the transition to an electric future entails significant implications not just for vehicle and component manufacturers but also for responsible investors. The supply chain starts with the sourcing of raw materials that are used in the production of batteries and EV-specific components. The primary challenge from an ESG standpoint is how EV manufacturers will be able to ensure that their supply chains remain committed to reaching these goals.

Rising EV adoption also raises awareness about a number of ESG issues, with mineral extraction and processing standing out as critical concerns. Pundits predict that around 30 percent of vehicles sold worldwide by the end of the decade will be electric. While this is seemingly good news for the climate, it is dangerous for the ecosystem and poses several ESG challenges due to the extraction of metals and minerals. Many minerals, including copper, aluminum, lithium, cobalt, and nickel, play a vital role in the EV ecosystem.

While everyone is enthusiastic about how EVs save the planet, many fail to consider the other side of the picture; the ever-expanding user base leads to increased demand for these minerals, which subsequently outweighs any potential benefits. A catch-22 situation, perhaps? An increase in the extraction and processing of minerals leads to higher waste generation, emissions, and water pollution, which is the exact opposite of what EVs set out to do in the first place.

And that is just the beginning of the EV value chain. After mineral extraction and processing, the battery cells are manufactured and assembled into packs that are ultimately integrated into electric vehicles. Even at the end of their life cycle, EV battery disposal poses quite a few ESG-related risks, as they contain a variety of valuable materials and minerals. Battery recycling processes can also result in pollution, including the emission of toxic fumes into the air and the release of chemicals into water sources and the surrounding environment.

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Aside from environmental factors, there are social aspects to consider as well. A lot of raw materials required for battery production, such as lithium and copper, for instance, are typically available in countries where ESG compliance and norms are very weak. With the global surge in EV sales, demand is outstripping supply, and manufacturers find it difficult to source raw materials locally. This, in turn, means procuring minerals and metals from developing or underdeveloped countries that are resource-rich but are prone to corruption, and ESG-related malpractices such as child labor, gender inequality, and other forms of exploitation.

And it is not just about humans either; unscrupulous mining activities and the use of water (which is required in copious amounts for lithium extraction) have the power to bring about massive droughts and wipe out entire species of animals. The stark disparity between electric mobility and such unethical behavior raises serious questions on sustainability among EV manufacturers, ESG investors, and companies that promise clean tech. And the worst part is, despite all this indiscriminate harm to the ecosystem, EV battery production still does not meet global demand. Go figure.

Finding the Right Balance

Most businesses and their consumers simply focus on the end product, period. Do we ever give a second thought to where our goods come from and how they are made? Not really. This is because we, as users and corporations, are fixated on the product rather than the supply chain. It’s the same story with the manufacturing of electric vehicles and their components; there is neither any concern for the actual extraction and processing of minerals nor for any human rights violations that may occur in the value chain.

To be true to the ethos of sustainability, investors and stakeholders must be fully aware of each stage of the EV manufacturing process. There should be clarity on the extraction of raw materials, processing, vehicle assembly, sales, and how disposed of materials can be reused or recycled.

The winds of change are blowing hard, and there is a major shift from traditional energy sources to more efficient and renewable energy. This mindset should also be reflected in companies and their workforce. Businesses that adhere to ESG norms are likely to attract the best workers, as the latter are also looking to be hired by companies with strong ethical standards.

It is imperative to educate the workforce about the need to comply with standards and enhance their skill sets. As difficult as it might sound, companies should ensure fairness and morality in their entire supply chain, irrespective of the country where the raw materials are sourced from.

Many countries where mining operations are carried out have a lax approach towards reforms, regulations, and transparency, which pose serious long-term risks to the environment. Systems, however small they may seem, should be put in place to monitor not just human rights violations but also any threat to the ecosystem, such as toxic emissions, decreasing groundwater levels, the eradication of flora and fauna, and so on.

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The global demand for EVs is expected to rise significantly in the coming years, which means robust supply chains, skilled workforces, and significant investments play a crucial role in meeting demand. Poorer nations are the most affected in the pursuit of a zero-carbon planet; businesses, policymakers, and ESG investors should take it upon themselves to join hands and identify innovative and more sustainable approaches to protect the ecosystem.

In summary, in-depth knowledge of the subject and good governance are key to managing these risks. Policymakers around the world are formulating and implementing regulations that hold raw material miners, battery and EV manufacturers responsible for their products and processes throughout the lifecycle, including end collection and recycling. Many countries also have specific laws for battery recycling and disposal. There are a ton of companies involved in the EV supply chain, right from production through to distribution, and governments should ensure that each one of them is actively contributing towards furthering ESG principles.